ACCOUNTING GLOSSARY

A&E can mean either Appropriation & Expense or Analysis & Evaluation.
A&G is Administrative & General.
A&M is Additions and Maintenance.
A&P is an acronym for Administrative and Personnel.
ABA (Accredited Business Accountant or Accredited Business Advisor), in the !, is a
national credential conferred "y Accreditation #ouncil for Accountancy and $axation to
professionals %ho speciali&e in supportin' the financial needs of individuals and small to
medium si&ed "usinesses. ABA is the only nationally reco'ni&ed alternative to the #PA.
Most accredited individuals do not perform audits. Generally, they are small "usiness
o%ners themselves. (n addition to 'eneral accountin' %or), #PAs are also heavily
schooled in performin' audits* ho%ever, only a small fraction of America+s "usinesses
re,uire an audit. (n 'eneral, a #PA has ma-ored in accountin', passed the #PA
examination and is licensed to perform audits. An ABA has ma-ored in accountin',
passed the ABA comprehensive examination and in most states is not licensed to perform
audits.
ABATEMENT, in 'eneral, is the reduction or lessenin'. (n la%, it is the termination or
suspension of a la%suit. .or example, an a"atement of taxes is a tax decrease or re"ate.
ABC see A#$(/($0 BA!E1 #2!$(3G.
ABM see A#$(/($0 BA!E1 MA3AGEME3$.
ABNORMAL EXPENSE see E4$5A251(3A50 ($EM!.
ABNORMAL GAIN see 325MA6 62!!.
ABNORMAL ITEMS see E4$5A251(3A50 ($EM!.
ABNORMAL LOSS see 325MA6 62!!.
ABNORMAL RETURNS is the difference "et%een the actual return and that is
expected to result from mar)et movements (normal return).
ABNORMAL SPOILAGE is spoila'e that is not part of everyday operations. (t occurs
for reasons such as the follo%in'7 out8of8control manufacturin' processes, unusual
machine "rea)do%ns, and unexpected electrical outa'es that result in a num"er of spoiled
units. !ome a"normal spoila'e is considered avoida"le* that is, if mana'ers monitor
processes and maintain machinery appropriately, little spoila'e %ill occur. $o hi'hli'ht
these types of pro"lems so that they can "e monitored, a"normal spoila'e is recorded in a
6oss from A"normal !poila'e Account in the 'eneral led'er and is not included in the
-o" costin' inventory accounts (%or) in process, finished 'oods, and cost of 'oods sold).
ABOVE THE LINE, in accountin', denotes revenue and expense items that enter fully
and directly into the calculation of periodic net income, in contrast to "elo% the line items
that affect capital accounts directly and net income only indirectly.
ABOVE THE LINE, for the individual, is a term derived from a solid "old line on .orm
9:;: and 9:;:A a"ove the line for ad-usted 'ross income. (tems a"ove the line prior to
comin' to ad-usted 'ross income, for example, can include7 (5A contri"utions, half of the
self8employment tax, self8employed health insurance deduction, <eo'h retirement plan
and self8employed !EP deduction, penalty on early %ithdra%al of savin's, and alimony
paid. A taxpayer can ta)e deductions a"ove the line and still claim the standard
deduction.
ABSOLUTE CHANGE is a numerical chan'e in an empirical value, e.'. cost of 'oods
%as reduced "y =>.::.
ABSORB is to assimilate, transfer or incorporate amounts in an account or a 'roup of
accounts in a manner in %hich the first entity loses its identity and is ?a"sor"ed? %ithin
the second entity. .or example, see AB!25P$(23 #2!$(3G.
ABSORBED COSTS incorporates "oth varia"le and fixed costs.
ABSORPTION see AB!25B.
ABSORPTION COSTING is the method under %hich all manufacturin' costs, "oth
varia"le and fixed, are treated as product costs %ith non8manufacturin' costs, e.'. sellin'
and administrative expenses, "ein' treated as period costs.
ABSORPTION VARIANCE is the variance from "ud'eted a"sorption costin' of
manufactured product. !ee also AB!25P$(23 #2!$(3G.
ACAT (Accreditation #ouncil for Accountancy and $axation) is a national or'ani&ation
esta"lished in 9>@A as a non8profit independent testin', accreditin' and monitorin'
or'ani&ation. $he #ouncil see)s to identify professionals in independent practice %ho
speciali&e in providin' financial, accountin' and taxation services to individuals and
small to mid8si&e "usinesses. Professionals receive accreditation throu'h examination
andBor course%or) and maintain accreditation throu'h commitment to a si'nificant
pro'ram of continuin' professional education and adherence to the #ouncil+s #ode of
Ethics and 5ules of Professional #onduct.
ACB normally refers to +ad-usted cost "ase.+
ACCELERATED DEPRECIATION is a method of calculatin' depreciation %ith
lar'er amounts in the first year(s).
ACCEPTANCE is a dra%ee+s promise to pay either a $(ME 15A.$ or !(GC$ 15A.$.
3ormally, the acceptor si'ns hisBher name after %ritin' ?accepted? (or some other %ords
indicatin' acceptance) on the "ill alon' %ith the date. $hat ?acceptance? effectively
ma)es the "ill a promissory note, i.e. the acceptor is the ma)er and the dra%er is the
endorser.
ACCOMODATION ENDORSEMENT is a) the 'uarantee 'iven "y one le'al entity to
induce a lender to 'rant a loan to another le'al entity. ") a "an)in' practice %here one
"an) endorses the acceptances of another "an), for a fee, ,ualifyin' them for purchase in
the acceptance mar)et.
ACCOUNT is the detailed record of a particular asset, lia"ility, o%ners+ e,uity, revenue
or expense.
ACCOUNT AGING usually refers to the methods of trac)in' past due accounts in
accounts receiva"le "ased on the dates the char'es %ere incurred. Account a'in' can also
"e used in accounts paya"le, to a lesser de'ree, to monitor payment history to suppliers.
ACCOUNT ANALYSIS is a %ay to measure cost "ehavior. (t selects a volume8related
cost driver and classifies each account from the accountin' records as a fixed or varia"le
cost. $he cost accountant then loo)s at each cost account "alance and estimates either the
varia"le cost per unit of cost driver activity or the periodic fixed cost.
ACCOUNTANT'S OPINION is a si'ned statement re'ardin' the financial status of an
entity from an independent pu"lic accountant after examination of that entities records
and accounts.
ACCOUNT CURRENT is a runnin' or continued account "et%een t%o or more parties,
or a statement of the particulars of such an account.
ACCOUNT DISTRIBUTION is the process "y %hich de"its and credits are identified
to the correct accounts.
ACCOUNT GROUP, in accountin', is a desi'nation of a 'roup of accounts of li)e type
(for example7 accounts receiva"le and fixed assets).
ACCOUNTING is primarily a system of measurement and reportin' of economic events
"ased upon the accountin' e,uation for the purpose of decision ma)in'. Generally, %hen
someone says ?accountin'? they are referrin' to the department, activity or individuals
involved in the application of the accountin' e,uation.
ACCOUNTING CONCEPTS are the assumptions underlyin' the preparation of
financial statements, i.e., the "asic assumptions of 'oin' concern, accruals, consistency
and prudence.
ACCOUNTING CONVENTION see #23/E3$(23.
ACCOUNTING CYCLE is the se,uence of steps in preparin' the financial statements
for a 'iven period.
ACCOUNTING DIVERSITY is the reco'nition that many diverse national and
international accountin' standards exist in the %orld.
ACCOUNTING ENTITY ASSUMPTION states that a "usiness is a separate le'al
entity from the o%ner. (n the accounts the "usinessD monetary transactions are recorded
only.
ACCOUNTING ENTITY is an or'ani&ation, institution or "ein' that has its o%n
existence for le'al or tax purposes. An accountin' entity is often an or'ani&ation %ith an
existence separate from its individual mem"ers88for example, a corporation, partnership,
trust, etc. !ee also A##23$(3G E3$($0 A!!MP$(23.
ACCOUNTING EQUATION is a mathematical expression used to descri"e the
relationship "et%een the assets, lia"ilities and o%ner+s e,uity of the "usiness model. $he
"asic accountin' e,uation states that assets e,ual lia"ilities and o%ner+s e,uity, "ut can "e
modified "y operations applied to "oth sides of the e,uation, e.'., assets minus lia"ilities
e,ual o%ner+s e,uity.
ACCOUNTING EVENT is %hen the assets and lia"ilities of a "usiness
increaseBdecrease or %hen there are chan'es in o%ner+s e,uity.
ACCOUNTING INCOME is the income derived throu'h historical accrual "ased
accountin'. (ncome E the chan'e in net assets occurrin' durin' the period excludin'
transactions %ith o%ners* i.e. transaction "ased.
ACCOUNTING MEASUREMENT AND DISCLOSURE is the concepts of
measurement and information disclosure re,uired for decision ma)in'.
ACCOUNTING PACKAGE/SOFTWARE, usually, is a commercially availa"le
soft%are pro'ram or suite that, %ith little customi&ation, %ill satisfy the accountin'
system needs of the purchasin' entity.
ACCOUNTING PERIOD is the time period for %hich accounts are prepared, usually
one year.
ACCOUNTING RATIO is the result of dividin' one financial statement item "y
another. 5atios help analysts interpret financial statements "y focusin' on specific
relationships.
ACCOUNTING STANDARDS BOARD (ASB) ma)es, improves, amends and
%ithdra%s accountin' standards. Many of A!Bs speciali&e in the various fields or sectors
of accountin'.
ACCOUNTING THEORY tries to descri"e the role of accountin' and is composed of
four types of accountin' theory7 classical inductive theories, income theories, decision
usefulness theories, and information economics B a'ency theories7 a. #lassical inductive
theories are attempts to find the principles on %hich current accountin' processes are
"ased* ". (ncome theories try to identify the real profit of an or'ani&ation* c. 1ecision
usefulness theories attempt to descri"e accountin' as a process of providin' the relevant
information to the relevant decision ma)ers* and, d. $he information economics B a'ency
theories of accountin' see accountin' information as a 'ood to "e traded "et%een rational
a'ents each actin' in their o%n self8interest.
ACCOUNTING TIMING DIFFERENCE is the effect that a defered accountin' event
%ould have on the financials if ta)en into consideration e.'., the release of a deferred tax
asset to the income statement as a deferred tax expense (ie the reversal of an accountin'
timin' difference).
ACCOUNTING TREATEMENT is the methods, processes and decisions as to any
'iven accountin' decision as to ho% a transaction is to "e or is handled in compliance to
GAAP and all applica"le statutes.
ACCOUNTS PAYABLE (AP) are trade accounts of "usinesses representin' o"li'ations
to pay for 'oods and services received.
ACCOUNTS PAYABLE TO SALES measures the speed %ith %hich a company pays
vendors relative to sales. 3um"ers hi'her than typical industry ratios su''est that the
company is usin' suppliers assets (cash o%ed) to fund operations.
ACCOUNTS RECEIVABLE is a current asset representin' money due for services
performed or merchandise sold on credit.
ACCOUNTS RECEIVABLE LEDGER is the "oo))eepin' led'er in %hich all
accounts for %hich cash assets o%ed to an or'ani&ation is maintained.
ACCOUNTS RECEIVABLE RESERVE is a reserve a'ainst "ad de"t. !ee also
5E!E5/E and 5E!E5/E A##23$!.
ACCOUNTS RECEIVABLE TURNOVER is the ratio of net credit sales to avera'e
accounts receiva"le, %hich is a measure of ho% ,uic)ly customers pay their "ills.
ACCRETION is the ad-ustment of the difference "et%een the price of a "ond purchased
at an ori'inal discount and the par value of the "ond* or, asset 'ro%th throu'h internal
'ro%th, expansion or natural causes, e.'. the a'in' of %ine or 'ro%th of tim"erBtrees.
ACCRUAL is the reco'nition of revenue %hen earned or expenses %hen incurred
re'ardless of %hen cash is received or dis"ursed.
ACCRUAL BASIS OF ACCOUNTING is %herein revenue and expenses are recorded
in the period in %hich they are earned or incurred re'ardless of %hether cash is received
or dis"ursed in that period. $his is the accountin' "asis that 'enerally is re,uired to "e
used in order to conform to 'enerally accepted accountin' principles (GAAP) in
preparin' financial statements for external users.
ACCRUAL CONCEPT see A##5A6 BA!(! 2. A##23$(3G.
ACCRUED ASSETS are assets from revenues earned "ut not yet received.
ACCRUED EXPENSES are expenses incurred durin' an accountin' period for %hich
payment is postponed.
ACCRUED INCOME is income earned durin' a fiscal period "ut not paid "y the end of
the period.
ACCRUED INTEREST is interest earned "ut not paid since the last due date.
ACCRUED INVENTORY functions as a ?clearin'? account to esta"lish a lia"ility for
inventory physically received into the %arehouse, "ut for %hich a vendor invoice had not
yet arrived.
ACCRUED LIABILITY are lia"ilities %hich are incurred, "ut for %hich payment is not
yet made, durin' a 'iven accountin' period. !ome examples in a manufacturin'
environment %ould "e7 %a'es, taxes, suppliersBvendors, etc.
ACCRUED PAYROLL is a lia"ility arisin' from employees+ salary expense that has
"een incurred "ut not paid.
ACCRUED REVENUE is the accumulated revenue as they have "een reco'ni&ed over a
'iven period.
ACCUMULATED AMORTIZATION is the cumulative char'es a'ainst the intan'i"le
assets of a company over the expected useful life of the assets.
ACCUMULATED DEPRECIATION is the cumulative char'es a'ainst the fixed assets
of a company for %ear and tear or o"solescence.
ACH is Automated #learin' Couse.
ACIDTEST RATIO is an analysis method used to measure the li,uidity of a "usiness
"y dividin' total li,uid assets "y current lia"ilities.
ACKNOWLEDGEMENT OF INDEBTEDNESS is a %ritten reco'nition of de"t that
is enforcea"le in la%, e.'. memorandum chec), "an) draft, or loan contract.
ACMA is an acronym for Associate #hartered Mana'ement Accountant.
ACQUISITION is one company ta)in' over controllin' interest in another company.
!ee also ME5GE5 and P226(3G 2. (3$E5E!$!.
ACQUISITION COST is the amount, net of "oth trade and cash discounts, paid for
property, plus transportation costs and ancillary costs.
ACR is Accounts 5eceiva"le. !ee A##23$! 5E#E(/AB6E.
ACTIVITY BASED COSTING (ABC) is a costin' system that identifies the various
activities performed in a firm and uses multiple cost drivers (non8volume as %ell as the
volume "ased cost drivers) to assi'n overhead costs (or indirect costs) to products. AB#
reco'ni&es the causal relationship of cost drivers %ith activities.
ACTIVITY BASED MANAGEMENT (ABM) converts Activity Based #ostin' (AB#)
into a system to mana'e an or'ani&ation. Activity Based Mana'ement not only focuses
on product, service, customer, channel costin', it also emphasi&es7 cost drivers (root
cause analysis), action plans to improve to achieve strate'ic o"-ectives, and, performance
measures for activities and processes.
ACTIVITY DRIVERS, in activity "ased costin' (AB#), activity costs are assi'ned to
outputs usin' activity drivers. Activity drivers assi'n activity costs to outputs "ased on
individual outputsD consumption or demand for activities. .or example, a driver may "e
the num"er of times an activity is performed (transaction driver) or the len'th of time an
activity is performed (duration driver) see 15A$(23 15(/E5!, (3$E3!($0
15(/E5!, $5A3!A#$(23 15(/E5!.
ACTIVITY RATIO is any accountin' ratio that measures a firm+s a"ility to convert
different accounts %ithin their "alance sheets into cash or sales.
ACTUAL COST is the amount paid for an asset* not its retail value, mar)et value or
insurance value.
ACTUALS is -ar'on used %hen spea)in' of an actual num"er experienced throu'h some
point in time as opposed to a num"er that is "ud'eted or pro-ected into the future, e.'.,
year8to8date sales, expenses, product produced, etc.
ACTUARIAL METHOD means the method of allocatin' payments made on a de"t
"et%een the amount financed and the finance or other char'es %here the payment is
applied first to the accumulated finance or other char'es and any remainder is su"tracted
from, or any deficiency is added to the unpaid "alance of the amount financed.
ACTUARIAL SCIENCE applies mathematical and statistical methods to finance and
insurance, particularly to the assessment of ris). Actuaries are professionals %ho are
,ualified in this field.
ADA, amon' others, is Americans %ith 1isa"ilities Act of 9>>:.
ADDINS is7 a. somethin' desi'ned or intended for use in con-unction %ith another, e.'.
accessories to a primary product in a purchase order* or, ". an accessory soft%are
pro'ram that extends the capa"ilities of an existin' application.
ADDITIONAL PAID IN CAPITAL is the amounts paid for stoc) in excess of its par
value* included are other amounts paid "y stoc)holders and char'ed to e,uity accounts
other than capital stoc).
ADEA is A'e 1iscrimination in Employment Act of 9>F@.
ADEQUATE DISCLOSURE is sufficient information in footnotes, as %ell as financial
statements, indicative of a firm+s financial status.
ADF, in invoicin', is After 1eductin' .rei'ht.
AD HOC is "ein' concerned %ith a particular end or purpose, e.'., a ad hoc committee
esta"lished to handle a specific su"-ect.
ADI, in invoicin', is After 1ate of (nvoice.
AD!UNCT ACCOUNT is an account that accumulates either additions or su"tractions
to another account. $hus the ori'inal account may retain its identity. Examples include
premiums on "onds paya"le, %hich is a contra account to "onds paya"le* and
accumulated depreciation, %hich is an offset to the fixed asset.
AD!USTED BASIS see BA!(!.
AD!USTED BOOK VALUE" 0our MBA performs t%o types of ad-usted "oo) value
analysis. $an'i"le Boo) /alue and Economic Boo) /alue (also )no%n as Boo) /alue at
Mar)et).
$an'i"le Boo) /alue is different than "oo) value in that it deducts from asset
value intan'i"le assets, %hich are assets that are not hard (e.'., 'ood%ill, patents,
capitali&ed start8up expenses and deferred financin' costs).
Economic Boo) /alue allo%s for a "oo) value analysis that ad-usts the assets to
their mar)et value. $his valuation allo%s valuation of 'ood%ill, real estate,
inventories and other assets at their mar)et value.
AD!USTED EARNINGS PER SHARE is a non8GAAP financial measure of earnin's
per share. 1ependent upon the entity, it may or may not include %hat %ould normally "e
included in a GAAP sanctioned earnin's per share calculation.
AD!USTING ENTRIES are special accountin' entries that must "e made %hen you
close the "oo)s at the end of an accountin' period. Ad-ustin' entries are necessary to
update your accounts for items that are not recorded in your daily transactions.
AD!USTMENT can "e either7 9. an increase or decrease to an account resultin' from
A1G!$(3G E3$5(E!* or, H. chan'in' an account "alance due to some event, e.'.,
ad-ustment of an account due to the return of merchandise for credit.
ADMINISTRATIVE/ADMINISTRATION COST see (31(5E#$ #2!$.
ADMITTED ASSETS are assets %hose values are permitted "y state la% to "e included
in the annual statement.
ADMITTED VALUE see A1M($$E1 A!!E$!.
ADR is American 1epository 5eceipts.
ADSCR is Avera'e 1e"t !ervice #overa'e 5atio.
ADVANCE is an amount paid "efore it is earned, e.'. payment ahead of actual
expenditures or phase completion of a construction pro-ect.
ADVERSE OPINION is expressed if the "asis of accountin' is unaccepta"le and
distorts the financial reportin' of the corporation. (f auditors discover circumstances
durin' the course of the audit that ma)e them ,uestion %hether they can issue an
un,ualified opinion, they should al%ays discuss those circumstances %ith the client
"efore issuin' the opinion, in order to determine %hether it is possi"le to rectify the
pro"lem.
ADVISING BANK is a "an) in the exporter+s country handlin' a letter of credit.
AFE, dependent upon usa'e, is an acronym for Authori&ation for Expenditure or Avera'e
.unds Employed.
AFFILIATE is a relationship "et%een t%o companies %hen one company o%ns
su"stantial interest, "ut less than a ma-ority of the votin' stoc) of another company, or
%hen t%o companies are "oth su"sidiaries of a third company.
AFUDC is Accumulated .unds sed 1urin' #onstruction or Allo%ance for .unds sed
1urin' #onstruction.
AGED TRIAL BALANCE alpha"etically lists accounts receiva"le %ith outstandin'
"alances. (t displays one "alance for every account "y a'e and is typically produced only
once on demand to chec) receiva"le details a'ainst other reports.
AGENCY is the relationship "et%een a principal and an a'ent %herein the a'ent is
authori&ed to represent the principal in certain transactions.
AGENCY COSTS is the incremental costs of havin' an A'ent ma)e decisions for a
principal.
AGGREGATE is the sum or total.
AGGREGATE THEORY is a theory of partnership taxation in %hich a partnership is
considered as an a''re'ate of individual co8o%ners %ho have "ound themselves to'ether
%ith the intention of sharin' 'ains and loses* under this theory, the partnership itself has
no existence separate and apart from its mem"ers.
AGI (Annual Gross (ncome) is annuali&ed total income prior to exclusions and
deductions.
AGING see A##23$ AG(3G.
AGING OF RECEIVABLES see A##23$ AG(3G.
AGREED UPON PROCEDURES are used %hen a client retains an external auditor to
perform specific tests and procedures and report on the results. Examples mi'ht include
special revie%s of loan portfolio or internal control systems. (n performin' a'reed8upon
procedures, the auditor provides no opinion, certification, or assurance that the assertions
"ein' made in the financial statements are free from material misstatement. $he users of
reports "ased on a'reed8upon procedures must dra% their o%n conclusions on the results
of the tests reported. .or example, an external auditor could "e as)ed to loo) at a certain
num"er of corporation loan files and document %hich of the re,uired forms are in the
files. $he auditor %ould report on the selection and the results of the procedures
performed "ut %ould not provide a formal opinion %ith conclusions dra%n from the
results of the procedures.
AICPA is the American (nstitute IofJ #ertified Pu"lic Accountants.
AIR WAYBILL is a "ill of ladin' and contract "et%een the shipper and the airline for
delivery of 'oods to a specified location, and sometimes %ith specified delivery
dateBtime. 3on8ne'otia"le, "ut serves as receipt from the airline to prove that 'oods %ere
received.
ALLOCATE is to distri"ute accordin' to a plan or set apart for a special purpose.
Examples7 a. spread a cost over t%o or more accountin' periods* ". char'e a cost or
revenue to a num"er of departments, products, processes or activities on a rational "asis.
ALLOCATION is the act of distri"utin' "y allottin' or apportionin'* distri"ution
accordin' to a plan, e.'., allocatin' costs is the assi'nment of costs to departments or
products over various time periods, products, operations, or investments. !ee
A662#A$E.
ALLONGE is a piece of paper attached to a ne'otia"le instrument to allo% space for
%ritin' endorsements.
ALL OTHER CURRENT ASSETS relates to any other current assets. 1oes not include
prepaid items.
ALL OTHER CURRENT LIABILITIES includes any other current lia"ilities,
includin' "an) overdrafts and accrued expenses.
ALL OTHER EXPENSES (NET) includes miscellaneous other income and expenses
(net), such as interest expense, miscellaneous expenses not included in 'eneral and
administrative expenses, netted a'ainst recoveries, interest income, dividends received
and miscellaneous income.
ALL OTHER NONCURRENT ASSETS are prepaid items and any other non8current
assets.
ALL OTHER NONCURRENT LIABILITIES means any other non8current
lia"ilities, includin' su"ordinated de"t, and lia"ility reserves.
ALLOWANCE, %ithin !ales, is a concession 'ranted to customers for unsatisfactory
'oods or services. 5educes sales "ecause a portion of the sale has not "een earned.
ALLOWANCE FOR BAD DEBTS is an account esta"lished to record a su"traction
from A##23$! 5E#E(/AB6E, to allo% for those accounts that %ill not "e paid.
ALLOWANCE FOR DOUBTFUL ACCOUNTS see A662KA3#E .25 BA1
1EB$!.
ALLOWANCE FOR DOUBTFUL DEBTS see A662KA3#E .25 BA1 1EB$!.
ALLOWANCE FOR NOTES RECEIVABLE LOSSES is an account maintained at a
level considered ade,uate to provide for pro"a"le losses. $he provision is increased "y
amounts char'ed to earnin's and reduced "y net char'e8offs. $he level of allo%ance is
"ased on mana'ementDs evaluation of the portfolio, %hich ta)es into account prevailin'
and anticipated "usiness and economic conditions and the net reali&a"le value of
securities held.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS see A662KA3#E .25
BA1 1EB$!.
ALLOWANCE METHOD is the accepted %ay to account for "ad de"t. Bad de"t
expense may "e "ased on the percent of credit sales for the period, an a'in' of the
accounts receiva"le "alance at the end of the period, or some other method, e.'., percent
of accounts receiva"le.
ALPHA is the measurement of returns from an investment in excess of mar)et returns. (t
represents the amount expected from fundamental causes, e.'. the 'ro%th rate in earnin's
per share. $his contrasts %ith BE$A, %hich is a measure of ris) or volatility.
ALTERNATE PAYEE ENDORSEMENT, normally, it is %hen one payee endorses a
draft over to another entity, then the ne% or alternate payee endorses the draft near the
ori'inal payees endorsement (si'nature).
ALTMAN# EDWARD developed the ?A6$MA3 L8!#25E? "y examinin' MN
manufacturin' companies. 6ater, additional ?L8!cores? %ere developed for private
manufacturin' companies (L8!core 8 Model A) and another for 'eneralBservice firms (L8
!core 8 Model B). /enture6ine selects the ?L8!core? appropriate for each firm "ased
upon the ,uestionnaire input from the listin' company. A ?L8!core? is only as valid as
the data from %hich it %as derived i.e. if a company has altered or falsified their financial
recordsB"oo)s, a ?L8!core? derived from those ?coo)ed "oo)s? is of hi'hly suspect value.
ORIGINAL ZSCORE (.or Pu"lic Manufacturer) (f the L8!core is A.: or a"ove
8 "anruptcy is not li)ely. (f the L8!core is 9.M or less 8 "an)ruptcy is li)ely. A
score "et%een 9.M and A.: is the 'ray area. Pro"a"ilities of "an)ruptcy %ithin the
a"ove ran'es are >NO for one year and @:O %ithin t%o years. 2"viously a hi'her
L8!core is desira"le.
MODEL A ZSCORE (.or Private Manufacturer) Model A is appropriated for a
private manufacturin' firm. Model A should not "e applied to other companies. A
L8!core of H.>: or a"ove indicates that "an)ruptcy in not li)ely, "uyt a L8!core of
9.HA or "elo% is a stron' indicator that "an)ruptcy is li)ely. Pro"a"ilities of
"an)ruptcy %ithin the a"ove ran'es are >NO for one year and @:O %ithin t%o
years. 2"viously a hi'her L8!core is desira"le.
MODEL B ZSCORE (.or Private General .irm) Model B L8!core is
appropriate for a private 'eneral non8manufacturin' firm. A L8!core of H.F: or
a"ove indicates that "an)ruptcy in not li)ely, "uyt a L8!core of 9.9: or "elo% is a
stron' indicator that "an)ruptcy is li)ely. Pro"a"ilities of "an)ruptcy %ithin the
a"ove ran'es are >NO for one year and @:O %ithin t%o years. A L8!core "et%een
the t%o is the 'ray area. 2"viously a hi'her L8!core is desira"le.
ALTMAN ZSCORE relia"ly predicts %hether or not a company is li)ely to enter into
"an)ruptcy %ithin one or t%o years7
(f the L8!core is A.: or a"ove 8 "an)ruptcy is not li)ely.
(f the L8!core is 9.M or less 8 "an)ruptcy is li)ely.
A L8!core "et%een 9.M and A.: is the 'ray area, i.e., a hi'h de'ree of caution
should "e used.
Pro"a"ilities of "an)ruptcy %ithin the a"ove ran'es are >NO for one year and @:O %ithin
t%o years. A L8!core "et%een the t%o is the 'ray area. 2"viously a hi'her L8!core is
desira"le. (t is "est to assess each individual company+s L8!core a'ainst that of the
industry. (n lo% mar'in industries it is possi"le for L8!cores to fall "elo% the a"ove. (n
such cases a trend comparison to the industry over consecutive time periods may "e a
"etter indicator. (t should "e remem"ered that a L8!core is only as valid as the data from
%hich it %as derived i.e. if a company has altered or falsified their financial
recordsB"oo)s, a L8!core derived from those ?coo)ed "oo)s? is of lesser use.
AMALGAMATION is a consolidation or mer'er, as of several corporations. (n
"usiness, the distinction "ein' that the survivin' entity incorporates the asset "ase of
others into its "ase.
AMORTIZATION 9. is the 'radual reduction of a de"t "y means of e,ual periodic
payments sufficient to meet current interest and li,uidate the de"t at maturity. Khen the
de"t involves real property, often the periodic payments include a sum sufficient to pay
taxes and ha&ard insurance on the property. H. is the process of spreadin' the cost of an
intan'i"le asset over the expected useful life of the asset. .or example7 a company pays
=9::,::: for a patent, they amorti&e the cost over the 9F year useful life of the patent. A.
the deduction of capital expenses over a specific period of time. !imilar to depreciation, it
is a method of measurin' the ?consumption? of the value of lon'8term assets li)e
e,uipment or "uildin's.
ANALYSIS CODES, in accountin', represent soft%are driven analysis methods %hich
are independent of the normal 'roupin' of account codes. An analysis code allo%s
mana'ement to collect and monitor income and expenditure for a particular function or
event that is not captured "y the use of a pro-ect code or class, i.e. allo%s for much finer
se'mentation.
ANCILLARY relates to somethin' extra or of lesser importance. .or example, ancillary
revenue %ould "e revenue derived from the provisionin' of products or services that are
not considered to "e primary to the 'eneration of revenue.
ANGEL INVESTOR is a private %ealthy individual that has no association %ith a
venture capital firm, investment fund, etc. $he ?an'el? invests hisBher private money into
%hat heBshe "elieves to "e promisin' opportunities, i.e., normally startup companies.
!ometimes t%o or more ?an'els? %ill -ointly invest into opportunitites to spread the ris).
ANNUALIZE is a statistical techni,ue %here"y fi'ures coverin' a period of less than
one year are extended to cover a 9H8month period. $he techni,ue, to "e accurate, must
ta)e seasonal variations into consideration.
ANNUAL REPORT is the re,uirement for all pu"lic companies to file an annual report
%ith the !ecurities and Exchan'e #ommission detailin' the precedin' year+s financial
results and plans for the upcomin' year. (ts re'ulatory version is called ?.orm 9: <.? $he
report contains financial information concernin' a company+s assets, lia"ilities, earnin's,
profits, and other year8end statistics. $he annual report is also the most %idely8read
shareholder communication.
ANNUITY, in finance, is a series of fixed payments, usually over a fixed num"er of
years* or for the lifetime of a person, in %hich case it %ould "e called a life8contin'ent
annuity or simply life annuity.
ANOMALY, 'enerally, is a deviation from the common rule. (t is an irre'ularity that is
difficult to explain usin' existin' rules or theory. (n securities, it is an unexplained or
unexpected price or rate relationship that seems to offer an opportunity for an ar"itra'e8
type profit, althou'h not typically %ithout ris). Examples include the tendency of small
stoc)s to outperform lar'e stoc)s, of stoc)s %ith lo% price8to8"oo) value ratios to
outperform stoc)s %ith hi'h price8to8"oo) value ratios, and of discount currency for%ard
contracts to outperform premium currency for%ard contracts.
ANR is Avera'e 3um"er of 5uns or Avera'e 3ot 5eady (call centers).
AOP is either Ad-usted 2peratin' Profit or Annual 2perations Plan.
AP is Accounts Paya"le.
APB is Accountin' Principles Board or an Accountin' Principles Board opinion
(GAAP).
APB $% is the Accountin' Principles Board E,uity Method of Accountin' for
(nvestments in #ommon !toc).
APIC is an acronym for Additional Paid8(n8#apital (financeB"usiness).
APPLIED RESEARCH is desi'ned to solve practical pro"lems of the modern %orld,
rather than to ac,uire )no%led'e for )no%led'e+s sa)e.
APPORTION is to divide and share out accordin' to a plan.
APPRECIATION is the increase in the value of an asset in excess of its deprecia"le
cost, %hich is due to economic, and other conditions, as distin'uished from increases in
value due to improvements or additions made to it.
APPROPRIATE / APPROPRIATED / APPROPRIATION is distri"ution of net
income to various accounts and B or the allocation of retained earnin's for a desi'nated
purpose, e.'. plant expansion.
APPROPRIATION ACCOUNT is a separate account for %hich specific dollar amounts
are authori&ed and appropriated.
AR is Accounts 5eceiva"le.
ARBITRAGE is the movements of funds to ta)e advanta'e of differences in exchan'e
or interest rates* such movements ,uic)ly eliminate any such differences.
ARGUMENT IN ACCOUNTING usually revolves around the premise that
characteri&es fair values of assets as "ein' more relevant "ut less relia"le than their
historical costs, %ith fair value "ein' ultimately more informative only if its increased
relevance out%ei'hs its reduced relia"ility.
ARM&S LENGTH TRANSACTION is a transaction that is conducted as thou'h the
parties %ere unrelated, there"y avoidin' any sem"lance of conflict of interest.
AROE is Ad-usted 5eturn on E,uity.
ARPU is Avera'e 5evenue Per ser.
ARR is an acronym for Accountin' 5ate of 5eturn.
ARREARS is an unpaid overdue de"t, or the state of "ein' "ehind in payments, e.'. an
account in arrears.
ARTICLES OF INCORPORATION is the primary le'al document of a corporation*
they serve as a corporation+s constitution. $he articles are filed %ith the state 'overnment
to "e'in corporate existence. $he articles contain "asic information on the corporation as
re,uired "y state la%.
ARTICLES OF PARTNERSHIP is the contract creatin' a partnership.
ARTICULATION, in "usiness, is the shape or manner in %hich thin's come to'ether
and a connection is made. (n the spo)en %ord, it is expressin' in coherent ver"al form.
ASB see A##23$(3G !$A31A51! B2A51.
ASEAN (A''()*+,*(- (. S(/,01+', A'*+- N+,*(-') is a tradin' "loc) of countries in !E
Asia. 2ri'inally formed as an anti8communist military alliance, it is no% focused on
developin' a free trade a'reement amon' mem"er nations.
ASIS CONDITION is the transfer of title to a property in an existin' condition %ith no
%arranties or representations.
ASK PRICE, in the context of the over8the8counter mar)et, the term ?as)? refers to the
lo%est price at %hich a mar)et ma)er %ill sell a specified num"er of shares of a stoc) at
any 'iven time. $he term ?"id? refers to the hi'hest price a mar)et ma)er %ill pay to
purchase the stoc). $he as) price (also )no%n as the ?offer? price) %ill almost al%ays "e
hi'her than the "id price. Mar)et ma)ers ma)e money on the difference "et%een the "id
price and the as) price. $hat difference is called the ?spread?.
ASSESSED VALUE is the estimated value of property used for tax purposes.
ASSESSMENT is a. proportionate share of a shared expense* or, ". amount of tax or
other levied special payment due to a 'overnmental municipality or association.
ASSET is anythin' o%ned "y an individual or a "usiness, %hich has commercial or
exchan'e value. Assets may consist of specific property or claims a'ainst others, in
contrast to o"li'ations due others. (!ee also L*+2*3*,*1').
ASSET AVAILABILITY is the stated condition or availa"ility of an asset for usa"ility.
$he su"-ect asset is not availa"le if it is already in use, at capacity, under'oin'
maintenance, "ro)en, etc.
ASSET EARNING POWER is a common profita"ility measure used to determine the
profita"ility of a "usiness "y ta)in' its total earnin' "efore taxes and dividin' that "y
total assets.
ASSET REVALUATION RESERVE is an accountin' concept and represents a
reassessment of the value of a capital asset as at a particular date. $he reserve is
considered a cate'ory of the e,uity of the entity. An asset is ori'inally recorded in the
accounts at its cost and depreciated periodically over its estimated useful life as a
measure of the amount of the asset+s value consumed in that period. (n practice, the actual
useful life of an asset can "e miscalculated or an event can cause a chan'e to the useful
life. #onse,uently, assets occasionally need to "e revalued in order to reflect a more close
approximation to their ?%orth? in the accounts. Khen the asset is revalued, the offsettin'
entry (in a dou"le entry accountin' system) %ould "e either made to the profit or loss
accounts or to the e,uity of the entity.
ASSET REVERSION is asset recovery "y the sponsorin' employer throu'h termination
of a defined "enefit pension fund andBor of assets in excess of amounts re,uired to pay
accrued "enefits of a pension fund. (n the .!., assets recovered throu'h reversion are
su"-ect to corporate income tax and an excise tax.
ASSET SALE is the sale of certain named assets of a corporation, partnership or sole
proprietorship. sually the seller retains o%nership of the cash and cash e,uivalents
(such as Accounts 5eceiva"le) and the lia"ilities of the entity. $he seller then %ill pay the
lia"ilities %ith the cash, any do%n payment and the cash e,uivalents as they "ecome
cash. Assets named are typically trade name, trade fixtures, inventory, leasehold ri'hts,
telephone num"er ri'hts and 'ood%ill. Assets sold can "e tan'i"le or intan'i"le.
ASSETS HELD FOR SALE are those assets, primarily lon'8term assets, that an entity
%ishes to dispose of or li,uidate throu'h sale to others.
ASSET TURNOVER RATIO is a 'eneral measure of a firm+s a"ility to 'enerate sales
in relation to total assets. (t should "e used only to compare firms %ithin specific industry
'roups and in con-unction %ith other operatin' ratios to determine the effective
employment of assets.
ASSET VALUATION is the process of determinin' the current %orth of a portfolio,
company, investment, or "alance sheet item. $he term is often used to descri"e the %orth
of an asset %hich may "e incorporated into company accounts, %here the o%nership of
the asset is not necessarily to "e transferred "ut the valuation is re,uired for the "alance
sheet, company ta)eovers, share flotation or mort'a'es.
ASSIGNED VALUE is a value that serves as an a'reed8upon reference for comparison*
normally derived from or "ased upon experimental %or) of some national or international
or'ani&ation.
ASSOCIATE, in "usiness, is a person "rou'ht to'ether %ith a company or another
person into a relationship in any of various intan'i"le %ays.
ASSUMPTION, 'enerally, is one or more "eliefs or unconfirmed facts that contri"ute to
a conclusion. !pecifically, it is the act of ta)in' on the responsi"ility or assumin' the
lia"ilities of another.
ASSURANCE has "een defined "y the American (nstitute of #ertified Pu"lic
Accountants (A(#PA) as ?(ndependent Professional !ervices that improve information
,uality or its context?. !uch services are very "road and could include assessments of
various industries, e.'., (nternet security or ,uality of health facilities.
ATA (Accredited $ax Advisor), in the !, is a national credential conferred "y
Accreditation #ouncil for Accountancy and $axation to professionals %ho handle
sophisticated tax plannin' issues, includin' o%nership of closely held "usinesses,
,ualified retirement plans and complicated estates.
ATM see A$2MA$E1BA$2MA$(# $E66E5 MA#C(3E.
ATP is an acronym for After $ax Profit, Accredited $ax Preparer, and possi"ly more.
ATP (Accredited $ax Preparer), in the !, is a national credential conferred "y
Accreditation #ouncil for Accountancy and $axation to professionals %ho have a
thorou'h )no%led'e "ehind the existin' tax code and tax preparation of individuals,
corporate and partnership tax returns.
AT RISK is the exposure to the dan'er of economic loss* fre,uently used in the context
of claimin' tax deductions. .or example, a person can claim a tax deduction in a limited
partnership if the taxpayer can sho% it is at ris) of never reali&in' a profit and of losin'
its initial investment.
ATTEST is to authenticate, affirm to "e true, 'enuine, or correct, as in an official
capacity.
AT THE MONEY is an option %here the stri)e price is approximately e,ual to the
underlyin' price.
ATTRITION a reduction in num"ers usually as a result of resi'nation, retirement, or
death.
AUCTION MARKET is a tradin' system in %hich "uyers enter competitive "ids and
sellers enter competitive offers simultaneously. $his, as opposed to the over8the8counter
mar)et, %here trades are ne'otiated. Examples7 the 30!E and the AME4. (t is
sometimes called dou"le auction mar)et.
AUDIT is the inspection of the accountin' records and procedures of a "usiness,
'overnment unit, or other reportin' entity "y a trained accountant for the purpose of
verifyin' the accuracy and completeness of the records. (t could "e conducted "y a
mem"er of the or'ani&ation (internal audit) or "y an outsider (independent audit). A #PA
audit determines the overall validity of financial statements. A tax audit ((5! in the .!.)
determines %hether the appropriate tax %as paid. An internal audit 'enerally determines
%hether the companyDs procedures are follo%ed and %hether em"e&&lement or other
ille'al activity occurred.
AUDIT BUREAU OF CIRCULATION (ABC) is a third8party or'ani&ation that
verifies the circulation of print media throu'h periodic audits.
AUDIT COMMITTEE, in a lar'er or more sophisticated corporation, the "oard may
find it useful to appoint an audit committee %hose oversi'ht extends not only to external
audits, "ut also to internal audits, internal controls, and external reportin'. (deally, an
audit committee is composed of three to five non8mana'ement directors and, as needed,
outsiders %ith accountin' and financial expertise. (n a smaller corporation the audit
committee may "e a sin'le director %ith financial expertise and audit experience %ho
ta)es the lead in exercisin' the "oard+s audit oversi'ht responsi"ility.
AUDIT EVIDENCE includes %ritten and electronic information (such as chec)s,
records of electronic fund transfers, invoices, contracts, and other information) that
permits the auditor to reach conclusions throu'h reasonin'.
AUDIT FAILURE is an (nstance %here the auditor said that the financial statements
%ere fairly stated %hen in fact, they %ere not.
AUDITING STANDARDS provide minimum 'uidance for the auditor that helps
determine the extent of audit steps and procedures that should "e applied to fulfill the
audit o"-ective. $hey are the criteria or yardstic)s a'ainst %hich the ,uality of the audit
results are evaluated.
AUDIT OPINION LETTER is a si'ned representation "y an auditor as to the relia"ility
and fairness of a set of financial statements. (t is usually presented at the "e'innin' of an
audit report.
AUDITOR is an accountant usually certified "y a national professional association of
accountants, if one exists in the corporationDs country, or certified "y another country+s
reco'ni&ed national association of accountants. #orporations %ill often %or) %ith "oth
internal auditors and external auditors.
AUDIT PLAN/PLANNING is developin' an overall strate'y for the expected conduct
and scope of the audit. $he nature, extent, and timin' of plannin' varies %ith the si&e and
complexity of the entity, experience %ith the entity, and )no%led'e of the entity+s
"usiness.
AUDIT REPORT is a si'ned, %ritten document %hich presents the purpose, scope, and
results of the audit. 5esults of the audit may include findin's, conclusions (opinions), and
recommendations.
AUDIT RISK is a com"ination of the ris) that material errors %ill occur in the
accountin' process and the ris) the errors %ill not "e discovered "y audit tests. Audit ris)
includes uncertainties due to samplin' (samplin' ris)) and to other factors (non8samplin'
ris)).
AUDIT SCHEDULES are the information formats developed "y the external auditors to
'uide the corporation in the preparation of particular information presented in a particular
manner that facilitates the audit. $hese should al%ays "e completed "y the corporation
prior to the start of the audit.
AUDIT SCOPE refers to the activities covered "y an internal audit. Audit scope
includes, %here appropriate7 audit o"-ectives* nature and extent of auditin' procedures
performed* $ime period audited* and related activities not audited in order to delineate
the "oundaries of the audit.
AUDIT STRATEGY is a 'ame plan to attac) audit issues "efore they are raised.
5easons and -ustifications for all positions must "e understood and the foundation laid for
ta)in' the position.
AUDIT TRAIL is a step8"y8step record "y %hich financial, "usiness, and ,uality
assurance data can "e traced to its source. .or example7 chec)in' the validity of an
accountin' entry throu'h the step8"y8step record "y %hich accountin' data can "e traced
to their source.
AUTHORITATIVE PRONOUNCEMENT is a formal declaration of opinion
sanctioned "y esta"lished authority.
AUTHORIZATION OF STOCK is the provision in a corporate charter 'ivin'
permission to issue stoc).
AUTHORIZATION SCHEDULE is the 'uideline under %hich the su"-ect activity is
controlled and authori&ed. .or example, expenditure spendin' may "e controlled "y
amounts and the mana'erial level re,uired authori&in' or approvin' a preset tri''er
amount. As the amount increases over certain preset levels, hi'her mana'erial authority is
re,uired for approval.
AUTHORIZED CAPITAL STOCK is the maximum num"er of shares of common
stoc) that can "e issued under a company+s Articles of (ncorporation. (ssued shares are
normally less than the num"er of authori&ed shares.
AUTHORIZED STOCK see A$C25(LE1 #AP($A6 !$2#<.
AUTOMATED/AUTOMATIC TELLER MACHINE (ATM) is an unattended
machine (outside some "an)s) that dispenses money or allo%s an individual to conduct
unassisted "usiness transactions %ith the A$M %hen a personal coded card is used.
AUXILIARY !OURNAL is a -ournal in %hich accountin' information is stored "oth
"efore and after the transfer to the General 6ed'er.
AVAILABLE FOR SALE is a term that means exactly %hat is says, i.e. an asset is
availa"le for purchase and transfer of o%nership upon reachin' an a'reed upon price.
AVAL is a term meanin' insepara"le from the financial instrument. $his 'ives a
'uarantee and is a"stracted from the performance of the underlyin' trade contract7 Article
A9 of the 9>A: Geneva #onvention of the Bills 2f Exchan'e states that the aval can "e
%ritten on the "ill itself or on an allon'e. ! Ban)s are prohi"ited from avali&in' drafts.
AVALIZOR is an institution or person %ho 'ives an aval.
AVERAGE AGE OF INVENTORY is calculated "y the formula7 AFN B inventory
turnover.
AVERAGE COST is total cost for all units "ou'ht (or produced) divided "y the num"er
of units.
AVERAGE COST METHOD is usin' a %ei'hted avera'e cost for items in inventory
rather than actual cost for each specific item.
AVERAGE FUNDS EMPLOYED see .31! EMP620E1.
AVERAGE SETTLEMENT PERIOD is calculated7
.or 1e"tors E $rade 1e"tors 4 AFN days B #redit !ales
.or #reditors E $rade #reditors 4 AFN days B #redit Purchases.
AVOIDABLE COST is the amount of expense that %ould not occur if a particular
decision %ere to "e implemented (e.'., if an employee is laid off at a company that is
self8insured for unemployment compensation, the avoida"le cost is total direct salary less
payments for unemployment "enefits plus savin's in employee "enefits).
AXIOM, 'enerally, it is a sayin' that is %idely accepted on its o%n merits* in lo'ic, it is
a proposition that is not suscepti"le of proof or disproof* its truth is assumed to "e self8
evident.
BACKDOOR LISTING is a techni,ue used "y a company %hich failed to 'et listed on
an exchan'e, %here"y the company ac,uires and mer'es %ith a company already listed
on that exchan'e.
BACKCHARGE is to char'e a person or a firm an amount of money in order to ma)e
ad-ustments for a previous transaction.
BACKLOG is value of unfilled orders placed %ith a manufacturin' company. Khether a
firm+s "ac)lo' is risin' or fallin' is a clue to its future sales and earnin's.
BAD DEBT is an open account "alance or loan receiva"le that has proven to "e
uncollecti"le and is %ritten off.
BALANCE is7 a. e,uality "et%een the totals of the credit and de"it sides of an account*
or, ". the difference "et%een the totals of the credit and de"it sides of an account.
BALANCED SCORECARD (BSC) is a strate'ic mana'ement system "ased upon
measurin' )ey performance indicators across all aspects and areas of an enterprise7
.inancial, #ustomer, (nternal Process, and 6earnin' and Gro%th.
BALANCE OF PAYMENTS / BALANCE OF TRADE is the difference "et%een a
country+s total export dollar value and its total import dollar value, 'enerally or %ith
respect to a particular tradin' partner. A positive "alance means a net inflo% of capital,
%hile a ne'ative means capital flo%s out of the country.
BALANCE SHEET is an itemi&ed statement that lists the total assets and the total
lia"ilities of a 'iven "usiness to portray its net %orth at a 'iven moment of time. $he
amounts sho%n on a "alance sheet are 'enerally the historic cost of items and not their
current values.
BALANCE SHEET GEARING is the ratio of interest8"earin' de"t to e,uity.
BALLOON PAYMENT is a final loan payment that is considera"ly hi'her than prior
re'ular payments, in order to pay off the loan.
BANCASSURANCE is a 'eneral term descri"in' the "roader financial services
activities of "an)s and "uildin' societies, in particular their Pinsurance companyD
activities.
BANK BALANCE is the amount of money in a "an) account on a particular date as
recorded "y a financial institution on a "an) statement.
BANK COLLECTION is the collection of a chec) "y the "an) on "ehalf of a depositor.
BANK GUARANTEE is an irrevoca"le commitment "y a "an) to pay a specified sum
of money in the event that the party re,uestin' the 'uarantee fails to perform the promise
or dischar'e the lia"ility to a third person in case of the re,uestor+s default.
BANK RECONCILIATION is the verification of a "an) statement "alance and the
depositorDs chec)"oo) "alance.
BANK STATEMENT is a statement reportin' all transactions in the accounts held "y
the account holder.
BANKRUPTCY is a state of insolvency of an or'ani&ation or individual, i.e. an ina"ility
to pay de"ts. (n the .!., "an)ruptcy can ta)e either of three forms7
A) #hapter @ is involuntary li,uidation forced "y creditor(s). !ome companies are so far
in de"t that they can+t continue their "usiness operations. $hey are li)ely to ?li,uidate?
and are forced to file under #hapter @. $he courts ta)e over and administers throu'h a
court appointed trustee. $heir assets are sold for cash "y a court appointed trustee.
Administrative and le'al expenses are paid first, and the remainder 'oes to creditors*
B) #hapter 99 is voluntary "y the de"tor. nless the court rules other%ise, the de"tor
stays in control of the enterprise. $he .!. $rustee, the "an)ruptcy arm of the Gustice
1epartment, %ill appoint one or more committees to represent the interests of creditors
and stoc)holders in %or)in' %ith the company to develop a plan of reor'ani&ation to 'et
out of de"t.* and,
#) #hapter 9A "an)ruptcy, a de"tor proposes a A8N year repayment plan to the creditors
offerin' to pay off all or part of the de"ts from the de"tors+ future income. $he amount to
"e repaid is determined "y several factors includin' the de"tors+ disposa"le income. $o
file under this chapter you must have a ?re'ular source of income? and have some
disposa"le income. 6i)e in a #hapter @, corporations and partnerships may not file under
this chapter.
BARRIERS TO ENTRY are o"stacles to the entry of ne% firms into a mar)et. Barriers
to entry may ta)e various forms. $hey may "e technical "arriers, le'al "arriers or "arriers
that arise from stron' "randin' of the product.
BARS is an acronym for Base Accounts 5eceiva"le !ystem.
BARTER SYSTEM see TRADE EXCHANGE.
BASE AMOUNT is the fundamental numerical assumption from %hich somethin' is
"e'un or developed or calculated or explained, e.'. "ase pay.
BASE CAPITAL includes (9) shares that (a) are non8cumulative, non8retracta"le, non8
redeema"le and, if converti"le, are only converti"le into common shares, and (") have
"een issued and paid for* "ase capital also includes (H) contri"uted surplus, and (A)
retained earnin's.
BASE TAX YEAR is the tax year prior to the su"-ect tax year.
BASIC DEFENSE INTERVAL (BDI) is a measure that if for some reason all of your
revenues %ere to suddenly cease, the Basic 1efense (nterval (B1() helps determine the
num"er of days your company can cover its cash expenses %ithout the aid of additional
financin'. $he B1( is calculated7 (#ash Q 5eceiva"les Q Mar)eta"le !ecurities) B
((2peratin' Expenses Q (nterest Q (ncome $axes) B AFN) E Basic 1efense (nterval.
BASIC EARNINGS POWER (BEP) is useful for comparin' firms in different tax
situations and %ith different de'rees of financial levera'e. $his ratio is often used as a
measure of the effectiveness of operations. Basic Earnin' Po%er measures the "asic
profita"ility of Assets "ecause it excludes consideration of interest and tax. $his ratio
should "e examined in con-unction %ith turnover ratios to help pinpoint potential
pro"lems re'ardin' asset mana'ement.
BASIC NET INCOME PER SHARE is al%ays reported as net income per share on an
undiluted "asis. $he calculation of diluted net income per share includes the effect of
common stoc) e,uivalents such as outstandin' stoc) options, %hile the calculation of
"asic net income per share does not.
BASIC TENETS OF ACCOUNTING are four in num"er7 9. Assets E 6ia"ilities Q
2%ner+s E,uity, H. 1e"its E #redits, A. Assets are on the left (de"it side), and, ;.
6ia"ilities and E,uity are on the ri'ht (credit side).
BASIS, 'enerally, is that fi'ure or value that is the startin' point in computin' 'ain or
loss, depreciation, depletion, and amorti&ation of a company. !pecifically, it is the
financial interest that the (nternal 5evenue !ervice attri"utes to an o%ner of an
investment property for the purpose of determinin' annual depreciation and 'ain or loss
on the sale of the asset. (f a property %as ac,uired "y purchase, the o%ner+s "asis is the
cost of the property plus the value of any capital expenditures for improvements to the
property, minus any depreciation allo%a"le or actually ta)en. $his ne% "asis is called the
A1G!$E1 BA!(!.
BASIS, in investments, is the cost or "oo) value of an investment. $he 'ain or loss on an
investment is the sale price less the "asis. Basis is often called ?cost "asis.?
BASIS POINTS is :.:9O in yield. .or example, in increasin' from N.::O to N.:NO, the
yield increases "y five "asis points.
BATCH is a collection of thin's or persons to "e handled or processed to'ether.
BATCH COSTING is the identification and assi'nment of those costs incurred in
completin' the manufacture of a specified "atch of components. Cavin' arrived at the
"atch cost, the unit cost is simply derived "y dividin' it "y the num"er of components in
the "atch.
BATCHING# in accountin', is the 'atherin' and or'ani&in' of incomin' invoices prior
to processin'.
BAY, in "usiness B accountin', means Buy Another 0early.
BBA can mean7 Bachelor of Business Administration, Balanced Bud'et Act of 9>>@,
Bud'et Activity Account, Bud'et By Account, British Ban)ers Association, Blac)
Business Association, etc.
BCF is an acronym for Broadcast #ash .lo%.
BCL is an acronym for, amon' others, Ban) #omfort 6etter or Bachelor of #anonB#ivil
6a%.
BDI see BA!(# 1E.E3!E (3$E5/A6.
BEHAVIOURAL ACCOUNTING is the explanation and prediction of human "ehavior
in all possi"le accountin' contexts, e.'., ade,uacy of disclosure, usefulness of financial
statement data, attitudes a"out corporate reportin' practices, materiality -ud'ements, and
decision effects of alternative accountin' procedures.
BELOW THE LINE, in accountin', denotes credits or de"its affectin' "alance sheet
accounts rather than the income statement. Extraordinary items may also appear "elo%
the net profit line in the income statement, "ut accountin' standards8setters have
increasin'ly favored reflectin' most such items in periodic net income.
BENCHMARK is a study to compare actual performance to a standard of typical
competence* or, a standard for the "asis of comparison as "ein' a"ove, "elo% or
compara"le to.
BENEFICIAL OWNER is the person %ho en-oys the "enefits of o%nership even
thou'h title is in another name (often used in ris) ar"itra'e).
BENEFICIARY is a person %ho "enefits from the terms of a trust, pension or provident
fund, or other deferred income plan, or an insurance policy. (n "an)in', it is the person in
%hose favor a letter of credit is issued or a draft is dra%n.
BENEFIT see $A4AB6E BE3E.($!.
BENEFIT PERIOD is the pro-ected useful life time period over %hich an asset %ill "e
productive.
BEST PRACTICES are the 'enerally understood operational characteristics of
corporations %hich have "een successful in terms of hi'h repayment rates, si'nificant
outreach, and pro'ress to%ards surplus 'eneration.
BETA, in securitites, is a statistical measurement correlatin' a stoc)+s price chan'e %ith
the movement of the stoc) mar)et. $he "eta is an indicator or statistical measure of the
relative volatility of a stoc), fund, or other security in comparison %ith the mar)et as a
%hole. $he "eta for the mar)et is 9.::. !toc)s %ith "etas a"ove 9.: are more responsive
to the mar)et, "ut are also more ris)y investments. !toc)s %ith a "eta "elo% 9.: tend to
move in the opposite direction of the mar)et. .or example, if the mar)et moves 9:O, a
stoc) %ith a "eta of A.:: %ill move A:O* a stoc) %ith a "eta of .N %ill move NO.
BID PRICE see A!< P5(#E.
BIFURCATED 'enerally means to "e divided into or made up of t%o parts. (n
accountin' an example %ould "e7 to split the cash account in the accountin' records into
t%o accounts, cash R principal and cash R income.
BIG BATH is a "usiness strate'y in %hich a company manipulates its income statement
to ma)e poor results loo) even %orse. !trate'y "ein' that the follo%in' year %ill sho%
si'nificant improvement. Bi' "ath is sometimes employed "y ne% #E2s to ma)e their
first years results more impressive "y employin' "i' "ath accountin' to prior year results.
BIG 4 usually refers to the lar'est accountin' firms7 1eloitte & $ouche, Ernst and
0oun', <PMG, and Price%aterhouse#oopers.
BILL is a 7 to enter in an accountin' system 7 prepare a "ill of (char'es) " 7 to su"mit a
"ill of char'es to c 7 to enter (as frei'ht) in a %ay"ill d 7 to issue a "ill of ladin' to or for*
e.'., ?"illa"le expenses? are those expenses for %hich reim"ursement invoices are issued.
BILLABLE are those costs andBor expenses that are covered under a contractual
a'reement "et%een t%o entities that may "e "illed to the receivin' entity.
BILLABLE HOURS is professional hours %or)ed and "illed to clients.
BILL AND HOLD see !C(P (3 P6A#E.
BILL AND HOLD INVENTORY see !C(P (3 P6A#E.
BILLBACK, in e8commerce and credit card transactions, is a means of recoverin' or
reducin' interchan'e fees for transactions clearin' differently than planned. $he
processin' company (.1#) passes throu'h the char'es to the merchant.
BILLINGS is the re,uest for payment of a de"t.
BILLINGS, 'enerally, is the re,uest for payment of a de"t. (n accountin', it is sales for
%hich invoicin' has "een issued.
BILLINGS IN EXCESS OF COSTS see #2!$ (3 E4#E!! 2. B(66(3G!.
BILL IN PLACE see !C(P (3 P6A#E.
BILL OF EXCHANGE see 15A.$.
BILL OF LADING is the contract "et%een the o%ner of the 'oods and the car'o carrier
to move the 'oods to a specified destination. A clean "ill of ladin' is issued "y the carrier
verifyin' receipt of the merchandise in apparent 'ood condition (%ithout visually
apparent dama'e or defect). Bills of ladin' can sometimes "e made to cover the %hole
trip, or separate "ills of ladin' can "e prepared for each carrier. 2cean shipments
'enerally re,uire t%o, an (nland Bill of 6adin' coverin' land transportation to the port
and an 2cean Bill of 6adin' coverin' the ship portion. Bills of ladin' are ne'otia"le
%hile car'o is in transit.
BILL OF MATERIALS (BOM) is a listin' of all the assem"lies, su"8assem"lies, parts,
and ra% materials that are needed to produce one unit of a finished product. Each finished
product has its o%n "ill of materials.
BILLS PAYABLE, in merchant accounts, are all "ills %hich have "een accepted, and
promissory notes %hich have "een made, are called ?"ills paya"le,? and are entered in a
led'er account under that name, and recorded in a "oo) "earin' the same title.
BILLS PURCHASED, in trade finance, allo%s a seller to o"tain financin' and receive
immediate funds in exchan'e for a sales document not dra%n under a letter of credit. $he
"an) %ill send the sales documents to the "uyer+s "an) on "ehalf of the seller.
BILLS RECEIVABLE, in merchant accounts, are all promissory notes, "ills of
exchan'e, "onds, and other evidences or securities %hich a merchant or trader holds, and
%hich are paya"le to him.
BLACK HOLE EXPENDITURE is a capital 5&1 expenditure that does not 'ive rise
to a deprecia"le asset and is not other%ise deducti"le.
BLACK MARKETS are created %hen "uyers and sellers meet to ne'otiate the exchan'e
of a prohi"ited or ille'al 'ood. More 'enerally, it is any unofficial mar)et in %hich prices
are inordinately hi'h.
BLANKET AUTHORIZATION is direct authority to act %ithout havin' to 'ain
approval for each action. .or example7 ?Blan)et authori&ation %as 'iven to him for all his
"usiness travel?.
BLIND RECEIVING is a method to ensure more accurate %arehouse receipt counts,
i.e., P2 ,uantities or items are not displayed on receivin' tic)ets.
BLIND TRUST is a trust %here assets are not disclosed to their o%ner.
BLUE SKY LAW is a la% providin' for state re'ulation and supervision of the issuance
of investment securities.
BMR, amon' others, is Base Mort'a'e 5ate.
BOM see B(66 2. MA$E5(A6!.
BONA FIDE GUARANTY covers a specific element of a secured transaction, for
example, the inte'rity of receiva"les or the accuracy of inventory count.
BOND is a commonly used form of lon' term de"t.
BOND COVENANT are a'reements %ithin a "ond that can either "e ne'ative or
positive in the vie% of the "ondholder, e.'., a ne'ative "ond covenant is a "ond covenant
that prevents certain activities unless a'reed to "y the "ondholders.
BONDED is to7 a. secure payment of duties and taxes on ('oods) "y 'ivin' a "ond* or, ".
convert into a de"t secured "y "onds* or, c. provide a "ond for or cause to provide such a
"ond (e.'., to "ond an employee) that 'uarantees any monetary loss caused "y intentional
acts "y the "onded employee.
BONDED WAREHOUSE is a %arehouse authori&ed "y customs officials for the
stora'e of 'oods on %hich payment of duty is deferred until the 'oods are removed.
BOND DISCOUNT is the excess of a "ond face value over issued price.
BOND FUND see G62BA6 M$A6 .31.
BOND INDENTURE is the title specifyin' all the o"li'ations of the issuin' company to
the "ondholder.
BONDING is 'enerally used "y service companies as a 'uarantee to their clients that
they have the necessary a"ility and financial trac)in' to meet their o"li'ations. Bonds are
also used to 'uarantee payment of duty for .!. #ustoms entry.
BOND PREMIUM is the excess of the issue price over the face value of the "ond.
BOND REFERENDUM see 5E.E5E31M.
BOND SINKING FUND is a provision to repay a "ond.
BONUS is remuneration over and a"ove re'ular salary.
BOOK(S) %hen used as a noun refers to -ournals or led'ers (for example7 cash "oo)).
Khen used a ver" it refers to the recordin' of an entry (for example7 to "oo) the sale).
BOOKBUILD is a particular %ay of conductin' a float %here the price at %hich shares
are sold is not fixed, "ut rather is determined follo%in' a process in %hich interested
investors "id for shares. $his is ,uite a common %ay of determinin' the price paid for
shares "y institutional investors (.unds Mana'ers).
BOOK COST, normally, is the cost at the time an asset is purchased or reali&ed, i.e. the
total amount paid to ac,uire an asset.
BOOK INCOME is the income reported %ithin the financial statements of the taxa"le
entity, i.e., taxa"le income normally is not ali'ned %ith the financial income ("oo)
income) reported %ithin financial statements
BOOKING, in import B export, is an arran'ement %ith a shippin' company to load and
carry a shipment.
BOOK INVENTORY is the ac,uistion cost of all inventory less lia"ilities associated
%th the inventory. !ee B22< /A6E.
BOOKKEEPING is the recordin' of "usiness transactions.
BOOK OF ACCOUNTS see 6E1GE5.
BOOKS OF ACCOUNT are the financial records of a "usiness. sually refers to the
lo%est level of recorded data, "efore summaries are made.
BOOKS OF RECORD are all mandatory entries into those documents that trac) the
activity, events, or decisions pertainin' to the su"-ect for %hich the records are
maintained, e.'., "oard of director minutes, "irths or deaths, and marria'e licenses.
BOOKTOMARKET is the ratio of the firm+s "oo) e,uity to mar)et e,uity.
BOOK VALUE is an accountin' term %hich usually refers to a "usiness+ historical cost
of assets less lia"ilities. $he "oo) value of a stoc) is determined from a company+s
records "y addin' all assets ('enerally excludin' such intan'i"les as 'ood%ill), then
deductin' all de"ts and other lia"ilities, plus the li,uidation price of any preferred stoc)
issued. $he sum arrived at is divided "y the num"er of common shares outstandin' and
the result is the "oo) value per common share. Boo) value of the assets of a company
may have little or no si'nificant relationship to mar)et value.
$an'i"le Boo) /alue is different than Boo) /alue in that it deducts from asset
value intan'i"le assets, %hich are assets that are not hard (e.'., 'ood%ill, patents,
capitali&ed start8up expenses and deferred financin' costs).
Economic Boo) /alue allo%s for a Boo) /alue analysis that ad-usts the assets to
their mar)et value. $his valuation allo%s valuation of 'ood%ill, real estate,
inventories and other assets at their mar)et value.
BOOKKEEPING is the art, practice, or la"or involved in the systematic recordin' of the
transactions affectin' a "usiness.
BOOK PROFIT see B22< (3#2ME.
BORROWING COSTS is the financial costs incurred "y an enterprise in connection
%ith the "orro%in' of funds, i.e. interest, amorti&ation of discounts or premiums arisin'
on the issue of de"t securities, loan fees, 'ains and losses on forei'n currency differences
related to "orro%ed funds and re'arded as an ad-ustment to interest costs.
BOTTOM LINE, in accountin'Bfinance, is specifically net income after taxes. (n
'eneral, it is an expression as to the end results of somethin', e.'. the net %orth of a
corporation on a "alance sheet, sales 'enerated from a mar)etin' campai'n, or final
decision on most any su"-ect (2ften said7 S'ive me the "ottom lineT).
BOTTOM UP is a concept of analy&in' a su"-ect, such as costs or revenue, startin' from
the lo%est level %or)in' to%ards the top.
BOUNCED CHECK is a chec) %ritten for an amount exceedin' the chec)in' account
"alance that is su"se,uently re-ected for payment due to insufficient funds.
BOY is Be'innin' 2f 0ear.
BR could "e Bac)%ard 5eportin' or Bad 5e'ister.
BRAND IMAGE is the vie% held "y consumers a"out a particular "rand of 'ood or
service. $he stron'er the "rand ima'e the more inelastic the demand for the product is
li)ely to "e.
BRAND LOYALTY is a situation %hen a consumer is reluctant to s%itch from
consumption of a favored 'ood. $he consumer is ?loyal? to the "rand.
BRAND NAME is a name 'iven to a product or service.
BREACH OF CONTRACT is the failure to perform provisions of a contract.
BREAKEVEN ANALYSIS is an analysis method used to determine the num"er of -o"s
or products that need to "e sold to reach a "rea)8even point in a "usiness.
BREAKEVEN EQUATION is the e,uation that determines B5EA<8E/E3 P2(3$.
6et p E unit sellin' price, v E unit varia"le cost, .# E total fixed costs, x E sales in units.
$he e,uation7 px E vx Q .#.
BREAKEVEN POINT is the volume point at %hich revenues and costs are e,ual* a
com"ination of sales and costs that %ill yield a no profitBno loss operation.
BREAKEVEN SALESsee B5EA<8E/E3 P2(3$.
BRIDGE LOAN (BRIDGING LOAN) is an e,uity loan secured to solve short8term
financin' pro"lem.
BRITISHAMERICAN MODEL is an accountin' model. $here are other accountin'
systems %hich differ from the .!. accountin' model. .!. GAAP and .A!B standards
are not the only accountin' principles used internationally* for example, many countries
reverse the .!. de"it and credit system. Many countries %ith hi'h rates of inflation
account for inflation in financial reports much more than the .!. does. Also, for any
company operatin' internationally there is the currency exchan'e translation pro"lem
%hen consolidatin' financial statements.
BROKERAGE, dependent upon usa'e, is the "usiness of a "ro)er* char'es a fee to
arran'e a contract "et%een t%o parties, or, the place %here a "ro)er conducts hisBher
"usiness.
BROUGHT FORWARD is the reco'nition of a value that %as determined in the past,
e.'. an accumulated "alance "rou'ht for%ard at the start of a ne% accountin' period.
BUDGET is an itemi&ed listin' of the amount of all estimated revenue %hich a 'iven
"usiness anticipates receivin', alon' %ith a listin' of the amount of all estimated costs
and expenses that %ill "e incurred in o"tainin' the a"ove mentioned income durin' a
'iven period of time. A "ud'et is typically for one "usiness cycle, such as a year, or for
several cycles (such as a five year capital "ud'et). 2f the many )inds of "ud'ets, a #A!C
B1GE$ sho%s #A!C .62K, an E4PE3!E B1GE$ lists expected payments of
money, and a #AP($A6 B1GE$ sho%s the anticipated payments for #AP($A6
A!!E$!. !ee .25E#A!$, P52GE#$(23.
BUDGETARY ACCOUNTING, contrary to financial accountin', loo)s for%ard7 it
measures the cost of planned ac,uisitions and the use of economic resources in the future.
BUDGETARY DEFICIT occurs %hen expenditures are 'reater than revenues.
BUDGET CONTROL is actions carried out accordin' to a "ud'et plan. $hrou'h the use
of a "ud'et as a standard, an or'ani&ation ensures that mana'ers are implementin' its
plans and o"-ectives. $heir actual performance is measured a'ainst "ud'eted
performance.
BUDGETING is the documentin' of intended expenditures over a specified time period
(normally one year) alon' %ith proposals for ho% to meet them. !ee also LE52 BA!E1
B1GE$.
BUDGET PERFORMANCE REPORT is the comparison of planned "ud'et and actual
performance.
BUDGETING PROCESS is a systematic activity that develops a plan for the
expenditure of a usually fixed resource, such as money or time, durin' a 'iven period to
achieve a desired result.
BUFFER is anythin' that stands "et%een t%o other thin's. .or example, an inventory
"uffer %ould "e additional inventory over and a"ove committed or planned inventory.
$he inventory "uffer %ill act as an inventory reserve to ensure that sufficient inventory is
availa"le %hen and if re,uired, i.e., the "uffer inventory stands "et%een committed
inventory and +out8of8stoc)+ status.
BURDEN RATE, %hen referrin' to personnel "urden, is the sum of employer costs over
and a"ove salaries (includin' employer taxes, "enefits, etc.). Khen referrin' to factory or
manufacturin' see 2/E5CEA1.
BURN RATE is the rate at %hich a ne% company uses up its venture capital to finance
overhead "efore 'eneratin' positive cash flo% from operations. (t is the rate of ne'ative
cash flo%, usually ,uoted as a monthly rate.
BURSARY is the treasury of a pu"lic institution or reli'ious order.
BUSINESS ANALYST , in securitiesBinvestment industry, is a person %ith expertise in
evaluatin' financial investments* a "usiness analyst performs investment research and
ma)es recommendations to institutional and retail investors to "uy, sell, or hold* most
analysts speciali&e in a sin'le industry or "usiness sector.
BUSINESS ENTITY is a selection of the le'al form under %hich a "usiness is to
operate7 sole proprietorship, 'eneral partnership, corporation, ! corporation (in the .!.),
or, a limited lia"ility company.
BUSINESS ENTITY PRINCIPLE is %here the "usiness is seen as an entity separate
from its o%ner(s) that )eeps and presents financial records and prepares the final
accounts and financial statements. $he accountin' is )ept for each entity as a %hole
('roups of companies must present consolidated accounts and consolidated financial
statements).
BUSINESS MATRIX, often used in "usiness incu"ators, is %here separate "usiness
entities -oin forces to advance the development of a start8up, e.'.., one firm may offer
offices, another mar)etin'Bsales assistance or manufacturin' expertise, etc. !uch a matrix
may receive compensation in the form of e,uity from the start8up "ein' assisted "y that
"usiness matrix.
BUSINESS PLAN is a description of a "usiness (normally over a 98N year period). A
"asic "usiness plan includes7 product(s) andBor service(s), the mar)et, competitor
analysis, the )ey people involved, financin' needs, and the financial re%ards if the
"usiness plan is implemented successfully. A %ell8prepared "usiness plan plays t%o
important roles, firstly, it is a useful mana'ement tool that can help mana'ement plot a
course for the company, and secondly, it is a vital sales tool that %ill impress fundin'
sources, e.'., venture capitalists or the "oard of directors, %ith mana'ement+s plannin'
a"ility and 'eneral competence. 2ther thin's "ein' e,ual, a %ell prepared "usiness plan
%ill increase a company+s chances of o"tainin' a financial commitment to fund the
"usiness.
BUSINESS PROCESS REENGINEERING (BPR) is the analysis and radical redesi'n
of "usiness processes usin' o"-ective, ,uantitative methods and tools and mana'ement
systems to accomplish chan'e or performance improvement. Also called7 5e8
En'ineerin', 5een'ineerin', Process 5een'ineerin', Process Uuality Mana'ement, BP5,
Process (nnovation, Process (mprovement, and Business Process En'ineerin'
BUSINESS PUBLICATIONS AUDIT (BPA) is similar to the Audit Bureau of
#irculation* the BPA is a third8party or'ani&ation that verifies the circulation of print
media throu'h periodic audits.
BUSINESS RISK see 2PE5A$(3G 5(!<.
BUSINESS SEGMENT is a component of an enterprise that (a) provides a sin'le
product or service or a 'roup of related products and services and (") that is su"-ect to
ris)s and returns that are different from those of other "usiness se'ments.
BUSINESS TRANSACTION see $5A3!A#$(23.
BUSINESS UNIT is e,uivalent to a %holly o%ned su"sidiary except that it is not treated
as a separate le'al entity. (t is an or'ani&ation %ithin a firm that could operate separately
"ecause it has all support functions contained %ithin the "usiness unit. $he internal
financial reportin' from a "usiness unit to the corporate office is "asically identical to a
separate le'al entity.
BUSINESS VALUATION determines the price that a hypothetical "uyer %ould pay for
a "usiness under a 'iven set of circumstances.
BUYER'S MARKET is %here the ,uantity of 'oods for sale exceeds the amount
consumers are %illin' and a"le to "uy at the current mar)et price. (t is characteri&ed "y
lo% prices. .or example, a mar)et condition that occurs in real estate %here more homes
are for sale than there are interested "uyers.
BVI is an acronym for British /ir'in (slands (a ma-or offshore "an)in' and corporation
player).
B/W is Blac) & Khite, Bet%een, or Bundled Kith.
BYLAWS are the provisions of corporate policies.
BYPRODUCTS are incidental products resultin' from the processin' of another
product.
C5A5 is sometimes used to identify the #hief Accountant
CAD see #A!C AGA(3!$ 12#ME3$!.
CAGR see #2MP231 A33A6 G52K$C 5A$E.
CALL can "e 9. process of redeemin' a "ond or preferred stoc) issue "efore its normal
maturity. A security %ith a call provision typically is issued at an interest rate hi'her than
one %ithout a call provision. (nvestors loo) at yield8to8call rather than yield8to8maturity*
H. ri'ht to "uy 9:: shares of stoc) at a specified price %ithin a specified period* or, A.
option to "uy (call) an asset at a specified price %ithin a specified period.
CALLABLE BOND is a "ond the issuer has the ri'ht to pay off at issuer+s discretion.
CALL CENTER is the part of an or'ani&ation that handles in"oundBout"ound
communications %ith customers.
CALL PREMIUM is a premium in price a"ove the par value of a "ond or share of
preferred stoc) that must "e paid to holders to redeem the "ond or share of preferred
stoc) "efore its scheduled maturity date.
CALL PROVISION is a. a provision of a "ond or preferred stoc) issue, listed in its
indenture (the formal a'reement "et%een the "ond issuer and the holder) that allo%s the
issuer to redeem the "ond "efore the maturity date either at par or at a premium to par* or,
". a clause in a mort'a'e 'ivin' the lender the ri'ht to demand and receive payment of
the "alance of the unpaid principal in full under certain conditions. A call provision is
similar to an acceleration clause.
C&C can mean7 #ash and #arry or #ollection & #lassification.
C&F (COST & FREIGHT) includes all shippin' costs "ut insurance. Generally used in
statement of terms, statin' cost and frei'ht are paid "y the exporter from his %arehouse to
a port in the importer+s country. (n this case, the "uyer is responsi"le for insurance.
C&I (COST & INSURANCE), in a price that is ,uoted S#&(T, means that the cost of
the product and insurance are included in the ,uoted price. (n this case, the cost of
shippin' %ould "e "orne "y the "uyer.
CANDY DEAL is a slan' term that refers to an ille'al "usiness practice to inflate
revenueBsales num"ers "y sellin' product to distri"utors %ith a pled'e to "uy them "ac)
later, in addition to providin' a percenta'e )ic)"ac) to the distri"utor for assistin' in
falsifyin' the sale.
CAPEX see #AP($A6 E4PE31($5E.
CAPITAL, in economics, can mean7 factories, machines, and other man8made inputs
into a production process. (n finance, capital is money and other property of a corporation
or other enterprise used in transactin' the "usiness.
CAPITAL ACCOUNT, in finance, is an account of the net value of a "usiness at a
specified date* in economics, it is that part of the "alance of payments recordin' a nation+s
outflo% and inflo% of financial securities.
CAPITAL ASSET is a lon'8term asset that is not purchased or sold in the normal course
of "usiness. Generally, it includes fixed assets, e.'., land, "uildin's, furniture, e,uipment,
fixtures and furniture.
CAPITAL ASSET PRICING MODEL (CAPM) is an e,uili"rium model %hich
descri"es the pricin' of assets, as %ell as derivatives. $he model concludes that the
expected return of an asset (or derivative) e,uals the ris)less return plus a measure of the
assets non8diversia"le ris) (?"eta?) times the mar)et8%ide ris) premium (excess expected
return of the mar)et portfolio over the ris)less return). $hat is7 expected security return E
ris)less return Q "eta x (expected mar)et ris) premium). (t concludes that only the ris)
%hich cannot "e diversified a%ay "y holdin' a %ell8diversified portfolio (e.'. the mar)et
portfolio) %ill affect the mar)et price of the asset. $his ris) is called systematic ris),
%hile ris) that can "e diversified a%ay is called diversifia"le ris) (or ?nonsystematic
ris)?). nfortunately, $he #APM is more difficult to implement in practice than the
"inomial option pricin' model or the Blac)8!choles formula "ecause to price an asset it
re,uires measurement of the asset+s expected return and its "eta. But, on the other hand, it
also attempts to ans%er a more difficult ,uestion7 $he "inomial option pricin' model or
the Blac)8!choles formula as)s %hat is the value of a derivative relative to the concurrent
value of its underlyin' asset. $he #APM as)s %hat is the value of an asset (or derivative)
relative to the return of the mar)et portfolio. Because of this, the option models are often
referred to as ?relative? valuation models, %hile the #APM is considered an ?a"solute?
valuation model. Killiam !harpe %on the 3o"el Pri&e in Economics principally for his
role in the development of the #APM.
CAPITAL BUDGET is the estimated amount planned to "e expended for capital items
in a 'iven fiscal period. #apital items are fixed assets such as facilities and e,uipment,
the cost of %hich is normally %ritten off over a num"er of fiscal periods. $he capital
"ud'et, ho%ever, is limited to the expenditures that %ill "e made %ithin the fiscal year
compara"le to the related operatin' "ud'ets.
CAPITAL CHARGE is a monetary amount, calculated "y multiplyin' the money the
"usiness has tied up in capital, "y the %ei'hted avera'e cost of capital (KA##). #apital
char'e is deducted from net operatin' profit after tax to arrive at Economic Profit.
CAPITAL CONTRIBUTION is cash or property ac,uired "y a corporation from a
shareholder %ithout the receipt of additional stoc).
CAPITAL EMPLOYED is the value of the assets that contri"ute to a company+s a"ility
to 'enerate revenue, i.e, fixed assets plus current assets minus current lia"ilities.
CAPITAL EXPENDITURE (CAPEX) is the amount used durin' a particular period to
ac,uire or improve lon'8term assets such as property, plant or e,uipment.
CAPITAL FUNDS is the total of capital de"entures, if any, capital stoc), if any, surplus,
undivided profits, unallocated reserves, 'uaranty fund, and 'uaranty fund surplus.
CAPITAL GAIN is the excess of sellin' price over purchase price, %hich may "e 'iven
special treatment for tax purposes provided the sale ta)es place more than a 'iven num"er
of months after purchase.
CAPITAL IMPROVEMENT, in real estate, is any permanent structure or other asset
added to a property that adds to its value. (n 'eneral, it is any value added activity or cost
to a lon'8term or permanent asset that increases its value.
CAPITAL INFUSION often refers to the cross8su"sidi&ation of divisions %ithin a firm.
Khen one division is not doin' %ell, it mi'ht "enefit from an infusion of ne% funds from
the more successful divisions. (n the context of venture capital, it can also refer to funds
received from a venture capitalist to either 'et the firm started or to save it from failin'
due to lac) of cash.
CAPITAL INTENSIVE is used to descri"e industries or sectors of the economy that
re,uire lar'e investments in capital assets to produce their 'oods, such as the automo"ile
industry. $hese firms re,uire lar'e profit mar'ins andBor lo% costs of "orro%in' to
survive.
CAPITAL INVESTMENT see #AP($A6 E4PE31($5E.
CAPITALIZATION is the statement of capital %ithin the firm 8 either in the form of
money, common stoc), lon'8term de"t, or in some com"ination of all three. (t is possi"le
to have too much capital (in %hich case the firm is overcapitali&ed) or too little capital (in
%hich case the firm is undercapitali&ed).
CAPITALIZATION OF MAINTAINABLE EARNINGS is a valuation method*
perhaps the most 'enerally accepted method that involves capitali&in' the future
maintaina"le earnin's "y the application of a suita"ly chosen capitali&ation rate or
multiple. $he definition of earnin's may "e profit after tax (?PA$?) or earnin's "efore
interest and tax (?EB($?). $his methodolo'y, %hich in reality is a surro'ate for the
discounted cash flo% method, re,uires consideration of several factors, includin'7 a. an
estimate of future maintaina"le earnin's havin' re'ard to historical operatin' results and
forecasts of future earnin's* ". determination of an appropriate capitali&ation rate %hich
%ill reflect the ris)s inherent in the "usiness includin' sensitivity to industry ris) factors,
'ro%th prospects, the 'eneral economic outloo) and alternative investment opportunities*
and c. a separate assessment of any surplus or unrelated assets and lia"ilities %hich are
not essential to the continuin' earnin' capacity of the "usiness operations.
CAPITALIZATION RATE, also )no%n as #AP 5A$E, is the rate of return a property
%ill produce on the o%ner+s investment. (t is stated as a rate of interest or discount rate
used to convert a series of future payments into a sin'le +present value+. (n real estate, the
rate includes annual capital recovery in addition to interest.
CAPITALIZE# in 'eneral "usiness, it is to supply %ith capital, as of a "usiness "y usin'
a com"ination of capital used "y investors and de"t capital provided "y lenders* or, to
consider expenditures as capital assets rather than expenses. !pecifically, it is to7 a)
convert a schedule of income into a principal amount, called capitalized value, "y
dividin' "y a rate of interest* ") record capital outlays as additions to asset accounts, not
as expenses* c) convert a lease o"li'ation to an assetBlia"ility form of expression called a
capital lease, i.e., to record a leased asset as an o%ned asset and the lease o"li'ation as
"orro%ed funds* or d) turn somethin' to oneDs advanta'e economically, e.'., sell
um"rellas on a rainy day.
CAPITALIZED COSTS are "usiness expenses that are %ritten off or deducted over a
period of time throu'h depreciation or amorti&ation schedules.
CAPITALIZED INTEREST is the accrued interest added to the principal "alance of a
loan %hile you are not ma)in' payments or your payments are insufficient to cover "oth
the principal and interest due. Khen this occurs, you are payin' interest on interest,
sometimes called ?ne'ative amorti&ation?.
CAPITALIZED LABOR means all direct costs of la"or that can "e identified or
associated %ith and are properly alloca"le to the construction, modification, or
installation of specific items of capital assets and, as such, can there"y "e %ritten do%n
over time via a depreciation or amorti&ation schedule as capitali&ed costs.
CAPITAL LEASE is a lease o"li'ation that has to "e capitali&ed on the "alance sheet. (t
is characteri&ed "y7 it is non8cancela"le* the life of lease is less than the life of the asset(s)
"ein' leased* and, the lessor does not pay for the up)eep, maintenance, or servicin' costs
of the asset(s) durin' the lease period.
CAPITAL LOSS is the excess of purchase price over sellin' price %hen the assets have
"een held for more than a certain period of time and %hich is 'iven a special treatment
for tax purposes.
CAPITAL MAINTENANCE contains t%o concepts, a financial concept and a physical
concept. Most entities adopt a financial concept of capital maintenance. nder this
concept a profit is earned only if the monetary amount of net assets at the end of the
period, excludin' distri"utionsBcontri"utions toBfrom o%ners, exceeds the monetary
amount of net assets at the "e'innin' of the period. .inancial capital maintenance is
usually measured in monetary units* ho%ever, the re,uirement to report the impact of
hyperinflation results in the measurement of assets and lia"ilities in monetary units of
constant purchasin' po%er.
CAPITAL MARKET is a mar)et %here e,uity or de"t securities are traded.
CAPITAL OUTLAY see #AP($A6 E4PE31($5E.
CAPITAL RATIONING is restrictions put of the amount planned for ne% expenditures.
CAPITAL REDUCTION means reducin' a company+s stated capital "ase.
CAPITAL REPLACEMENT, or economic depreciation, is the portion of the value of
machinery and e,uipment, in addition to repairs, that is used up in the production of a
particular commodity. (t is "ased on the current value of the machinery. #apital
replacement may "e re'arded as a discretionary expense in any particular year. (t may "e
deferred %hen income is lo% "ut ultimately must "e paid to maintain the capital stoc) so
that over the lon' term, the operation remains in "usiness.
CAPITAL RESERVE is a fund set aside for specific purposes, there"y cannot "e
distri"uted for other uses. !ee also 5E/E3E 5E!E5/E.
CAPITAL SPARE is the parts %ithin inventory that are purchased as spare parts for
deprecia"le assets (e.'., capital e,uipment). As such, the capital spares %ithin inventory
are deprecia"le and should not "e treated as normal inventory.
CAPITAL STOCK is the o%nership shares of a corporation authori&ed "y its articles of
incorporation, includin' preferred and common stoc).
CAPITAL STRUCTURE refers to the permanent lon'8term financin' of a company.
#apital structure normally includes common and preferred stoc), lon'8term de"t and
retained earnin's. (t does not include accounts paya"le or short8term de"t.
CAPITAL SURPLUS is an archaic term. !ee P5EM(M 23 #AP($A6 !$2#<.
CAPITAL TO RISK ASSET RATIO (CRAR) is one of the most %idely used
analytical measures of "an) capital ade,uacy and a tool for controllin' "an) ris). !ince
ris) assets are al%ays less than total assets, the capitalBris) asset ratio is naturally hi'her
than the capitalBtotal asset ratio for any 'iven computational period.
CAPITATION, 'enerally, is a tax or payment levied on the "asis of a fixed amount per
person. (n medical insurance, it is a method of payin' for healthcare services on the "asis
of the num"er of patients %ho are covered for specific services over a specified period of
time rather than the cost or num"er of services that are actually provided.
CAPM see #AP($A6 A!!E$ P5(#(3G M21E6.
CAP RATE see #AP($A6(LA$(23 5A$E.
CAPTIVE DISTRIBUTOR is one held under control of another "ut havin' the
appearance of independence* especially7 o%ned or controlled "y another concern and
operated for its needs rather than for an open mar)et.
CARNET is a customs document %hich permits you to send or carry merchandise into a
country duty and tax free for a short period, for use as samples or as display merchandise
in a trade sho%, for example.
CARRY FORWARD (#.) is data items that %ill al%ays carry for%ard into su"se,uent
transactions. (f the item is allo%ed per the re,uiredBconditional matrix and no entry is
made, the ne% transaction %ill reflect the data from the most current record. .or example,
if the ne% transaction to "e added is current (in se,uence), the #. data item %ill carry
for%ard the data from the prior active record. (f the ne% transaction to "e added is out8of8
se,uence and no entry is made, the #. data item %ill reflect the data from the current
status record. (f the item is not allo%ed, the ne% transaction %ill reflect the data from the
prior active record.
CARRYING VALUE, also )no%n as ?"oo) value?, it is a company+s total assets minus
intan'i"le assets and lia"ilities, such as de"t.
CASEBASED REIMBURSEMENT, in healthcare, is a hospital payment system in
%hich a hospital is reim"ursed for each dischar'ed inpatient at rates prospectively
esta"lished for 'roups of cases %ith similar clinical profile and resource re,uirements.
CASH is money, in the form of notes and coins, %hich constitutes payment for 'oods at
the time of purchase.
CASH AGAINST DOCUMENTS (CAD) is a transaction %here the "uyer assumes
o%nershipBtitle for the 'oods "ein' purchased upon payin' the a'reed upon sale price in
cash.
CASH & EQUIVALENTS means all cash, mar)etplace securities, and other near8cash
items. Excludes sin)in' funds.
CASH BASIS OF ACCOUNTING is the accountin' "asis in %hich revenue and
expenses are recorded in the period they are actually received or expended in cash. se of
the cash "asis 'enerally is not considered to "e in conformity %ith 'enerally accepted
accountin' principles (GAAP) and is therefore used only in selected situations, such as
for very small "usinesses and (%hen permitted) for income tax reportin'. !ee also
Accrual Basis.
CASH BILL is a documented receipt of cash payment as opposed to an invoice or
promise to pay.
CASH BOOK is a "oo) that records all payments and receipts of "usiness transactions R
%hether "y cash, chec) or credit card.
CASH BUDGET trac)s a "usinessDs anticipated cash receipts and dis"ursements. $his is
a very detailed and important schedule that dra%s on information in the 2peratin'
Bud'et.
CASHCARD is a credit card that entitles the holder to receive cash.
CASH CLEARING ACCOUNT represents a clearin' account for voided and reissued
imprest cash chec)s. (t is also used for miscellaneous corrections of imprest cash chec)s.
CASH CONVERSION CYCLE see #A!C #0#6E.
CASH COVERAGE RATIO see #A!C 1EB$ #2/E5AGE 5A$(2.
CASH COWS are products that produce a lar'e amount of revenue or mar'in "ecause
they have a lar'e share of an existin' mar)et %hich is only expandin' slo%ly.
CASH CYCLE is the len'th of time, normally stated in num"ers of days, "et%een the
purchase of ra% materials and the collection of accounts receiva"le 'enerated in the sale
of the final product.
CASH DEBT COVERAGE RATIO is the ratio of net cash provided "y operatin'
activities to avera'e total lia"ilities, called the cash de"t covera'e ratio, is a cash8"asis
measure of solvency. $his ratio indicates a companyDs a"ility to repay its lia"ilities from
cash 'enerated from operatin' activities %ithout havin' to li,uidate the assets used in
operations.
CASH DISBURSEMENT see 1(!B5!EB1(!B5!EME3$.
CASH DISBURSEMENTS/PAYMENTS !OURNAL is the -ournal recordin' all
dis"ursements (or payments).
CASH DISCOUNT is a refund of some fraction of the amount paid "ecause the
purchase price is paid "y the "uyer in cash, as opposed to ma)in' the purchase on credit
or, sometimes, credit card or chec).
CASH DIVIDEND is the payment of earnin's to shareholders.
CASH DRAW see P52P5(E$25! 15AK.
CASH EARNINGS is cash revenues minus cash expenses. $his differs from earnin's in
that it does not include non8cash expenses such as depreciation.
CASH FLOW is earnin's "efore depreciation and amorti&ation. #ash flo% is calculated
as the difference "et%een cash inflo%s and outflo%s. #ash flo% can "e derived from
2peratin' Profit "y ad-ustin' for items %hich do not affect payments (e.'. depreciation)
and items (e.'. chan'es in %or)in' capital) %hich affect payments "ut are not recorded in
2peratin' Profit.
CASH FLOW ANALYSIS is a type of financial analysis that compares the timin' and
amount of cash inflo%s %ith the timin' and amount of cash outflo%s. A firmDs cash flo%
position can 'reatly affect its a"ility to remain in "usiness. $hese effects may not "e
apparent from a cost8"enefit analysis.
CASH FLOW / CURRENT PORTION OF LONG TERM DEBT is a measure of the
firm+s a"ility to meet its o"li'ations %ith internally 'enerated cash.
CASH FLOW PRO!ECTION is a forecast of the cash (chec)s or money orders) a
"usiness anticipates receivin' and dis"ursin' durin' the course of a 'iven span of time 8
fre,uently a month. (t is useful in anticipatin' the cash portion of your "usiness at
specific times durin' the period pro-ected.
CASH FLOW STATEMENT see !$A$EME3$ 2. #A!C .62K!.
CASH FREE BALANCE AMOUNT, in the 'eneral led'er, usually represents the net
amount of Balance .or%ard plus Allocations plus 5evenue minus Expenditures minus
Encum"rances.
CASH FROM FINANCING is the sum of all the individual financin' activity cash flo%
line items.
CASH FROM INVESTING is the sum of all the individual investin' activity cash flo%
line items.
CASH FLOW FROM OPERATIONS is the sum of all the individual operatin' activity
cash flo% line items, less cash reali&ed from the sale of extraordinary items, e.'., fixed
assets.
CASH IN ADVANCE is %hen full payment is due "efore the merchandise is shipped.
6east ris) to seller, most ris) to "uyer.
CASH IN BANK literally means coin, currency, and cash items on deposit.
CASH ON HAND literally means coin, currency, and cash items on hand. (t is not
possi"le to have ne'ative cash on hand.
CASH PORTION is that percenta'e of assets consistin' of the le'al tender of the
amounts in ,uestion* the "alance of %hich is the non8cash portion* an example, a
transaction %here a corporation is ac,uired via a com"ination of cash and stoc).
CASH PROFIT is profit after tax plus depreciation.
CASH RATIO is a refinement to the U(#< 5A$(2. (t is the ratio of cash and
mar)eta"le securities to current lia"ilities. $he #A!C 5A$(2 indicates the extent to
%hich lia"ilities could "e li,uidated immediately. !ometimes called 6(U(1($0
5A$(2.
CASH RECEIPTS see 5E#E(P$!.
CASH RECEIPTS !OURNAL is the -ournal for recordin' all cash receipts.
CASH RESERVE RATIO (CRR) is a ratio %hich "an)s have to maintain %ith itself in
the form of cash reserves or "y %ay of current account %ith the 5eserve Ban), computed
as a certain percenta'e of its demand and time lia"ilities. $he o"-ective is to ensure the
safety and li,uidity of the deposits %ith the "an)s.
CASH SHORT/OVER ACCOUNT, in retail sales, is %here any differences "et%een
the cash re'ister tape totals and the actual cash receipts is char'ed a'ainst the cash short
and over account. (f the endin' "alance of the account is a de"it it is sho%n on the
(ncome !tatement as a miscellaneous expense. (f the endin' "alance of the account is a
credit it is sho%n on the (ncome !tatement as 2ther 5evenue.
CASH SWEEP is the use of surplus cash to prepay de"t or provide extra security for
lenders, instead of payin' it out to investors.
CAVEAT, 'enerally, is a %arnin' a'ainst certain acts* in la%, is a formal notice filed
%ith a court or officer to suspend a proceedin' until filer is 'iven a hearin'.V
CD see #E5$(.(#A$E 2. 1EP2!($.
CEO is an acronym for #hief Executive 2fficer. $he #E2 is the principle individual
responsi"le for the activities of a company.
CERTIFICATE OF DEPOSIT (CD) is a document %ritten "y a "an) or other financial
institution that is evidence of a deposit, %ith the issuerDs promise to return the deposit
plus earnin's at a specified interest rate %ithin a specified time period.
CERTIFICATE OF INSPECTION is certification, 'enerally "y an independent third
party, that the 'oods %ere in 'ood condition at the time of shipment.
CERTIFICATE OF OBLIGATION is a "ond issued "y a city, %ithout voter approval.
CERTIFICATE OF ORIGIN is a document that states %here the 'oods %ere made.
$his document is le'ally re,uired for many countries for the importation of merchandise.
CERTIFIED FINANCIAL PLANNER (CFP) is a financial planner %ho has received a
license from the (nstitute of #ertified .inancial Planners, indicatin' that heBshe %as
trained in investments, "ud'etin', taxes, "an)in', estate plannin' and insurance. !ome
#.Ps %or) on commission for the products they sell, and some %or) for a flat hourly fee.
CERTIFIED FINANCIAL STATEMENTS are financial statements that have
under'one a formal audit "y a certified pu"lic accountant and usually contain statements
of certification "y the #PA.
CERTIFIED PAYROLL REPORT means the record that a contractor or su"contractor
en'a'ed on a pu"lic %or) is re,uired to su"mit to an a%ardin' 'overnment "ody %ith a
statement of compliance as re,uired pursuant to re'ulations for each month in %hich the
contractor or su"contractor employs one or more %or)men in connection %ith the pu"lic
%or).
CERTIFIED PUBLIC ACCOUNTANT (CPA) is an accountant licensed to practice
pu"lic accountin'.
CFM, in finance B accountin', means #ertified (n .inancial Mana'ement.
CFO is an acronym for #hief .inancial 2fficer. $he #.2 is the officer in a corporation
responsi"le for handlin' funds, si'nin' chec)s, the )eepin' of financial records, and
financial plannin' for the company.
C5G5A5 means #ertified General Accountant.
CHAIRPERSON OF THE BOARD is the head of the "oard of directors of a
corporation, and 'enerally considered as head of the firm.
CHANNEL COSTING is the fulfillment cost information pertainin' to distri"ution
channels.
CHARGEBACK, in the credit industry, occurs %hen a credit card processor Schar'es
"ac)T to the merchant the cost of returned items or incorrect orders that the customer
claims %ere made to his or her credit card.
CHARGE OFF see BA1 1EB$.
CHAPTER S or SUBCHAPTER S is a le'al corporate entity or'ani&ed under the
nited !tates .ederal $ax #ode that allo%s !u"chapter ! #orporations to distri"ute all
income B loss proportionately to its shareholders, %ho then claim that income B loss on
their personal income taxes* there"y avoidin' the payment of corporate taxes.
CHARTER is the document of corporation or'ani&ation.
CHARTERED ACCOUNTANT (CA) is a British accountant %ho is a mem"er of the
(nstitute of #hartered Accountants. $hey %or) in many areas of "usiness and the pu"lic
sector, in roles ran'in' from sole practitioner to chief executive of a multinational
company. (n pu"lic practice firms, they provide professional services to a %ide ran'e of
fee payin' clients from private individuals to lar'e commercial and pu"lic sector
or'ani&ations, includin' "an)s. $he seservices include auditBassurance, accountancy, tax,
"usiness advisory, mana'ement consultancy, systems and ($,corporate finance, corporate
recovery and forensic accountin'. (n commerceBindustry and the pu"lic sector, they %or)
in a variety of roles includin' fund mana'ement, venture capital and e,uity analysis, as
%ell as financial mana'ement and financial reportin' roles.
CHARTERED FINANCIAL CONSULTANT (C0FC) is a financial plannin'
desi'nation for the insurance industry. #h.#s must meet experience re,uirements and
pass exams coverin' finance and investin'. $hey must have at least three years of
experience in the financial industry, and have studied and passed an examination on the
fundamentals of financial plannin', includin' income tax, insurance, investment and
estate plannin'.
CHART OF ACCOUNTS is a list of led'er account names and associated num"ers
arran'ed in the order in %hich they normally appear in the financial statements. $he
#hart of Accounts are customarily arran'ed in the follo%in' order7 Assets, 6ia"ilities,
2%ners+ E,uity (!toc)holders+ E,uity for a corporation), 5evenue, and Expenses.
CHATTEL MORTGAGE CONTRACT is a credit contract used for the purchase of
e,uipment %here the purchaser receives title of the e,uipment upon delivery "ut the
creditor holds a mort'a'e claim a'ainst it.
CHECK is a draft dra%n a'ainst a "an), paya"le upon demand to the personBentity
named upon the draft.
CHECK REGISTER is the -ournal for recordin' payments "y chec).
CHIEF ACCOUNTING OFFICER see #.2.
CHURN RATE is the percenta'e of customers (e.'., cellular telephone su"scri"ers) that
cancels their service per month.
CIA, in accountin', is an acronym for #ertified (nternal Auditor* or, #ash in Advance.
CIBT is an acronym for #ash (ncome Before $axes.
CIF (COST# INSURANCE AND FREIGHT) is a shipment %here all shippin' costs are
paid "y the exporter, includin' insurance.
CIP could "e #apital (mprovement Plan, #apital (mprovement Pro'ram, #apital
(nvestment Pro'ram, or #apital (nvestment Proposal(s).
CK is #hec).
CLAIM, in health care, is an itemi&ed statement of healthcare services and their costs
provided "y a hospital, physician+s office, or other provider facility. #laims are su"mitted
to the insurer or mana'ed care plan "y either the plan mem"er or the provider for
payment of the costs incurred. (n 'eneral la%, a claim is7 9) to ma)e a demand for money,
for property, or for enforcement of a ri'ht provided "y la%. H) the ma)in' of a demand
(assertin' a claim) for money due, for property, from dama'es or for enforcement of a
ri'ht. (f such a demand is not honored, it may result in a la%suit. (n order to enforce a
ri'ht a'ainst a 'overnment a'ency (ran'in' for dama'es from a ne'li'ent "us driver to a
shorta'e in payroll) a claim must "e filed first. (f re-ected or i'nored "y the 'overnment, a
la%suit may "e filed.
CLEARANCE LETTER is a documented certification from a reco'ni&ed authority that
the cleared entity has satisfied certain re,uirements, payments, actions, etc.
CLEARED ITEMS are accounts paya"le documents %hich have "een paid.
CLEARING ACCOUNT, in "an)in', is a "an) account used "y a mort'a'e servicin'
company for the temporary, short8term deposit of mort'a'e payments that have "een
collected and are either a%aitin' transmittal to investors %ho "ou'ht the mort'a'es or
a%aitin' deposit in escro% accounts. !ee #A!C #6EA5(3G A##23$.
CLIENT is someone %ho pays for 'oods or services.
CLOSELY HELD is a description of a corporation %hose votin' stoc) is o%ned "y a
very small num"er of shareholders.
CLOSING ACCOUNT is the determinin' the "alance of an account and postin' an
entry to offset such "alance.
CLOSING ENTRY is a -ournal entry at the end of a period to transfer the net effect of
revenue and expense items from the income statement to o%ners+ e,uity.
C5M5A5 means #ertified Mana'ement Accountant.
CMI see #2!$ MA3AGEME3$ (31E4.
CMO see #266A$E5(A6(LE1 M25$GAGE 2B6(GA$(23.
CNF is #ost and .rei'ht
COA, in accountin', means #hart 2f Accounts or #ost of Ac,uisition.
COD is #ash 2n 1elivery* %hich is exactly %hat it means.
CODING, in accountin', is the assi'nation of the proper account code to invoices.
COE see #2!$ 2. EU($0.
COGM is #ost 2f Goods Manufactured. !ee #ost of Goods !old.
COGNOVIT NOTE is a note in %hich the ma)er ac)no%led'es the de"t and authori&es
the entry of -ud'ment a'ainst him or her %ithout notice or a hearin' 7 a note containin' a
confession of -ud'ment. $his type of note is not valid in many states.
COGAS is #ost 2f Goods Availa"le for !ale. !ee #ost of Goods !old.
COGS see #2!$ 2. G221! !261
COGS (COST OF GOODS) RATIO E #2G! B $otal !ales.
COHORT SURVIVAL METHOD, in academia, utili&es historic enrollment data and
"irth records to estimate future enrollments.
COLLATERAL is assets used as security for the extension of a loan.
COLLATERALIZED MORTGAGE OBLIGATION (CMO) or, since 9>MF, as a 5eal
Estate Mort'a'e (nvestment #onduit (5EM(#). #M2s and 5EM(#s (terms %hich are
often used interchan'ea"ly) are similar types of securities %hich allo% cash flo%s to "e
directed so that different classes of securities %ith different maturities and coupons can
"e created. $hey may "e collaterali&ed "y mort'a'e loans as %ell as securiti&ed pools of
loans.
COLLATERAL NOTE is a note secured "y collateral. !ame as secured note.
COLLECTION PAPERS are those documents specified as necessary for payment to "e
made, such as the commercial invoice, certificate of inspection, and "ill of ladin'.
COLLECTION PERIOD (P16*(7 E-7) is used to appraise accounts receiva"le (A5).
$his ratio measures the len'th of time it ta)es to convert your avera'e sales into cash.
$his measurement defines the relationship "et%een accounts receiva"le and cash flo%. A
lon'er avera'e collection period re,uires a hi'her investment in accounts receiva"le. A
hi'her investment in accounts receiva"le means less cash is availa"le to cover cash
outflo%s, such as payin' "ills. NOTE" #omparin' the t%o COLLECTION PERIOD
ratios (Period Avera'e and Period End) su''ests the direction in %hich A5 collections
are movin', there"y 'ivin' an indication as to potential impacts to cash flo%.
COLLECTION PERIOD (P16*(7 A816+91) is used to appraise accounts receiva"le
(A5). $his ratio measures the len'th of time it ta)es to convert your avera'e sales into
cash. $his measurement defines the relationship "et%een accounts receiva"le and cash
flo%. A lon'er avera'e collection period re,uires a hi'her investment in accounts
receiva"le. A hi'her investment in accounts receiva"le means less cash is availa"le to
cover cash outflo%s, such as payin' "ills. NOTE" #omparin' the t%o COLLECTION
PERIOD ratios (Period Avera'e and Period End) su''ests the direction in %hich A5
collections are movin', there"y 'ivin' an indication as to potential impacts to cash flo%.
COLLECTIVE INVESTMENT SCHEME, 'lo"ally, is any arran'ement for poolin'
several investors+ funds so that the pooled fund can o"tain economies of scale and a
spread of investments "eyond the reach of individual investors. (t is usually called an
investment company in the .!.A.
COMBINED FINANCIAL STATEMENT is a financial statement that mer'es the
assets, lia"ilities, net %orth, and operatin' fi'ures of t%o or more affiliated companies. A
com"ined statement is distin'uished from a consolidated financial statement of a
company and su"sidiaries, %hich must reconcile investment and capital accounts.
COMFORT LETTERS see <EEP8KE66 AG5EEME3$!.
COMMERCIAL BANK is a financial institution that provides commercial "an)in'
services. A commercial "an) accepts deposits, 'ives "usiness loans and provides other
services to "usinesses.
COMMERCIAL ATTACH: is a "usiness and trade expert on the staff of a consulate
or em"assy. $hey are responsi"le for promotin' exports of their country+s 'oods and are
an excellent source of help.
COMMERCIAL LOAN is a short8term "usiness loan usually issued for a term of up to
six months.
COMMERCIAL PAPER is short8term o"li'ations %ith maturities ran'in' from H to
H@: days issued "y corporations, "an)s, or other "orro%ers to investors %ho have
temporarily idle cash on hand. #ommercial paper is usually unsecured and discounted.
COMMISSION is remuneration proportional to sales volume.
COMMITMENT is the act of standin' "ehind a policy %hose value ends %hen the
policy is concluded. .or example7 ? Ke made a commitment to do this?.
COMMITMENT BASED ACCOUNTING is %here spendin' controls are enacted that
ensures that no "ud'et executor can exceed his annual appropriation.
COMMITTED COSTS are costs, usually fixed costs, %hich the mana'ement of an
or'ani&ation has a lon'8term responsi"ility to pay. Examples include rent on a lon'8term
lease and depreciation on an asset %ith an extended life.
COMMON EQUITY is the result of su"tractin' redeema"le and non8redeema"le
preferred stoc) from total e,uity.
COMMON LAW is an un%ritten "ody of la% "ased on 'eneral custom in En'land* it is
used to some extent in the nited !tates.
COMMON SIZE ANALYSIS, as used in vertical analysis of financial statements, an
item is used as a "ase value and all other accounts in the financial statement are compared
to this "ase value. 2n the "alance sheet, total assets e,ual 9::O and each asset is stated
as a percenta'e of total assets. !imilarly, total lia"ilities and stoc)holder+s e,uity are
assi'ned 9::O, %ith a 'iven lia"ility or e,uity account stated as a percenta'e of total
lia"ilities and stoc)holder+s e,uity. 2n the income statement, 9::O is assi'ned to net
sales, %ith all revenue and expense accounts then related to it in percenta'es. !ee
#2MM23 !(LE PE5#E3$AGE!.
COMMON SIZE PERCENTAGES 8 (n the (ncome !tatement, each ?#ommon !i&e O?
is the field amount expressed as a percent of ?3et 5evenues.? (n the Balance !heet, each
?#ommon !i&e O? is the amount in the cate'ory as a percent of ?$otal Assets. ?5A$(2
A3A60!(!? as prepared "y /enture6ine presents several standard ?<ey 5atios? to
compare this firm to any of several standards. $his firm+s ratios may "e compared to
industry standards, to a sin'le other firm of similar (or different) type, or to this firm+s
past or anticipated performance. (n this analysis /enture6ine uses industry data "ased
upon the !(# #ode of that particular listin' (%hen availa"le).
COMMONSIZE STATEMENT see #2MM23 !(LE A3A60!(!.
COMMON STOCK is the most fre,uently issued class of stoc)* usually it provides a
votin' ri'ht "ut is secondary to preferred stoc) in dividend and li,uidation ri'hts.
COMPANY is an or'ani&ed 'roup of people to perform an activity, "usiness or
industrial enterprise.
COMPANY KIT, normally, is a for sale commercially pac)a'ed self8instruction product
containin' %ritten instructions, forms, soft%are (sometimes), for esta"lishin' an
enterprise.
COMPANY LIMITED BY GUARANTEE is %here the lia"ilities of the mem"ers %ill
"e restricted to the amount each a'rees to contri"ute to the assets of the company in the
event of dissolution or li,uidation.
COMPANY LIMITED BY SHARES is %here the mem"ers personal lia"ilities are
limited to the par value of their shares. a company limited "y 'uarantee.
COMPARABILITY is the ,uality or state of "ein' similar or ali)e.
COMPENSATING BALANCES are the funds a "usiness mi'ht "e re,uired to )eep in a
deposit or reserve account to help offset %hat the "an) perceives as ris). $he lender
mi'ht re,uire that an amount "ased on the "usinessD avera'e account "alance or a certain
percenta'e of the face value of the loan "e maintained in a deposit account.
COMPENSATING ERROR is the name 'iven to the situation %here one mista)e
cancels out the effect of a second mista)e.
COMPETITIVE PRICING 'enerally is %here firms must "e a"le to offer the "est price
in the mar)et and meet price erosion %ithout compromisin' ,uality. $his is normally met
%henever a firm finds accepta"le a prices8production com"ination such that7 a. At these
prices, there is no other production plan yieldin' hi'her profits and usin' fe%er capital
'oods* namely, firms "ehave as constrained profit maximi&ers at 'iven prices* and, ".
$here is no price vector satisfyin' ?a.? %ith hi'her prices for capital 'oods. (n other
%ords, the prices of capital 'oods are maximal %ithin those satisfyin' constrained profit
maximi&ation
COMPILATION is the presentation of financial statement information "y the entity
%ithout the accountantDs assurance as to conformity %ith Generally Accepted Accountin'
Principles (GAAP). (n performin' this accountin' service, the accountant must conform
to the A(#PA !tatements on !tandards for Accountin' and 5evie% !ervices (!!A5!).
COMPLETED CONTRACT METHOD OF ACCOUNTING is a method of revenue
reco'nition for lon'8term contracts (i.e., contract %hich span more than one accountin'
period) %here"y the total contract revenue and related cost of performance are reco'ni&ed
in the period in %hich the contract is completed. $his method stands in contrast to the
percenta'e8of8completion method of accountin' and is most often used %hen si'nificant
uncertainty exists %ith respect to the total cost of performin' the contract and,
accordin'ly, the ultimate amount of profit to "e reco'ni&ed thereon.
COMPLIANCE AUDIT is the revie% of financial records to determine %hether the
entity is complyin' %ith specific procedures or rules.
COMPLIANCE PANEL is a multi8mem"er committee chartered to investi'ate
conformance to la%s, rules or re'ulations. 2n many occasions they may "e empo%ered
"y 'overnment a'encies to ma)e rulin's as to compliance or non8compliance of any
entity under their perusal.
COMP;SITE DEPRECIATION is the 'roupin' of similar assets or dissimilar assets
%ithin the same class to'ether for the purpose of computin' a sin'le depreciation rate to
"e applied to all assets %ithin the 'roup.
COMPOSITE FINANCIAL STATEMENT is an avera'e or index of financial
statements of multiple accountin' periods or companies, e.'., industry avera'es.
COMPOUND ANNUAL GROWTH RATE (CAGR) is the year over year 'ro%th rate
applied to an investment or other part of a company+s activities over a multiple8year
period. $he formula for calculatin' #AG5 is (#urrent /alueBBase /alue) W (9BX of years)
8 9.
COMPOUND INTEREST is interest calculated from the total of ori'inal principal plus
accrued interest.
COMPOUND INTEREST PRINCIPLE is %here the interest is computed on principal
plus interest earned in previous periods.
COMPOUND !OURNAL ENTRY is a -ournal entry that involves more than one de"it
or more than one credit or "oth.
COMPREHENSIVE INCOME is chan'e in e,uity (net assets) of an entity durin' a
period from transactions and other events and circumstances from non8o%ner sources. (t
includes all chan'es in e,uity durin' a period, except those resultin' from investments "y
o%ners and distri"utions to o%ners.
COMPTROLLER is the misspellin' of the %ord #23$5266E5 caused "y confusion
in the root of the %ord in .rench and 6atin. #omptroller is sometimes used %ithin titles
in the 'overnment, e.'. #omptroller of the #urrency.
COMPULSORY LIQUIDATION is the %indin'8up of a company "y a court. A
petition must "e presented "oth at the court and the re'istered office of the company.
$hose "y %hom it may "e presented include7 the company, the directors, a creditor, an
official receiver, and the !ecretary of !tate for $rade and (ndustry. $he 'rounds on %hich
a company may "e %ound up "y the court include7 a special resolution of the company
that it "e %ound up "y the court* that the company is una"le to pay its de"ts* that the
num"er of mem"ers is reduced "elo% t%o* or that the court is of the opinion that it %ould
"e -ust and e,uita"le for the company to "e %ound up. $he court may appoint a
provisional li,uidator after the %indin'8up petition has "een presented* it may also
appoint a special mana'er to mana'e the company+s property. 2n the 'rant of the order
for %indin'8up, the official receiver "ecomes the li,uidator and continues in office until
some other person is appointed, either "y the creditors or the mem"ers.
CONDITIONAL SALES CONTRACT is a credit contract used for the purchase of
e,uipment %here the purchaser doesn+t receive title of the e,uipment until the amount
specified in the contract has "een paid in full.
CONDUCIVE is tendin' to "rin' a"out or "ein' partly responsi"le for, e.'. current
%or)in' conditions may not "e conducive to productivity.
CONDUIT is a primary means "y %hich somethin' is transmitted,
CONDUIT DEBT is issued "y a state a'ency or pu"lic corporation on "ehalf of
"orro%ers %hich include "usinesses, health care institutions, private hi'her education
institutions, local 'overnments, and ,ualified individuals (loans for hi'her education and
housin' purposes). 3o !tate credit support is provided.
CONSERVATISM PRINCIPLE provides that accountin' for a "usiness should "e fair
and reasona"le. Accountants are re,uired in their %or) to ma)e evaluations and
estimates, to deliver opinions, and to select procedures. $hey should do so in a %ay that
neither overstates nor understates the affairs of the "usiness or the results of operation.
CONSERVATIVE INVESTOR, dependent upon the de'ree of conservatism, is one that
protects and preserves their principal a"ove consideration of capital 'ains to the point that
in the extreme they can "e descri"ed as "ein' ris) averse.
CONSIGNMENT is %hen 'oods are offered for sale on "ehalf of another %ithout the
seller actually purchasin' or ta)in' title to the 'oods. 2nly %hen there is a su"se,uent
sale does the o%ner receive any payment.
CONSISTENCY is usin' the same accountin' procedures "y an accountin' entity from
period to period. $hat means usin' similar measurement concepts and procedures for
related items %ithin the companyDs financial statements for one period.
CONSISTENCY PRINCIPLE re,uires accountants to apply the same methods and
procedures from period to period. Khen they chan'e a method from one period to
another they must explain the chan'e clearly on the financial statements.
CONSOLIDATED CAPITAL is the value of all money and other assets, on a
consolidated "asis, used directly in "usiness operations.
CONSOLIDATED ENTITY is a user8defined com"ination of several consolidation
units, 'rouped to'ether for consolidation and reportin' purposes.
CONSOLIDATED FINANCIAL STATEMENTS is the end financial statement that
accounts for all assets, lia"ilities and operatin' accounts of a parent and all su"sidiaries.
CONSOLIDATED NEXUS is a consolidation of a connected series or 'roup (usually
contracts).
CONSOLIDATION is similar to refinancin', "ut there is no loan fee. (t simplifies loan
repayment "y com"inin' several types of federal education loans into one ne% loan. ((n
the case of 1irect 6oan consolidation, the interest rate may "e lo%er than one or more of
the underlyin' loans.).
CONSORTIA see #23!25$(M.
CONSORTIUM is an association of companies for some definite purpose.
CONSTANT DOLLAR is %hen the dollar amount is ad-usted for inflation.
CONSTRAINT is a limitin' factor to "usiness activity.
CONSTRUCTION IN PROGRESS is capital assets under construction or development
that have not yet "een placed into service, such as a "uildin' or par)in' lot. #apital assets
are not su"-ect to depreciation %hile in a construction in pro'ress status.
CONSTRUCTIVE FRAUD is an act, statement, or omission %hich operates as a fraud,
althou'h perhaps it %as not intended to "e such.
CONSULAR DECLARATION is a formal statement to the consul of a forei'n country
declarin' the merchandise to "e shipped.
CONSUMABLE is a resource attri"ute representin' a type of capacity. A resource %ith
consuma"le capacity can have its capacity value permanently altered as a result of "ein'
tas)ed, e.'. chemicals in a manufacturin' process or office supplies.
CONSUMER is an individual %ho purchases, uses, maintains, and disposes of products
and services.
CONSUMER PRICE INDEX (CPI) is the measure of chan'e in consumer prices as
determined "y a monthly survey "y the .!. Bureau of 6a"or !tatistics. Amon' the #P(
components are the costs of food, housin', transportation, and electricity (i.e., the avera'e
cost of a ?"as)et? of 'oods and services). Also )no%n as the cost8of8livin' index.
CONSUMMATE is to "rin' to completion or fruition* conclude, e.'., consummate a
"usiness transaction.
CONSUMPTION SMOOTHING is aimed at protectin' consumption patterns from the
impact of shoc)s, and can ta)e effect either "efore or after their occurrence. Post8shoc)
responses include modifyin' consumption, raisin' income "y mo"ili&in' la"or or sellin'
assets, dra%in' on informal or formal sources of savin's, or activatin' claims on informal
insurance mechanisms.
CONTINENTAL MODEL is an accountin' model. $here are other accountin' systems
%hich differ from the .!. accountin' model. .!. GAAP and .A!B standards are not
the only accountin' principles used internationally* for example, many countries reverse
the .!. de"it and credit system. Many countries %ith hi'h rates of inflation account for
inflation in financial reports much more than the .!. does. Also, for any company
operatin' internationally there is the currency exchan'e translation pro"lem %hen
consolidatin' financial statements.
CONTINGENCY BUDGET is the amount of money re,uired to implement a
contin'ency plan. (f an authori&ed entity approves a contin'ency plan, it %ould normally
set aside a contin'ency "ud'et, %hich %ould only "e called upon if the contin'ency plan
had to "e implemented.
CONTINGENCY PLAN is a plan that provides an outline of decisions and measures to
"e ta)en if defined circumstances, outside the control of the affected or'ani&ation, should
occur.
CONTINGENT ASSET is a possi"le asset from past events %hose existence %ill "e
confirmed only "y the occurrence or non8occurrence of one or more uncertain future
events not %holly %ithin the control of the enterprise.
CONTINGENT LIABILITY is7 (a) A possi"le o"li'ation from past events that %ill "e
confirmed only "y the occurrence or non8occurrence of one or more uncertain future
events not %holly %ithin the control of the enterprise* or (") A present o"li'ation from
past events "ut is not reco'ni&ed "ecause (i) it is not pro"a"le that an outflo% of
resources %ill "e re,uired to settle the o"li'ation* or (ii) the o"li'ation cannot "e
measured relia"ly. !ome examples7 in corporate reports are pendin' la%suits, -ud'ments
under appeal, disputed claims, and the li)e, representin' potential financial lia"ility.
CONTINUITY ASSUMPTION see G2(3G #23#E53 #23#EP$.
CONTINUOUS BUDGET is a "ud'et that rolls ahead each time period (e.'., month)
%ithout re'ard to the fiscal year, i.e., a t%elve8month or other periodic forecast is al%ays
availa"le* also called a 5266 .25KA51 B1GE$.
CONTINUOUS INVENTORY see PE5PE$A6 (3/E3$250.
CONTRA ACCOUNT 9. is the reduction to the 'ross cost of an asset to arrive at the net
cost* also )no%n as a valuation allowance* e.'., accumulated depreciation is a contra
account to the ori'inal cost of a fixed asset to arrive at the "oo) value* or, H. reduction of
a lia"ility to arrive at its carryin' value* e.'., "ond discount, %hich is a reduction of "onds
paya"le.
CONTRACT ALLOWANCE is the limit set %ithin an a'reement as to %hat is the
maximum allo%ed of any 'iven item covered under contract, e.'., home construction
%ith a "uilder may have allo%ances or ?limits? set in your contract that tell you ho%
much the price of your house ?allo%s? for thin's such as floor coverin's, countertops,
and ca"inets.
CONTRACT COSTING is mainly associated %ith civil en'ineerin' %or)s, althou'h
sometimes also %ith the manufacture of a ma-or en'ineerin' structure over a considera"le
time (for example, a contract to manufacture a tur"ine 'enerator).
CONTRACTEE is the person or entity %ho %ill receive the 'oods or services under the
provisions of the contract.
CONTRACT LAW is that "ody of la% %hich re'ulates the enforcement of contracts.
#ontract la% has its ori'ins thousands of years a'o as the early civili&ations "e'an to
trade %ith each other, a le'al system %as created to support and to facilitate that trade.
$he En'lish and .rench developed similar contract la% systems, "oth referrin'
extensively to old 5oman contract la% principles such as consensus ad idem or caveat
emptor. $here are some minor differences on points of detail such as the En'lish la%
re,uirement that every contract contain consideration. More and more states are chan'in'
their la%s to eliminate consideration as a prere,uisite to a valid contract thus contri"utin'
to the uniformity of la%. #ontract la% is the "asis of all commercial dealin's from "uyin'
a "us tic)et to tradin' on the stoc) mar)et.
CONTRACTOR is the person or entity %ho %ill provide the 'oods or services under the
provisions of the contract.
CONTRACT RATE OF INTEREST is the interest rate specified in a contract.
CONTRACT REVENUES are the revenues reco'ni&ed under O of completion method.
CONTRACTUAL ALLOWANCE, in healthcare, is the difference "et%een %hat
hospitals "ill and %hat they receive in payment from third party payers, most commonly
'overnment pro'rams* also )no%n as contractual ad-ustment.
CONTRIBUTED ASSETS are those assets, includin' real property assets, that are
o%ned, leased or licensed "y the contri"utin' entity. !uch contri"utions are normally
associated %ith the contri"utin' entity receivin' e,uity interest (in a commercial
exchan'e) or tax relief (in a charita"le donation) in reco'nition of the value for those
contri"uted assets.
CONTRIBUTED CAPITAL see PA(18(38#AP($A6.
CONTRIBUTION see #23$5(B$(23 MA5G(3.
CONTRIBUTION MARGIN (CM) is the difference "et%een sales and the varia"le
costs of the product or service, also called mar'inal income. (t is the amount of money
availa"le to cover fixed costs and 'enerate profits.
CONTRIBUTION MARGIN ANALYSIS is a techni,ue used in "rand mar)etin' and
product mana'ement to help a company decide %hat product(s) to add to its product
portfolio. $he mana'er as)s %hat %ill happen to profits if a ne% product is added or an
existin' product is discontinued. #alculations ta)e into account additional revenues,
additional costs, effects on other products in the portfolio (referred to as canni"ali&ation),
and competitors+ reactions.
CONTRIBUTION MARGIN RATIO is the computation sho%in' #23$5(B$(23
MA5G(3 as a percenta'e of sales.
CONTRIBUTION/SALES RATIO (C/S RATIO) is a tool used in profit mana'ement.
(t is important to esta"lish the #B! 5A$(27 #B! ratio E (!ales revenue R /aria"le cost of
sales)B!ales revenue x 9::. (f a company achieves a hi'h avera'e mar'inal profit ratio of
say, ;:O, it does not mean that it %ill achieve hi'h profits. $he eventual profit %ill "e
dependent on the level of fixed costs %ithin the or'ani&ation.
CONTROL is the process of directin' operations to achieve a 'oal.
CONTROL ACCOUNT is a summary account in the General 6ed'er that is supported
"y detailed individual accounts in a su"sidiary led'er. !ee #5E1($25! #23$526
A##23$, 1EB$25! #23$526 A##23$, and !$2#< #23$526 A##23$.
CONTROLLABLE COST see #23$5266AB6E E4PE3!E.
CONTROLLABLE EXPENSE expenses that can "e controlled or restrained "y
mana'ement. !ome of the costs of doin' "usiness can "e postponed or spread out over a
lon'er period of time (e.'., personnel costs, travel & entertainment, mar)etin' expense).
CONTROLLABLE MARGIN technically is the excess of contri"ution mar'in over
controlla"le fixed costs. Mana'erially it is that mar'in that you can reasona"ly expect
from a process that is "alanced and controlled. #ontrolla"le mar'in is considered to "e
the "est measure of a mana'er+s performance in efforts to control revenues and costs.
CONTROLLER is usually an experienced accountant %ho directs internal accountin'
processes and procedures, includin' cost accountin'.
CONVENTION is an a'reement, principle or statement expressed or implied that is used
to solve 'iven types of pro"lems. #onventions allo% a standardi&ed approach to pro"lem
solvin' and "ehavior in certain situations. .or example, placin' de"its on the ri'ht and
credits on the left of an account is termed an accountin' convention.
CONVERSION COSTS is 1irect 6a"or Q Manufacturin' 2verhead.
CONVERTIBLE is a corporate security (usually "onds, notes or preferred stoc)) that
can "e exchan'ed for another form of security (usually common stoc)).
CONVERTIBLE BOND is a "ond that can "e converted to other securities under
certain conditions.
CONVERTIBLE CURRENCY is any national currency that can "e easily exchan'ed
for that of another country.
CONVERTIBLE DEBT is a de"t instrument %hich can "e exercised into the security of
the de"tor in accordance %ith the conditions set forth in the de"t instrument.
CONVERTIBLE NOTE see #23/E5$(B6E 1EB$.
CONVERTIBLE PREFERRED STOCK is preferred stoc) %hich can "e converted
into common stoc) at the option of the holder of the preferred stoc).
COO is an acronym for #hief 2peratin' 2fficer. $he #22 is responsi"le for the day8to8
day mana'ement of a company. $he #22 usually reports to the #E2.
COOKIE !AR RESERVES is an overly a''ressive accrual of operatin' expenses and
the creation of lia"ility accounts done in an effort to reduce future year operatin'
expenses.
COOKING THE BOOKS is %hen a company fraudulently misrepresents the financial
condition of a company "y providin' false or misleadin' information.
COOPERATIVE ADVERTISING is a -oint advertisin' strate'y under %hich costs are
shared* e.'. "y a manufacturer and another firm that distri"utes its products.
COPYRIGHT is a form of le'al protection used to safe'uard ori'inal literary %or)s,
performin' arts, sound recordin's, visual arts, ori'inal soft%are code and rene%als.
CORE PROCESS 8 A process is a set of related and interdependent activities that
transform an input to a system to an output %ith added value to a customer. (t is the
transformation of people, money, materials or information that is the value8added %or) of
the or'ani&ation. $he #25E P52#E!!E! are those "y %hich the or'ani&ation creates its
most value8added and essential transformations for the customers.
CORPORATE GOVERNANCE is the system "y %hich "usiness corporations are
directed and controlled. $he corporate 'overnance structure specifies the distri"ution of
ri'hts and responsi"ilities amon' different participants in the corporation, such as, the
"oard, mana'ers, shareholders and other sta)eholders, and spells out the rules and
procedures for ma)in' decisions on corporate affairs. By doin' this, it also provides the
structure throu'h %hich the company o"-ectives are set, and the means of attainin' those
o"-ectives and monitorin' performance.
CORPORATION is a type of "usiness or'ani&ation chartered "y a state and 'iven many
of the le'al ri'hts as a separate entity.
CORPORATION TAX is the tax paya"le "y corporations
CORPUS is often confused and misunderstood. $he literal meanin' of the term corpus is
the main partBor'an of a "ody. $he term corpus also denotes the sum and su"stance of an
issueBentity.
CORPUS FUND is the capital of the or'ani&ation* the funds 'enerated and )ept for the
existence and sustenance of the or'ani&ation. 3ormally a corpus fund denotes a
permanent fund )ept for the "asic expenditures needed for the administration and survival
of the or'ani&ation.
CORRECTING ENTRY, a type of A1G!$(3G E3$50, is re,uired at the end of an
accountin' period if a mista)e %as made in the accountin' records durin' the period. !ee
5E/E5!(3G E3$50.
CORRESPONDENT BANK is a "an) havin' communications and "usiness lin)s %ith
the seller+s "an).
COST is the amount of money that must "e paid to ta)e o%nership of somethin'*
expense or purchase price.
COST ACCOUNTING is a mana'erial accountin' activity desi'ned to help mana'ers
identify, measure, and control operatin' costs.
COST ACCUMULATION METHODS are the various %ays in %hich the entries in a
set of cost accounts may "e a''re'ated to provide different perspectives on the
information.
COST ALLOCATION is the assi'nment to each of several particular cost8centers of an
e,uita"le proportion of the costs of activities that serve all of them, i.e. shared cost pools.
COST ASSIGNMENT involves assi'nin' costs of an account to the accounts that are
responsi"le or accounta"le for incurrin' the cost. .or example, the cost of issuin'
purchase orders is allocated to the various o"-ects procured. $he cost assi'nment is done
throu'h assi'nment paths and cost drivers. $he assi'nment path identifies the source
account (the account %hose cost is "ein' assi'nedY?(ssue Purchase 2rders? in the a"ove
example) and destination accounts (the accounts to %hich the costs are "ein' allocatedY
the various cost o"-ects procured "y issuin' purchase orders in the a"ove example). $he
cost driver identifies the measure or rationale on the "asis of %hich the assi'nment needs
to "e doneYthat is, %hether the costs of issuin' purchase orders need to "e assi'ned to
various cost o"-ects evenly, "ased on some defined percenta'e values, or "ased on some
criterion, li)e the num"er of purchase orders of each cost o"-ect issued. 1efinin' the cost
drivers and assi'nment paths (i.e., source and destination accounts) ena"le proper
assi'nment and accountin' of the various costs incurred in the or'ani&ation.
COST AVOIDANCE is an action ta)en in the present desi'ned to decrease costs in the
future.
COST BASIS, in securities, is the purchase price after commissions or other expenses. (t
is used to calculate capital 'ains or losses %hen the security is eventually sold.
COSTBENEFIT ANALYSIS is the method of measurin' the "enefits anticipated from
a decision "y determinin' the cost of the decision, then decidin' %hether the "enefit
out%ei'hs the cost of that decision.
COST CEILING, in pro-ect mana'ement, is the sum of the Pro-ect #ost $ar'et plus the
pro-ect+s #ontin'encies cost allo%ances.
COST CENTER is a non8revenue8producin' element of an or'ani&ation, %here costs are
separately fi'ured and allocated, and for %hich someone has formal or'ani&ational
responsi"ility.
COST DRIVER is any activity or series of activities that ta)es place %ithin an
or'ani&ation and causes costs to "e incurred. #ost drivers are used in a system of activity8
"ased costin' to char'e costs to products or services. #ost drivers are applied to cost
pools, %hich relate to common activities. #ost drivers are not restricted to departments or
sections, as more than one activity may "e identified %ithin a department.
COST EFFECTIVE is %hen a -ud'ement is made that somethin' is economical in terms
of the 'oods or services received for the money spent.
COST ELEMENT, in cost accountin', is the lo%est level component of a resource
activity, or cost o"-ect.
COST/INCOME RATIO is total expenses divided "y the sum of total income.
COST IN EXCESS OF BILLINGS, in percenta'e of completion method, is %hen the
"illin's on uncompleted contracts are less than the income earned to date. $hese
under"illin's result in increased assets. #onversely, %here "illin's are 'reater than the
income earned on uncompleted contracts, a lia"ility, "illin's in excess of costs, results.
COST MANAGEMENT INDEX (CMI) is a method for determinin' cost mana'ement
"enchmar)s for pu"lic companies usin' pu"lished financial data. (t is used to esta"lish
realistic cost reduction 'oals "y conductin' a definitive comparison of sin'le company
performance a'ainst others in that industry com"ined %ith a thorou'h internal
expenditure analysis. $his provides realistic parameters for cost cuttin' o"-ectives as %ell
as insi'ht into %hich cate'ories of products and services to tar'et. $he #M( e,uals cost
of 'oods sold plus sales, 'eneral and administrative expenses, divided "y your operatin'
revenue (#M( E (#2G!Q!G&A)B5evenue). (t is expressed as a percenta'e.
COST OB!ECT is anythin' for %hich cost data is desired, e.'., products, product lines,
customers, -o"s, and or'ani&ational su"8units such as departments or divisions of a
company.
COST OF CAPITAL/FUNDS is the rate of return that a "usiness could earn if it so
chose other investments %ith the e,uivalent ris)s. Also can "e stated as opportunity cost
of the funds used due to the investment decision.
COST OF DEBT is interest rate times 9 minus the mar'inal tax rate ("ecause interest is
a tax deduction). An increase in the tax rate decreases the cost of de"t.
COST OF EQUITY (COE) is the minimum rate of return a firm must offer o%ners to
compensate for %aitin' for their returns, and for "earin' ris). (t is calculated7 #2E E
1ividends per !hare (for next year) B #urrent Mar)et /alue of !toc) Q Gro%th 5ate of
1ividends.
COST OF GOODS SOLD (COGS) is a fi'ure representin' the cost of "uyin' ra%
material and producin' finished 'oods. (ncluded are precise factors, i.e. material and
factory la"or* as %ell as others that are varia"le, such as factory overhead.
COST OF GOODS SOLD BUDGET decomposes, or "rea)s do%n, the components of
a "usinessDs cost of 'oods sold (in some cases referred to as the cost of revenues). $his
"ud'et "rea)s out each separate factor underlyin' the cost of 'oods sold for a "usiness.
!ee 2PE5A$(3G B1GE$.
COSTOFLIVING LEASE is a lease %here yearly increases are tied to the cost of
livin' index.
COST OF MONEY is a form of indirect cost incurred "y investin' capital in facilities
employed on 'overnment contracts.
COST REDUCTION is actions ta)en in the present desi'ned to decrease costs in the
present. !ee #2!$ A/2(1A3#E.
COST OF REVENUE see #2!$ 2. G221! !261.
COST OF SALES see #2!$ 2. G221! !261.
COST PER THOUSAND (CPM) is advertisin' terminolo'y used in "uyin' media.
#PM refers to the cost it ta)es to reach a thousand people %ithin your tar'et mar)et.
COSTPLUS is determinin' payment "ased on the actual cost of production or service
provisionin' plus an a'reed8upon fee or rate of profit* for example, a cost8plus
'overnment contract.
COST PRINCIPLE is the principle %here a company is o"li'ed to record its fixed
assets at their actual purchase price or production cost.
COST SPLIT is the "rea)do%n of the costs associated %ith producin' a product,
providin' a service, ... $he ma)eup is dependent upon %hat costs are "ein' analy&ed, e.'.
in manufacturin' a company %ould trac) the cost split "et%een materials, direct la"or,
and production overhead.
COST SYNERGY is the savin's in operatin' costs expected after t%o companies, %ho
compliment each other+s stren'ths, -oin.
COST UNIT is a functional cost unit %hich esta"lishes standard cost per %or)load
element of activity, "ased on calculated activity ratios converted to cost ratios.
COSTVOLUMEPROFIT ANALYSIS (CVPA) examines the "ehavior of total
revenue, total costs and profit as chan'es occur in the output level, sellin' price and
varia"le costs per unit or fixed costs.
COUNTERBALANCE is a compensatin' e,uivalent or to oppose and miti'ate the
effects of somethin' "y contrary actions.
COUPON BOND pays the holder of the "ond a fixed interest payment (a coupon
payment) every year until the "ond reaches maturity. (t is named a coupon payment,
"ecause a "ondholder had to o"tain their interest payment "y clippin' a coupon off of a
"ond and send it to the "ond issuer, the "ond issuer then sent the "ondholder the payment.
$his process is no lon'er necessary for most coupon "onds. Examples of coupon "onds7
$reasury "onds, $reasury notes and corporate "onds.
COUPON RATE is the annual interest rate of a "ond.
COVENANT is a clause in a contract that re,uires one party to do, or refrain from doin',
certain thin's. (t is usually a restriction on a "orro%er imposed "y a lender.
COVERAGE OF FIXED CHARGES is computed "y ta)in' your net income, "efore
taxes and fixed char'es (de"t repayment, lon'8term leases, preferred stoc) dividends
etc.), and dividin' "y the amount of fixed char'es. $he resultin' num"er sho%s your
a"ility to meet your fixed o"li'ations of all types Y the hi'her the num"er, the "etter.
COVERAGE RATIO is a measure of a corporation+s a"ility to meet a certain type of
expense. (n 'eneral, a hi'h covera'e ratio indicates a "etter a"ility to meet the expense in
,uestion. Examples7 dividend covera'e, fixed8char'e covera'e, interest covera'e,
preferred dividend covera'e.
CP is an acronym %ith many possi"le meanin's, e.'., #apacity Plannin', #entral
Procurement, #han'e of Plan (insurance), #laims Procedure (insurance), #ommercial
Paper, #ommunity Property, #onsumer Products, #ontin'ency Plan, #ontract Price,
#han'e Proposal, etc.
C5P5A5 means #ertified Pu"lic Accountant.
CPFF is #ost Plus .ixed .ee.
CPI see #23!ME5 P5(#E (31E4.
CPLTD is #urrent Portion of 6on'8$erm 1e"t.
CPT is #ost Per $housand.
CR, in accountin', is an acronym for #redit 5ecord.
CRAR see #AP($A6 $2 5(!< A!!E$ 5A$(2.
CRAT is an acronym for #harita"le 5emainder Annuity $rust.
CREATIVE ACCOUNTING is slan' for the concept of maintainin' accounts 'ivin'
possi"ly ille'al or du"ious "enefits to the entity for %hich the accounts are maintained.
CREDIT, in accountin', is an accountin' entry system that either decreases assets or
increases lia"ilities* in 'eneral, it is an arran'ement for deferred payment for 'oods and
services.
CREDIT CARD is a card authori&in' purchases on credit at a predetermined interest
rate and payment conditions.
CREDIT CARD RECEIPTS is sales revenue %here payment has "een made throu'h
the use of reco'ni&edBauthori&ed credit cards versus cash or chec) receiptsBpayments.
CREDIT CONTROL is policies and procedures aimed at controllin' the 'rantin' of
credit.
CREDIT LINE is the maximum credit that a customer is allo%ed.
CREDIT MEMO is a document used to issue a vendor credit.
CREDIT NOTES are issued to indicate a positive action %ithin an account. #redit notes
are issued for reasons such as overpayment, duplicate payment, dama'ed 'oods, returned
merchandise, etc.
CREDITOR DAYS is the num"er of days it ta)es the company to pay trade creditors.
$his ratio provides an indication of the amount of credit 'iven to the "usiness "y its
suppliers. $he formula is trade creditors divided "y sales multiplied "y AFN days.
CREDITORS are the entities to %hich a de"t is o%ed "y another entity.
CREDITORS CONTROL ACCOUNT reflects the total amount o%ed to all the
individual creditors. $he "alance of the creditors control account must e,ual the total of
the creditors list, %hich represents the amounts o%ed "y the individual creditors o"tained
from the individual "alances in the various su"sidiary led'er accounts for each creditor.
$his su"sidiary led'er is )no%n as the creditors+ led'er.
CREDITORS TURNOVER E Avera'e creditors B (#redit !ales B AFN).
CREDIT RISK is the ris) of loss from an unfulfilled payment or delivery, i.e. the
possi"ility that a "orro%er %ill default on any monies that are o%ed.
CREDIT SALES are merchandise or services sold on the promise to pay later.
CRITICAL ACCOUNTING ESTIMATE is %hen a company must ma)e assumptions
a"out matters that are S hi'hly uncertainT %hen the company ma)es the accountin'
estimate and either of the follo%in' conditions %ould have a material effect on the
companyDs financial condition, chan'es in financial condition or results of operations7 9.
the company could reasona"ly have used a different estimate for the current period* or,
H.chan'es in the estimate are reasona"ly li)ely to occur from period to period in the
future.
CROSSFOOTING is the addition of columns of fi'ures in different %ays to chec) the
accuracy of the totals, e.'. vertically and hori&ontally derivin' the same total in a
spreadsheet.
CROWN CORPORATION is a corporation that has "een esta"lished "y a nationDs
'overnment.
CRR see #A!C 5E!E5/E 5A$(2.
CRUT is an acronym for #harita"le 5emainder nitrust.
C/S RATIO see #23$5(B$(23B!A6E! 5A$(2.
CUMULATIVE EARNINGS is the sum of all earnin's over the time periods in
,uestion.
CUMULATIVE PREFERRED STOCK is preferred stoc) %hich 'ives holder a ri'ht to
dividends if they have not "een paid in a 'iven year.
CURRENCY DENOMINATION see 1E32M(3A$(23.
CURRENCY MEASUREMENT is part of determinin' the ?functional currency? that
mainly influences sales prices for 'oods B services. (t %ill often "e the currency in %hich
denominated and settled7 a. of country %hose competitive forces and re'ulations mainly
determine sales prices for 'oods B services* ". that mainly influences la"or, material and
other costs of providin' 'oods B services* or, as stated, c. %ill often "e the currency in
%hich transactions are denominated and settled.
CURRENCY TRANSLATION see .25E(G3 #55E3#0 $5A3!6A$(23.
CURRENT ACCOUNT in a national economy it is a cate'ory in the "alance of
payments account that includes all transactions that either contri"ute to national income
or involve the spendin' of national income.
CURRENT ASSETS are those assets of a company that are reasona"ly expected to "e
reali&ed in cash, or sold, or consumed durin' the normal operatin' cycle of the "usiness
(usually one year). !uch assets include cash, accounts receiva"le and money due usually
%ithin one year, short8term investments, ! 'overnment "onds, inventories, and prepaid
expenses.
CURRENT CAPITAL see K25<(3G #AP($A6.
CURRENT CASH DEBT RATIO measures a"ility to pay current lia"ilities in 'iven
year %ith cash derived from operatin' activities. #alculated usin' net cash from
operatin' activities divided "y avera'e current lia"ilities.
CURRENT COST is the cost %hich %ould "e incurred for replacement of an asset.
CURRENT COST ACCOUNTING is a system of accountin' %hich ad-usts for
chan'in' pricin'.
CURRENT DEBT TO TOTAL DEBT sho%s #urrent 6ia"ilities as a percent of $otal
1e"t. !maller firms carry proportionally hi'her level of current de"t to total de"t than
lar'er firms.
CURRENT LIABILITIES are lia"ilities to "e paid %ithin one year of the "alance sheet
date.
CURRENT MATURITIESL/T/D is that portion of lon' term o"li'ations %hich is due
%ithin the next fiscal year.
CURRENT PORTION OF LONGTERM DEBT is only that portion of lon'8term
o"li'ations (paya"le in more than one year) %hich are o%ed and paya"le in the current
year* e.'. the portion of a five8year loan or lease that is due in the current calendarBfiscal
year.
CURRENT RATIO, a comparison of current assets to current lia"ilities, is a commonly
used measure of short8run solvency, i.e., the immediate a"ility of a firm to pay its current
de"ts as they come due. #urrent 5atio is particularly important to a company thin)in' of
"orro%in' money or 'ettin' credit from their suppliers. Potential creditors use this ratio
to measure a company+s li,uidity or a"ility to pay off short8term de"ts. $hou'h
accepta"le ratios may vary from industry to industry "elo% 9.:: is not atypical for hi'h
,uality companies %ith easy access to capital mar)ets to finance unexpected cash
re,uirements. !maller companies, ho%ever, should have hi'her current ratios to meet
unexpected cash re,uirements. $he rule of thum" #urrent 5atio for small companies is
H79, indicatin' the need for a level of safety in the a"ility to cover unforeseen cash needs
from current assets. #urrent 5atio is "est compared to the industry.
CURTAIL is to terminate or a""reviate "efore an intended or proper end or its full
extent, e.'. the national product launch %as curtailed due to lac) of acceptance in the
rural mar)et place.
CUSTODIAN is an entity entrusted %ith 'uardin' and )eepin' property or records.
CUSTODIAN BANK is the "an) that acts a custodian to a mutual fund. 1oes not
mana'e anythin', -ust holds the cash and securities and does the clerical.
CUSTOMER ACQUISITION COST is calculated "y dividin' total ac,uisition
expenses "y total ne% customers. Co%ever, there are different opinions on %hat
constitutes an ac,uisition expense, e.'. re"ates and special discounts do not represent an
actual cash outlay, yet they have an impact on cash (and, presuma"ly, on the customer).
$here is no set standard, i.e. ac,uisition costs vary across industries. Khen ac,uisition
data is availa"le, it is "est to try to determine if you are comparin' apples to apples. $his
is not easy, as customer ac,uisition data is usually scarce and the methodolo'y is often
,uestiona"le.
CUSTOMS are the authorities char'ed %ith collectin' duty and controllin' the entry of
merchandise into a country.
CUSTOMS BROKER is an individual or firm licensed to process entry and clear 'oods
into the country for another.
CUTOFF RATE is the predetermined maximum rate andBor minimum rate at %hich the
su"-ect is still accepta"le, "ut %here a rate a"ove the proscri"ed hi'her or "elo% the
proscri"ed lo%er rate is no lon'er accepta"le.
CUTOFF YIELD, in securities, is the yield at %hich or "elo% %hich the "ids are
accepted.
CVP see #2!$8/26ME8P52.($ A3A60!(!.
CVPA see #2!$8/26ME8P52.($ A3A60!(!.
CYCLE COUNT is a partial count of a sin'le inventory location as opposed to a
#omplete #ount, i.e., a complete count of a sin'le inventory location. An or'ani&ation
should not %ait to do a complete count* usually once a year. $he "est %ay to ensure that a
minimum of >@O accuracy is maintained in inventory on an on'oin' "asis is to
continually count your products. $hat is, count part of your inventory every day, and
count each item several times per year. $his process is called ?cycle countin'.?
DAC, in accountin', is an acronym for 1eferred Ac,uisition #osts.
DAIRY QUEEN ACCOUNTING is a fi'ure of speech from the steel industry meanin'
that some people don+t )no% if they are doin' accountin' for 1airy Uueen or a steel mill.
DATA EVENT ANALYSIS is the examination of somethin' %hich happens %ithin the
"usiness environment %hich the company needs to )no% a"out and %hich must "e
recorded in the company memory, that is, the company files. A data event may "e
externally or internally 'enerated and may occur throu'h some action "ein' ta)en or
merely as a result of the passa'e of time. $he occurrence of data events recorded in some
manner. 1ata event analysis determines %hat information must "e recorded such that the
event can "e recalled and acted upon. (t must also determine ho% that event "ecame
)no%n to the company* that is, %hat tri''ered the company a%areness of the eventZ
DATA FIXATION, in "ehavioral accountin', is a compulsive preoccupation to focus
only upon the num"ers %ithout loo)in' "eyond for the meanin' "ehind the results
themselves.
DATE DRAFT is a payment option draft that matures in a specified num"er of days
after the date issued.
DATE OF RECORD is the date %hich determines %hich shareholders receive
dividends.
DAYS CASH ON HAND is calculated7 #ashB(Ioperatin' expense 8 depreciation
expenseJBAFN).
DAYS' INVENTORY sho%s the avera'e len'th of time items are in inventory, i.e., ho%
many days a "usiness could continue sellin' usin' only its existin' inventory. $he 'oal,
in most cases, is to demonstrate efficiency throu'h havin' a hi'h turnover rate and
therefore a lo% daysD inventory. Co%ever, reali&e that this ratio can "e unfavora"le if
either too hi'h or too lo%. A company must "alance the cost of carryin' inventory %ith
its unit and ac,uisition costs. $he cost of carryin' inventory can "e HNO to ANO. $hese
costs include %arehousin', material handlin', taxes, insurance, depreciation, interest and
o"solescence.
DAYS PAYABLE OUTSTANDING (DPO) is an estimate of the len'th of time the
company ta)es to pay its vendors after receivin' inventory. (f the firm receives favora"le
terms from suppliers, it has the net effect of providin' the firm %ith free financin'. (f
terms are reduced and the company is forced to pay at the time of receipt of 'oods, it
reduces financin' "y the trade and increases the firm+s %or)in' capital re,uirements. (t is
calculated7 1ays Paya"le 2utstandin' E AFN B Paya"les $urnover (Paya"les $urnover E
Purchases B Paya"les).
DAYS SALES OUTSTANDING (DS;) is a financial indicator that sho%s "oth the a'e,
in terms of days, of a company+s accounts receiva"le and the avera'e time it ta)es to turn
the receiva"les into cash. (t is compared to company and industry avera'es, as %ell as
company sellin' terms (e.'., 3et A:) for determination of accepta"ility "y the company.
1!2 is calculated7 1!2 E ($otal 5eceiva"lesB$otal #redit !ales) x 3um"er of 1ays.
3ote7 2nly credit sales are to "e used. #ash sales are excluded.
DBA (7(*-9 2/'*-1'' +') is a le'al entity (sole proprietorship, partnership, corporation)
conductin' "usiness under any chosen name for %hich a "usiness license has "een issued.
DCAA is the 1efense #ontract Audit A'ency.
DDA, amon' others, can mean7 1isa"ility 1iscrimination Act (9>>N, <), 1ividend
1is"ursin' A'ent (finance), 1emand 1eposit Account, 1irect 1eposit Advance (Kells
.ar'o), 1irect 1eposit Advice, 1eposit 1emand Account, or 1esi'n 1evelopment
Activity.
DEBENTURE is a corporate (2 that is not "ac)ed "y the company+s assets (unsecured)
and is therefore some%hat ris)ier than a "ond.
DEBIT is a record of an inde"tedness* specifically 7 an entry on the left8hand side of an
account constitutin' an addition to an expense or asset account or a deduction from a
revenue, net %orth, or lia"ility account.
DEBIT CARD is a "an)in' card enhanced %ith automated teller machine (A$M) and
point8of8sale (P2!) features so that it can "e used at merchant locations. A de"it card is
lin)ed to an individual+s chec)in' account, allo%in' funds to "e %ithdra%n at the A$M
and point8of8sale %ithout %ritin' a chec). Each financial institution creates an identity
for its de"it card to customi&e the product and differentiate it in the mar)et. 1e"it cards
can also "e called deposit access cards.
DEBIT MEMORANDUM can "e either a) a form or document 'iven "y the "an) to a
depositor to notify that the depositor+s "alance is "ein' decreased due to some event other
than the payment of depositor ori'inated chec), e.'. "an) service char'es* or ") a form of
document used "y a seller to notify a "uyer that the seller is de"itin' (increasin') the
amount of the "uyer+s accounts paya"le due to errors or other factors re,uirin'
ad-ustments.
DEBIT NOTES are issued to indicate a short payment.
DEBT COVENANT is one of many terms used to descri"e rules 'overnin' the loans
that a company has outstandin'. 2ther related phrases %ould "e ?loan terms? ?credit
a'reement,? ?loan a'reement.?
DEBT COVERAGE RATIO is the ratio "et%een the net income of an investment and
the amount of de"t service of the investment7 expressed as (32( B 1! E 1#5), i.e. it is
the relationship of net operatin' income divided "y annual de"t service.
DEBT FINANCING is raisin' money throu'h sellin' "onds, notes, or mort'a'es or
"orro%in' directly from financial institutions. 0ou must repay "orro%ed money in full,
usually in installments, %ith interest. A lender incurs ris) and char'es a correspondin'
rate of interest "ased on that ris). $he lender usually assesses a variety of factors such as
the stren'th of your "usiness plan, mana'ement capa"ilities, financin', and your past
personal credit history, to evaluate your companyDs chances of success.
DEBT INSTRUMENT is a %ritten promise to repay a de"t. Examples7 notes, "ills,
"onds, #1s, G(#s, commercial paper, and "an)er+s acceptances.
DEBTOR is the party a'ainst %ho one has a claim.
DEBTOR DAYS is a ratio used to %or) out ho% many days on avera'e it ta)es a
company to 'et paid for %hat it sells. (t is calculated "y dividin' the fi'ure for trade
de"tors sho%n in its accounts "y its sales, and then multiplyin' "y AFN.
DEBTORS CONTROL ACCOUNT reflects the total amount o%ed "y the all the
individual de"tors. $he "alance of the de"tors control account must e,ual the total of the
de"tors list, %hich represents the amounts o%ed "y the individual de"tors o"tained from
the individual "alances in the various su"sidiary led'er accounts for each de"tor. $his
su"sidiary led'er is )no%n as the de"tors+ led'er.
DEBT RATIO measures the percent of total funds provided "y creditors. 1e"t includes
"oth current lia"ilities and lon'8term de"t. #reditors prefer lo% de"t ratios "ecause the
lo%er the ratio, the 'reater the cushion a'ainst creditor+s losses in li,uidation. 2%ners
may see) hi'h de"t ratios, either to ma'nify earnin's or "ecause sellin' ne% stoc) %ould
mean 'ivin' up control. 2%ners %ant control %hile ?usin' someone else+s money.? 1e"t
5atio is "est compared to industry data to determine if a company is possi"ly over or
under levera'ed. $he ri'ht level of de"t for a "usiness depends on many factors. !ome
advanta'es of hi'her de"t levels are7
$he deducti"ility of interest from "usiness expenses can provide tax advanta'es.
5eturns on e,uity can "e hi'her.
1e"t can provide a suita"le source of capital to start or expand a "usiness.
!ome disadvanta'es can "e7
!ufficient cash flo% is re,uired to service a hi'her de"t load. $he need for this
cash flo% can place pressure on a "usiness if income streams are erratic.
!uscepti"ility to interest rate increases.
1irectin' cash flo% to service de"t may starve expenditure in other areas such as
development %hich can "e detrimental to overall survival of the "usiness.
DEBT SERVICE COVERAGE is the ratio of cash flo% availa"le to pay for de"t to the
total amount of de"t payments to "e made (interest and principal payments).
DEBT SERVICE RATIO is the measurement of de"t payments to 'ross income.
DEBT TO EQUITY measures the ris) of the firm+s capital structure in terms of amounts
of capital contri"uted "y creditors and that contri"uted "y o%ners. (t expresses the
protection provided "y o%ners for the creditors. (n addition, lo% 1e"tBE,uity ratio
implies a"ility to "orro%. Khile usin' de"t implies ris) (re,uired interest payments must
"e paid), it also introduces the potential for increased "enefits to the firm+s o%ners. Khen
de"t is used successfully (operatin' earnin's exceedin' interest char'es) the returns to
shareholders are ma'nified throu'h financial levera'e. 1ependin' on the industry,
different ratios are accepta"le. $he company should "e compared to the industry, "ut,
'enerally, a A79 ratio is a 'eneral "enchmar). !hould a company have de"t8to8e,uity ratio
that exceeds this num"er* it %ill "e a ma-or impediment to o"tainin' additional financin'.
(f the ratio is suspect and you find the company+s %or)in' capital, and current B ,uic)
ratios drastically lo%, this is a si'n of serious financial %ea)ness.
DEBT TO TOTAL ASSETS RATIO measures the percenta'e of assets financed "y all
terms of de"t, includes "oth current and lon' term de"t.
DECISION THEORY is a "ody of )no%led'e and related analytical techni,ues of
different de'rees of formality desi'ned to help a decision ma)er choose amon' a set of
alternatives in li'ht of their possi"le conse,uences.
DECLININGBALANCE DEPRECIATION METHOD is an accelerated depreciation
method in %hich an asset+s "oo) value is multiplied "y a constant depreciation rate (such
as dou"le the strai'ht8line percenta'e, in the case of dou"le8declinin'8"alance.). $his
depreciation method is allo%ed "y the .!. tax code and 'ives a lar'er depreciation in the
early years of an asset. nli)e the strai'ht line and the sum of the di'its methods, "oth of
%hich use the ori'inal "asis to calculate the depreciation each year, the dou"le declinin'
"alance uses a fixed percenta'e of the prior year+s "asis to calculate depreciation. $he
percenta'e rate is HB3 %here 3 is the life of the asset. Kith this method, the "asis never
"ecomes &ero. #onse,uently, it is standard practice to s%itch to another depreciation
method as the "asis decreases. sually the taxpayer %ill convert to the strai'ht line
method %hen the annual depreciation from the declinin' "alance "ecomes less than the
strai'ht line.
DECRETION is a decrease. !ee also A##5E$(23.
DEDICATED TRANSACTIONS, in securities, is a list all the transactions (includin'
cash) for each portfolio to'ether %ith any relevant fees and notes. And, not only can one
monitor profitBloss "ut you can also chart the historical valuation of a portfolio, monitor
the annuali&ed rate of return, compare portfolio performance a'ainst indices or sectors
and chart the performance of different constituents of a portfolio on a sin'le chart.
DEDUCTIVE ACCOUNTING THEORY (mathematical method) assumes that optimal
accountin' standards and reportin' rules can "e derived "y deduction much in the %ay
that Pytha'oras derived the rule for measurin' the hypotenuse of a trian'le "ased upon
s,uare root of the summed s,uares of the other t%o sides (assumin' one an'le is a perfect
>:8de'ree an'le).
DEED OF TRUST see $5!$ 1EE1.
DEFAULT# in finance, default is %hat occurs %hen a party is un%illin' or una"le to pay
their de"t o"li'ations. $his can occur %ith all de"t o"li'ations includin' "onds,
de"entures, mort'a'es, loans, and notes. 1efault can also occur %ith soverei'n "onds,
that is, 'overnments can default on their payments to creditors. (n corporate finance, a
default is typically a prelude to "an)ruptcy. Kith most mort'a'es and loans the total
amount o%in' "ecomes immediately paya"le on the first instance of a default of
payment.
DEFEASANCE is the release of a de"tor from the primary o"li'ation for a de"t. A le'al
defeasance could ta)e place in a"solute terms, i.e., the de"t could cease to exist for
anyone ("y "ein' for'iven or set aside), or the creditor could formally reco'ni&e that
another party has ta)en over the primary o"li'ation for the de"t.
DEFEASANCE CLAUSE is the clause in a mort'a'e that permits the mort'a'or to
redeem his or her property upon the payment of the o"li'ations to the mort'a'ee.
DEFENSE INTERVAL see BA!(# 1E.E3!E (3$E5/A6.
DEFERRAL see 1E.E55E1.
DEFERRED, in accountin', is any account %here the asset or lia"ility is not reali&ed
until a future date, e.'. annuities, char'es, taxes, income, etc. $he deferred item may "e
carried, dependent on type of deferral, as either an asset or lia"ility.
DEFERRED ANNUITY is an annuity in %hich the income paymentsB%ithdra%als "e'in
at some future date
DEFERRED ASSET is an amount o%ed to an entity that is not expected to "e received
"y that entity %ithin one year from the date of the "alance sheet.
DEFERRED CREDITOR see 1E.E55E1 (3#2ME.
DEFERRED DEVELOPMENT COSTS is the non8reco'nition of costs of development
until such until some condition(s) is satisfied.
DEFERRED EXPENSES see P5EPA(1 E4PE3!E!.
DEFERRED INCOME is that income for %hich the cash has "een collected "y the
company, "ut have yet to "e ?earned?. .or example, a customer pays their annual
soft%are license upfront on the 9st Gan. As the company financial year8end is A9st May,
the company %ould only "e a"le to record five months of the income as turnover in the
profit and loss account. $he rest %ould "e accrued in the "alance sheet as a ?deferred?
creditor.
DEFERRED PAYMENT CREDIT is a type of a letter of credit %here payment is made
at a specified interval after collection papers are su"mitted.
DEFERRED REVENUE see 1E.E55E1 (3#2ME.
DEFERRED TAX ASSETS have an effect of decreasin' future income tax payments,
%hich indicates that they are prepaid income taxes and meet definition of assets. Khereas
deferred tax lia"ilities have an effect of increasin' future year+s income tax payments,
%hich indicates that they are accrued income taxes and meet definition of lia"ilities.
DEFERRED TAXES refers to all deferred taxes.
DEFERRED TAX LIABILITIES have an effect of increasin' future year+s income tax
payments, %hich indicates that they are accrued income taxes and meet definition of
lia"ilities. Khereas deferred tax assets have an effect of decreasin' future income tax
payments, %hich indicates that they are prepaid income taxes and meet definition of
assets.
DEFICIT is a de"it "alance in the 5etained Earnin's account resultin' from
accumulated losses.
DEFICIT BUDGET is %here the estimates of expenses are 'reater than estimates of
revenue.
DEFICIT SPENDING is an excess of 'overnment expenditures over 'overnment
revenue, resultin' in a shortfall that must "e financed throu'h "orro%in'.
DEFINED CONTRIBUTION is a pension desi'n that defines the amount of
contri"utions, usually a percenta'e of salary. $he "enefits paya"le at retirement depend
on factors such as future investment return and annuity rate at retirement. (f a plan is
re'istered for tax purposes, the maximum contri"ution amount (usually a percenta'e of
earnin's or income up to a dollar limit) is defined "y tax re'ulations.
DEFLATION is a contraction of economic activity resultin' in a decline of prices.
DELINQUENCY RATIO is the ratio of past8due loans to total num"er of loans
serviced.
DELIVERY ORDER is a document from the consi'nee, shipper, or o%ner of frei'ht
orderin' the release of frei'ht to another party.
DELTA, in securities tradin', is the relationship "et%een an option price and the
underlyin' futures contract or stoc) price. (n 'eneral usa'e, it is the difference "et%een
t%o empirical data points, e.'. the delta "et%een ; and F is H.
DEMAND DEPOSIT is a "an) deposit f rom %hich %ithdra%als may "e made %ithout
notice.
DEMAND DRAFT, also )no%n as si'ht draft, is a draft paya"le on demand from the
date of issue, e.'. a payroll chec).
DEMAND NOTE is a note paya"le on demand from the person %ho is o%ed the money.
DEMINIMUS, root is +1e minimis non curat lex+ (6atin), a common la% principle
%here"y -ud'es %ill not sit in -ud'ement of extremely minor trans'ressions of the la%. (t
has "een restated as ?the la% does not concern itself %ith trifles?. (t is commonly used to
include a test of anyone -ud'in' conformance to accountin' principles, re'ulations or
rules.
DEMOGRAPHICS are the attri"utes such as income, a'e, and occupation that "est
descri"e your tar'et mar)et.
DEMUTUALIZATION refers to the demutuali&in' of an insurance company. $he
proceeds from such an event are normally distri"uted to the policyholders in the form of
either cash, shares, or a com"ination thereof in the survivin' entity.
DENOMINATION is one of a series of )inds, values, or si&es, as in a system of
currency or %ei'hts, e.'. .!. currency comes in denominations of =9, =N, =9:, =H:, etc.
DEPENDENT, 'enerally, is a person %ho relies on another person for support
(especially financial support)* in .!. tax la%, it means a dependent as defined in tax
code !ection 9NH %hich excludes those individuals %ho do not ,ualify for a dependent
deduction on the employeeDs tax return includin' domestic partners and parents.
DEPLETION is the process of cost allocation that assi'ns the ori'inal cost of a natural
resource to the periods "enefited. .or example7 a minin' company purchases mineral
ri'hts to a deposit for =N million for a period of ten years. $he cost of the natural
resource, =N million, %ill "e depleted over the ten years of the "enefit* i.e., it is the
physical exhaustion of a natural resource (e.'., tim"er, oil and coal).
DEPOSIT can mean a variety of thin's7 a. a payment 'iven as a 'uarantee that an
o"li'ation %ill "e met* ". the act of puttin' money into a "an) account* c. a partial
payment made at the time of purchase %ith the "alance to "e paid later* or, d. money
'iven as security for an article ac,uired for temporary use.
DEPOSITS IN TRANSIT is deposits made to a "an) account that have not "een
credited to the "an) statement.
DEPOSITORY ACCOUNT are those accounts %here assets* e.'. cash or securities* are
placed on deposit in favor of the depositor.
DEPRECIATED HISTORICAL COST (DHC) is he method of valuation of certain
assets at the actual cost of their ac,uisition and su"se,uent enhancement less a reduction
for depreciation to date.
DEPRECIATION is the amount of expense char'ed a'ainst earnin's "y a company to
%rite off the cost of a plant or machine over its useful live, 'ivin' consideration to %ear
and tear, o"solescence, and salva'e value. (f the expense is assumed to "e incurred in
e,ual amounts in each "usiness period over the life of the asset, the depreciation method
used is strai'ht line (!6). (f the expense is assumed to "e incurred in decreasin' amounts
in each "usiness period over the life of the asset, the method used is said to "e
accelerated. $%o commonly used variations of the accelerated method of depreciatin' an
asset are the sum8of8years di'its (!01) and the dou"le8declinin' "alance (11B)
methods. .re,uently, accelerated depreciation is chosen for a "usiness+ tax expense "ut
strai'ht line is chosen for its financial reportin' purposes.
DEPRECIATION ALLOCATION is the allocation of the cost of capital expenditures
so that revenue is matched
%ith expenses for items that %ill last more than one year (land is not deprecia"le). $he
methodol'y is to allocate plant and e,uipment cost to expense throu'h the use of
accelerated, strai'ht line and units of production amorti&ation methods* as %ell as the
disposal of assets* and, repairs and "etterments to assets.
DEPRECIATION CONVENTION is utili&ed to determine ho% much depreciation to
char'e the first year %hen an item is "ou'ht part %ay throu'h the year. $hree different
conventions are used7 9. Calf year convention 8 All property placed in service is
considered to "e placed in service half %ay throu'h the year. 1urin' the first year, half of
the ?normal? depreciation is ta)en. At the end of the depreciation period, the other half of
the ?normal? depreciation is ta)en* H. Mid8,uarter convention 8 (f the amount of
depreciation claimed on ne% items durin' the last A months of a year exceeds ;:O of the
total depreciation claimed durin' the year, then the mid8,uarter convention is used. $he
amount of depreciation of each item is fi'ured for one year then multiplied "y M@.NO if
%as placed in service durin' Gan. 8 March, FH.NO if it %as placed in service durin' April 8
Gune, A@.NO for items placed in service durin' Guly8!ept, and 9H.NO for items placed in
service durin' 2ct. 8 1ec.* or, A. Mid8month convention 8 All property is considered to "e
placed in service durin' the midpoint of the month. $his re,uires some calculations.
DEPRECIATION METHOD see 1EP5E#(A$(23.
DEPRECIATION RECAPTURE is a provision contained in the (nternal 5evenue #ode
that ma)es excess depreciation ta)en on real property su"-ect to income tax upon the sale
or disposition of the property.
DEPRECIATION RESERVE in the process of allocatin' the cost of a fixed asset over
its effective service life in a systematic and rational manner (depreciation schedule), the
value of each deprecia"le asset is reduced "y its depreciation amount. $o match this, the
depreciation amounts are added to a ?depreciation reserve? in the lon'8term lia"ilities.
DEPRECIATION REVERSAL is the reversal of a depreciaton amount in the
depreciation reserve account.
DEPRECIATION SCHEDULE is the statement, over time, as to the schedule (timin'
and amounts) of depreciation of any lon'8term asset. A depreciation schedule is used for
any type of depreciation applica"le, i.e., either strai'ht line or accelerated depreciation.
!ee 1EP5E#(A$(23.
DERIVATIVE is a transaction or contract %hose value depends on or, as the name
implies, derives from the value of underlyin' assets such as stoc), "onds, mort'a'es,
mar)et indices, or forei'n currencies. 2ne party %ith exposure to un%anted ris) can pass
some or all of the ris) to a second party. $he first party can assume a different ris) from a
second party, pay the second party to assume the ris), or, as is often the case, create a
com"ination. 1erivatives are normally used to control exposure or ris). !ee
1E5(/A$(/E #23$5A#$.
DERIVATIVE CONTRACT is, 'enerally, a financial contract the value of %hich is
derived from the values of one or more underlyin' assets, reference rates, or indices of
asset values, or credit8related events. 1erivative contracts include interest rate, forei'n
exchan'e rate, e,uity, precious metals, commodity, and credit contracts, and any other
instruments that pose similar ris)s. !ee 1E5(/A$(/E.
DERIVATIVE LIABILITIES are financial instruments under contracts that have one or
more underlyin' and one or more notional amounts. !ee 1E5(/A$(/E.
DESIGNATED is somethin' selected or named for a duty, e.'., desi'nated receipts.
DESIGNATED RECEIPTS is that revenue %hich is identified for a specific purpose.
DEVALUATION, in economics, is the lo%erin' in value of one currency in relation to
other currencies.
DEVELOPMENT normally refers to a) improvin' a product or producin' ne% types of
products* or ") in real estate, process of placin' improvements on or to a parcel of land.
DEVOLUTION is the dele'ation of authority from hi'her to lo%er levels.
DEVOLVE is to pass on or dele'ate to another, e.'. a devolved letter of credit.
DEVOLVED BUDGETING follo%s from devolvin' mana'erial responsi"ility, and
assumes that those %ho are closest to the point of delivery of productBservice and other
activities %ill normally "e in the "est position to ma)e informed choices "et%een
alternative courses of action. .or devolved "ud'etin' to "e fully effective, the "ud'et
holder should maintain proper control of the costs "ein' char'ed to him or her and "e
accounta"le for performance a'ainst "ud'et. $he "ud'et structures are "ein' scrutini&ed
continuously, the aim "ein' to esta"lish %hat further scope exists for useful devolution of
authority and responsi"ility
DILUTED EARNINGS PER SHARE are earnin's per share, includin' common stoc),
preferred stoc), unexercised stoc) options, and some converti"le de"t. 1iluted earnin's
per share are usually a more accurate reflection of the company+s real earnin' po%er.
DILUTED SHARE see 1(6$E1 EA53(3G! PE5 !CA5E.
DILUTION is the decrease, %ea)enin', or loss in a financial statement related item. .or
example, share value may "e diluted throu'h the issuance of additional common shares.
DIO is 1ays (nventory 2utstandin'.
DIRECT ATTRIBUTION is the most precise method of costin' an output. (t see)s to
capture accurately the volume and cost of resources used "y particular activities. $his can
"e expensive unless the information is already availa"le "ecause it re,uires detailed
measurement of actual costs. !uch direct measurement is seldom -ustifia"le solely to
improve the accuracy of a cost system, "ut many institutions use this method to o"tain
efficiency 'ains and cost savin's.
DIRECT COST is that portion of cost that is directly expended in providin' a product or
service for sale and is included in the calculation of #2!$ 2. G221! !261, e.'. la"or
and inventory (it can "e traced to a 'iven cost o"-ect in an economically feasi"le manner).
2pposite of indirect cost.
DIRECT EXPENSE is that portion of expense that is directly expended in providin' a
product or service for sale and is included in the calculation of #2!$ 2. G221!
!261, e.'. la"or and inventory.
DIRECT FINANCING LEASE is one in %hich the lessorDs only source of revenue
isinterest. $he lessor ('enerally a "an) or other financial institution) "uys anasset and
leases it to the lessee. $his transaction is an alternative to the morecustomary lendin'
arran'ement in %hich a "orro%er uses the loan proceedsto purchase an asset. A direct
financin' lease is the functional e,uivalent of a loan.
DIRECT LABOR is %or) performed "y individuals %hich is directly related to a
specific cost o"-ective. $his %or) is readily identifia"le %ith a particular product or
service.
DIRECT LABOR BUDGET is a "ud'et of planned expenditures for direct la"or. $he
direct la"or "ud'et indicates the rate per hour and the num"er of hours necessary to meet
production re,uirements. !ee 2PE5A$(3G B1GE$.
DIRECT LABOR RATE VARIANCE reveals the difference "et%een the standard rate
and actual rate for the actual la"or hours %or)ed I(standard rate 8 actual rate) 4 actual
hoursJ.
DIRECT LABOR UTILIZATION RATE is total payroll char'ed directly to -o"
num"ers in the period divided "y the total payroll (direct and indirect) expended in the
period. !ince payroll is "y far the sin'le lar'est cost to operate a firm, 'enerally spea)in',
the hi'her the direct la"or rate, the more efficiently economically mana'ed is the firm.
DIRECT MATERIAL is the cost of ra% materials and components that can easily and
economically "e identified either %ith individual units of production or %ith a
responsi"ility center.
DIRECTOR'S REPORT is %ritten "y the 1irectors of a company and forms part of the
company+s financial statements. $his report must support and ela"orate on the
information contained in the (ncome !tatement, Balance !heet and !ource and
Application of .unds !tatement.
DIRECTORS RESPONSIBILITY STATEMENT contains %ritten assurances from
the "oard of directors that all company policies are follo%ed7 i) in the preparation of the
Annual Accounts, the applica"le Accountin' !tandards and there are no material
departures* ii) selected such accountin' policies and applied them consistently and made
-ud'ments and estimates that are reasona"le and prudent so as to 'ive a true and fair vie%
of the state of affairs of the #ompany at the end of the financial year and of the profit of
the #ompany for that period.
DIRECTORS VALUATION is a valuation that is not an independent valuation.
DIRECT WRITEOFF METHOD is a method of reco'nition of uncollecti"le accounts
only %hen )no%n to "e such.
DISABILITY INSURANCE, in the nited !tates, is a payroll tax re,uired in some
states that is deducted from employee paychec)s to insure income durin' periods %here
an employee is una"le to %or) due to an in-ury or illness.
DISBURSE/DISBURSEMENT is the payin' out of money to satisfy a de"t or an
expense.
DISCLOSURE DOCUMENT PROGRAM, in the nited !tates, is a form of le'al
protection that safe'uards intellectual property %hile it is in its development sta'es.
DISCLOSURE NOTE see 1(!#62!5E P5(3#(P6E.
DISCLOSURE PRINCIPLE states that any and all information that affects the full
understandin' of a company+s financial statements must "e include %ith the financial
statements. !ome items may not affect the led'er accounts directly. $hese %ould "e
included in the form of accompanyin' notes. Examples of such items are outstandin'
la%suits, tax disputes, and company ta)eovers.
DISCOUNT is a decrease in value (often due to interest to "e earned) or decrease in
price.
DISCOUNT ALLOWED, normally, is a reduction of the invoice amount for early
payment of the invoice value.
DISCOUNTED CASH FLOW is a valuation method "est used to evaluate a "usiness
esta"lished for the purpose of fulfillin' a specific pro-ect, in certain startup and other
companies %here cash flo% is more important than net income, and %hen a certain time
frame is set %here an investor %ishes to see his investment returned over a specific
period of time. (n discounted cash flo%, the present value of lia"ilities is su"tracted from
the com"ined present value of cash flo% and tan'i"le assets, %hich determines the value
of the "usiness.
DISCOUNTED CASH FLOW METHOD is a "ud'etin' method for pro-ect evaluation
and selection.
DISCOUNTED EARNINGS determines the value of a "usiness "ased upon the present
value of pro-ected future earnin's, discounted "y the re,uired rate of return
(capitali&ation rate). sually, the ,uestion is ho% %ell earnin's are pro-ected.
DISCOUNTED PAYBACK is the period of time re,uired to recover initial cash outflo%
%hen the cash inflo%s are discounted at the opportunity cost of capital.
DISCOUNTING is the sellin' of accounts receiva"le to a financial entity.
DISCONTINUED OPERATIONS is the sale, disposal, or planned sale in the near
future of a "usiness se'ment (product line or class of customer).
DISCOUNT RATE is the interest rate that the .ederal 5eserve of the .!. Government
char'es a .!. "an) to "orro% funds %hen a "an) is temporarily short of funds. #ollateral
is necessary to "orro%, and such "orro%in' is ,uite limited "ecause the .ed vie%s it as a
privile'e to "e used to meet short8term li,uidity needs, and not a device to increase
earnin's.
DISCREPANCY is a difference "et%een conflictin' facts or claims or opinions. (n
import B export, it is situations relatin' to official documents that are presented that do not
conform to %hat is re,uired %ithin the 6etter of #redit.
DISCRETIONARY means it is not mandatory, it is up to the individual or company.
DISCRETIONARY ACCRUAL is a non8mandatory expenseBasset that is recorded
%ithin the accountin' system that has yet to "e reali&ed. An example of this %ould "e
mana'ement "onus.
DISCRETIONARY COST can "e increased or decreased at the discretion of the
decision ma)er (e.'., advertisin' and "usiness travel).
DISCRETIONARY INCOME means the amount of a company+s income availa"le for
spendin' after the essentials have "een met. !ee 1(!P2!AB6E (3#2ME.
DISHONORED NOTE is a note on %hich a de"tor has defaulted.
DISINTERMEDIATION is the diversion of savin's from accounts %ith lo% fixed
interest rates to direct investment in hi'h8yieldin' instruments.
DISPATCH, in shippin', is the amount paid "y a vessel+s operator to a charterer if
loadin' or unloadin' is completed in less time than stipulated in the charter party.
DISPOSABLE INCOME is the amount of an individual+s income left after taxes %hich
is availa"le for spendin' and B or savin's. !ee 1(!#5E$(23A50 (3#2ME.
DISSOLUTION is the act of endin', terminatin' or %indin'8up a company or state of
affairs. .or example, %hen the life of a company is ended "y normal le'al means, it is
said to "e ?dissolved?. $he same is said of marria'e or partnerships %hich, "y
dissolution, ends the le'al relationship "et%een those persons formally -oined "y the
marria'e or partnership.
DISTRIBUTABLE CASH is a common term used "y income funds to descri"e the
amount of cash that is availa"le to meet distri"ution o"li'ations of the fund. 1istri"uta"le
cash does not have a standard meanin' and may "e calculated differently "y different
income funds.
DISTRIBUTION COST is any cost incurred to fill an order for a product or service. (t
includes all money spent on %arehousin', deliverin' andBor shippin' products and
services to customers.
DISTRIBUTIONS are payments from fund or corporate cash flo%. May include
dividends from earnin's, capital 'ains from sale of portfolio holdin's and return of
capital. .und distri"utions can "e made "y chec) or "y investin' in additional shares.
.unds are re,uired to distri"ute capital 'ains (if any) to shareholders at least once per
year. !ome corporations offer 1ividend 5einvestment Plans (1.5.P.).
DISTRIBUTION TO OWNERS is payment of earnin's to o%ners of a "usiness
or'ani&ation in the form of a dividend. A dividend is a distri"ution to a corporation+s
stoc)holders usually in cash* sometimes in the corporation+s stoc) and much less
fre,uently in property (usually other securities).
DIT is 1epreciation, (nterest and $axes.
DIVESTITURE is the sale "y a company of a product line, a su"sidiary or a division.
DIVIDEND is that portion of a corporation+s earnin's %hich is paid to the stoc)holders.
DIVIDEND CAPITALIZATION" !ince most closely held companies do not pay
dividends, %hen usin' dividend capitali&ation valuators must first determine dividend
payin' capacity of a "usiness. 1ividend payin' capacity "ased on avera'e net income and
on avera'e cash flo% are used. $o determine dividend payin' capacity, near term capital
needs, expansion plans, de"t repayment, operation cushion, contractual re,uirements,
past dividend payin' history of a "usiness and dividends of a compara"le company
should "e investi'ated. After analy&in' these factors, percent of avera'e net income and
of avera'e cash flo% that can "e used for the payment of dividends can "e estimated.
Khat also must "e determined is the dividend yield, %hich can "est "e determined "y
analy&in' compara"le companies. As %ith the price earnin's ratio method, this usually
produces a su"-ective result.
DIVIDEND COVER see 1(/(1E31 PA02$ 5A$(2.
DIVIDEND PAYOUT RATIO is a measure of the percenta'e of earnin's paid out in
dividends* computed "y dividin' cash dividends "y the net income availa"le to each class
of stoc).
DIVIDENDS PER SHARE (DPS) ratio is very similar to the EP!7 EP! sho%s %hat
shareholders earned "y %ay of profit for a period %hereas 1P! sho%s ho% much the
shareholders %ere actually paid "y %ay of dividends. $he formula7 1ividends per share E
1ividends paid to e,uity shareholders B Avera'e num"er of issued e,uity shares.
DIVIDEND YIELD is the annual rate of return, expressed as a percenta'e, on an
investment.
DIVIDEND YIELD RATIO allo%s investors to compare the latest dividend they
received %ith the current mar)et value of the share as an indictor of the return they are
earnin' on their shares. $he formula for the dividend yield is7 1ividend yield E 6atest
annual dividends B #urrent mar)et share price.
DIVISION is a self sufficient unit %ithin a company. A division contains all the
functions necessary to operate indepently from the parent company.
DOCK RECEIPT is a document issued "y the ocean carrier of a shipment
ac)no%led'in' receipt of the 'oods to "e shipped.
DOCTRINE is a. somethin' that is tau'ht* ". a principle or position or the "ody of
principles in a "ranch of )no%led'e or system of "eliefs* c. a principle of la% esta"lished
throu'h past decisions* d. a statement of fundamental 'overnment policy especially in
international relations.
DOCUMENTARY CREDIT is an arran'ement "y "an)s for settlin' international
"usiness transactions. A letter of credit is a form of documentary credit.
DOCUMENT CONTROL is a function or department %hich )eeps trac) of all
documentation, specifications and processes. $he purpose is to ensure that everyone uses
the correct and most current processes and specifications.
DOCUMENT MAINTENANCE is a formali&ed system of ensurin' that all controlled
documents are to the latest confi'uration or version.
DOCUMENT RECONCILIATION is the synchroni&ation of formali&ed documents to
approved or chan'ed re,uirements or specifications.
DOCUMENT RETENTION POLICY is a set of 'uidelines that a company follo%s to
determine ho% lon' it should )eep certain records, includin' e8mail and %e" pa'es. $he
policy is important for many reasons, includin' le'al re,uirements that apply to some
documents. .or example7 a. for tax8related items 8 the recommended retention is seven
years* and, ". for real estate records 8 the recommended retention is t%enty years.
DOCUMENT REVIEW is a formali&ed techni,ue of data collection involvin' the
examination of existin' records or documents.
DOLLAR CONTROL SYSTEMS are systems used in inventory mana'ement that
reveals the cost and 'ross profit mar'in on individual inventory items.
DOLLARIZATION is the use of .!. dollars "y a country as its o%n currency* the
lin)in' of a currencyDs value to that of the .!. dollar* or, the use of the .!. dollar for
accountin' purposes.
DOLLAR VALUE LIFO, in the .!., is a method of expressin' the value of an
inventory in monetary values rather than units. Each homo'eneous 'roup of inventory
items is converted into "ase8year prices "y usin' the appropriate price indices. $he
difference "et%een openin' and closin' inventories is a measure in monetary terms of the
chan'e in the financial period.
DOLLARWEIGHTED RATE OF RETURN is also called the internal rate of return*
the interest rate that ma)es the present value of the cash flo%s from all the su"8periods in
an evaluation period plus the terminal mar)et value of the portfolio e,ual to the initial
mar)et value of the portfolio.
DONATED ASSETS are assets received in a voluntary non8reciprocal transfer from
another entity such as 'ifts of capital assets* usually voluntary contri"utions of resources
to a 'overnmental entity "y a non8'overnmental entity.
DONATED CAPITAL is a 'ift of assets to a company, usually "y state or local
'overnments, to induce a "usiness to relocate to their -urisdiction.
DOOMSDAY RATIO is related to the ,uic) (acid test) ratio in that it is a conservative
approach to de"t covera'e. $he doomsday ratio only considers the cash on hand %hen
evaluatin' if an entity can cover their current lia"ilities. $he approach is that if the
"usiness %ere to 'o "an)rupt today, %ould the "usiness have enou'h cash on hand to
cover current de"ts. $he ratio is considered a 'ood indicator of the cash cushion of safety.
(t may spot cash shorta'es, there"y assistin' in avoidin' a credit crisis. (t is calculated7
#ash divided "y #urrent 6ia"ilities.
DOUBLE ACCOUNTING is the un8intentional, or sometimes fraudulently intentional,
dou"le countin' of assets or lia"ilities, or any other datasets, %hich, in the end, 'ive an
inaccurate vie% of %hat the data really means. (n accountin', this is usually caused "y a
multiplicity of entries of the same data %hich, in the end, causes confusion or financial
reportin' inaccuracies.
DOUBLE DECLINING BALANCE DEPRECIATION see 1E#6(3(3G BA6A3#E
1EP5E#(A$(23.
DOUBLEENTRY ACCOUNTING is a system of recordin' transactions in a %ay that
maintains the e,uality of the accountin' e,uation. $he accountin' techni,ue records each
transaction as "oth a credit and a de"it. 1ou"le8entry "oo))eepin' (1EB) or accountin'
%as developed durin' the fifteenth century and %as first recorded in 9;>; as a system "y
the (talian mathematician 6uca Pacioli.
DOUBTFUL DEBT is a de"t %here circumstances have rendered its ultimate recovery
uncertain. #onservatism re,uires that dou"tful de"ts should "e treated in the same %ay as
"ad de"ts. $hey should thus "e recorded as an expense in the profit and loss account and
to "e credited to a provision to set off a'ainst ultimate default if it occurs.
DOW !ONES INDUSTRIAL AVERAGE is an index that trac)s the daily share value
of A: lar'e ! companies listed on the 3e% 0or) !toc) Exchan'e. $he 1o% Gones
'enerally mirrors the exchan'e as a %hole.
DOWNSTREAM / UPSTREAM SALES see P!$5EAM B 12K3!$5EAM !A6E!.
DPO see 1ays Paya"les 2utstandin'.
DPS see 1(/(1E31! PE5 !CA5E.
D6 is an ancient (talian a""reviation for the (talian %ord Pde"areD* meanin' Pde"itD (not to
"e confused %ith the acronym DR %ith "oth letters in uppercase).
DR, in accountin', is an acronym for 1e"it 5ecord.
DRAFT, in import B export, is a contract "et%een "uyer and seller that the "uyer %ill pay
a certain amount of money, %ithin a specified period of time, for the 'oods purchased.
DRAFT# DEMAND OR SIGHT, in import B export, is a draft paya"le upon presentation
to the dra%ee. (t may "e used %hen the exporter %ishes to retain control of the shipment
for credit or title retention reasons. $he "uyer must pay the "an) "efore receivin' the
documents to ta)e custody of the 'oods. A #21 shipment is similar.
DRAW see P52P5(E$25! 15AK.
DRAWDOWN is the ma'nitude of a decline in account value, either in percenta'e or
currency terms.
DRAWEE is the "uyer of a draft instrument.
DRAWING ACCOUNT see P52P5(E$25! 15AK.
DROP SHIP is %here the sellerBretailer of a product ships the product directly from the
manufacturer to the customer %ithout re,uirin' inventory carryin' "y the sellerBretailer.
DSO, in accountin', is an acronym that usually means +1ays !ales 2utstandin'+.
DTD can "e7 1ated, 1ay8to8day, or 1ocument $ype 1escription, amon' others.
DUALITY CONCEPT is the foundation of the universally applica"le dou"le entry "oo)
)eepin' system. (t stems from the fact that every transaction has a dou"le (or dual) effect
on the position of a "usiness as recorded in the accounts. .or example, %hen an asset is
"ou'ht, another asset cash (or "an)) is also and simultaneously decreased 25 a lia"ility
such as creditors is also and simultaneously increased. !imilarly, %hen a sale is made the
asset of stoc) is reduced as 'oods leave the "usiness and the asset of cash is increased (or
the asset of de"tors is increased) as cash comes into the "usiness (or a promise to pay is
made and accepted). Every financial transaction "ehaves in this dual %ay.
DUE DILIGENCE usually refers to an internal audit of a tar'et firm "y an ac,uirin'
firm.
DUMPING is the sellin' of merchandise in a forei'n country at, or, "elo% cost in order
to sei&e mar)et share.
DUN is %hen you importune ("e' or are insistent upon) a de"tor for payment7 a dunnin'
letter.
DUN & BRADSTREET (D&B) is a nited !tates "ased for profit a'ency that furnishes
su"scri"ers %ith mar)etin' statistics and the financial standin's and credit ratin's of
"usinesses.
DURATION DRIVERS represent the amount of time re,uired to perform an activity.
DUTY is a tax imposed "y a customs authority on imported 'oods. 2ften used
interchan'ea"ly %ith the term ?tariff.?
EA is Enrolled A'ent ((5! desi'nation).
E&O INSURANCE is an errors and omissions, or E&2, lia"ility policy (often called
malpractice insurance) covers lia"ility for ne'li'ent acts, errors and omissions committed
"y professionals, includin' physicians, accountants, la%yers, etc.
E&OE is a British acronym that stands for ?Errors and 2missions Excepted?. E&2E is a
le'al disclaimer that notifies the reader that, %ithout pre-udice, that the content andBor
validity of the su"-ect data may chan'e %ithout notice.
E&P is Earnin's and Profits.
EARNED INCOME is that income reali&ed "y the provisionin' of 'oods and services.
EARNED SURPLUS see 5E$A(3E1 EA53(3G!.
EARNING ASSET is an asset %hich provides income (e,', rental property).
EARNING POWER is earnin's "efore interest and taxes (EB($) divided "y total assets.
EARNING QUALITY is "est determined throu'h the inverse relationship "et%een the
amount of time elapsed "et%een revenue reco'nition and cash collection.
EARNINGS is a term that refers to the financial capacity of a corporation to ma)e
distri"utions to shareholders other than return of capital, e.'., dividends. !ee also
5E$A(3E1 EA53(3G!.
EARNINGS BEFORE TAXES see P52.($ BE.25E $A4E!.
EARNINGS FROM OPERATIONS (EFO) represent earnin's "efore other operatin'
items less (i) depreciation and amorti&ation plus (ii) other income less (iii) other expense.
EARNINGS MANAGEMENT occurs %hen mana'ers use -ud'ment in financial
reportin' and in structurin' transactions to alter financial reports to either mislead some
sta)eholders a"out the underlyin' economic performance of the company, or to influence
contractual outcomes that depend on reported accountin' num"ers.
EARNINGS PER SHARE (EPS) is earnin's "efore extraordinary 'ains and losses, less
preferred8share dividends, divided "y all common shares outstandin' at the most recent
fiscal year end. 3et income, or earnin's, refers to the company+s after8tax profits "efore
extraordinary 'ains or extraordinary losses for the most recent annual period.
EARNINGS RETENTION is the proportion of net income that is not paid in dividends.
A firm earnin' =M: million after taxes and payin' dividends of =H: million has a
retention rate of =F: millionB=M: million, or @NO. A hi'h retention rate ma)es it more
li)ely a firm+s income and dividends %ill 'ro% in future years.
EBIT is Earnin's Before (nterest and $ax. EB($ is an indicator of a company+s financial
performance calculated as revenue less expenses excludin' tax and interest. (t is
sometimes referred to as operatin' earnin's.
EBITDA means Earnin's Before (nterest, $axes, 1epreciation and Amorti&ation, "ut
after all product B service, sales and overhead (!G&A) costs are accounted for.
!ometimes referred to as 2perational #ash .lo%.
EBITDARM is an acronym for Earnin's Before (nterest, $axes, 1epreciation,
Amorti&ation, 5ent and Mana'ement fees.
E5C5 (EUROPEAN COMMUNITY (6 EUROPEAN COMMON MARKET) is a
tradin' "loc) of countries in Europe that have a'reed on common re'ulations on cross8
"order trade.
ECONOMETRICS literally means +economic measurement+. (t is the "ranch of
economics that applies statistical methods to the empirical study of economic theories
and relationships. (t is a com"ination of mathematical economics, statistics, economic
statistics and economic theory.
ECONOMICALLY FEASIBLE means that the "enefit of tracin' the cost ('reater
accuracy) out%ei'hs the cost of doin' so.
ECONOMIC BOOK VALUE allo%s for a "oo) value analysis that ad-usts the assets to
their mar)et value. $his valuation allo%s valuation of 'ood%ill, real estate, inventories
and other assets at their mar)et value.
ECONOMIC DEPRECIATION is the decline in real estate property value caused "y
external forces, such as nei'h"orhood "li'ht or adverse development.
ECONOMIC ENTITY accountin' concept that provides context or Spoint of vie%T for
the economic events (i.e., transactions) captured "y the financial statements. (n short, it
ans%ers the ,uestions, SKhose asset is itZT* SKhose lia"ility is itZT
ECONOMIC EVENT is the transfer of control of an economic resource from one party
to another party.
ECONOMIC EXPOSURE, in forei'n exchan'e, is the extent to %hich the value of the
firm, as measured "y the present value of all expected future cash flo%s, %ill chan'e
%hen exchan'e rates chan'e.
ECONOMIC INCOME is the maximum amount that can "e distri"uted to o%ners
durin' the accountin' period and leave the "usiness as %ell off at the end of the
accountin' period as it %as at the "e'innin' of the period* i.e. cash flo% "ased.
ECONOMIC ORDER QUANTITY is the order ,uantity that minimi&es total inventory
costs. A total inventory cost is the sum of orderin', carryin' and stoc)8out costs.
ECONOMIC PROFITS is the difference "et%een the total revenue and the total
opportunity costs.
ECONOMIC SUBSTANCE refers to the application of income tax la%s, i.e., the
su"stance of the transaction, rather than its form, determines the tax conse,uences, %ith
fe% exceptions. $he ?form? of a transaction is only the la"el the interested parties attach
to their arran'ement. .or instance, an arran'ement mi'ht "e called a compensation
a'reement, loan, lease or sale. 1ocuments may support the form, "ut the courts are not
concerned %ith these la"els or papers that purport to 'overn the transaction 88 they focus
on its su"stance. $he ?su"stance over form? analysis is used to dissect self8servin'
transactions "et%een parties, includin' loans and payments to family mem"ers*
transactions "et%een related corporations and their shareholders, partnerships and their
partners* and "et%een trusts and their "eneficiaries. .or instance, sale of a home "y a
parent to a child may "e recharacteri&ed "y the court as a 'ift, if the child never pays for
it. 5elated8party transactions provide fertile territory for self8dealin', %ith the tax "enefit
as the real motivatin' purpose, dis'uised "y the form of the transaction. (n contrast,
arm+s8len'th transactions %ith independent third parties are far less vulnera"le.
ECONOMIC VALUE (EV) is the value of an asset derivin' from its a"ility to 'enerate
income.
ECONOMIC VALUE ADDED (EVA) measures the difference "et%een the return on a
companies capital and the cost of that capital. A positive E/A indicates that value has
"een created for shareholders* a ne'ative E/A si'nifies value destruction.
ECONOMIES OF SCALE is "ased upon the theory that the more you produce of a
'ood, the less that it costs for each additional unit, i.e., efficiency. !pecifically, it is the
reduction of the costs of production of 'oods due to increasin' the si&e of the producin'
entity and the share of the total mar)et for the 'oodBproduct.
EEO is E,ual Employment 2pportunity or E,ual Employment 2ffice.
EF&L is Errors, .ines and 6osses.
EFFECTIVE DATE OF INTEREST is the mar)et rate at time of a de"t issue.
EFFECTIVE INTEREST RATE is the cost of credit on a yearly "asis expressed as a
percenta'e. (ncludes up8front costs paid to o"tain the loan, and is, therefore, usually a
hi'her amount than the interest rate stipulated in the note.
EFFECTIVE TAX RATE is the net rate a taxpayer pays on income that includes all
forms of taxes. (t is calculated "y dividin' the total tax paid "y taxa"le income.
EFFICIENCY is the ratio of the output to the input of any system.
EFFICIENT MARKET THEORY is the hypothesis that mar)et prices reflect the
)no%led'e and expectations of all investors. Kithin this theory, investors %ho adhere to
it "elieve it to "e hi'hly impro"a"le that mar)et movement can "e predicted, i.e., usin'
darts to chose stoc)s are -ust as effective as stoc) or mar)et analysis.
EFO see EA53(3G! .52M 2PE5A$(23!.
EFT see Electronic .unds $ransfer.
EITF see Emer'in' (ssues $as) .orce.
ELECTRONIC FUNDS TRANSFER is a payment executed throu'h computers.
ELIMINATION is the the act of removin' a mathematical ,uantity "y com"inin'
e,uations. $his is common practice in accountin' %hen consolidatin' financial reports*
one example %ould "e inter8company transactions, currency translations, and account
"alances.
EMBEZZLEMENT is the fraudulent appropriation of funds or property entrusted to
your care "ut actually o%ned "y someone else.
EMC (EXPORT MANAGEMENT COMPANY) is a private company that serves as
the export a'ent for manufacturers, "ein' paid "y commission or retainer. Merchandise is
not normally purchased "y the EM#.
E<169*-9 I''/1' T+'= F(6)1 (EITF) %as formed in 9>M; in response to the
recommendations of the .A!B+s tas) force on timely financial reportin' 'uidance and an
.A!B (nvitation to #omment on those recommendations. $he mission of the E($. is to
assist the .A!B in improvin' financial reportin' throu'h the timely identification,
discussion, and resolution of financial accountin' issues %ithin the frame%or) of existin'
authoritative literature.
EMI is E,ual Monthly (nstallments (financeB"usiness).
ENCUMBERED is %hen an asset is o%ned "y one party su"-ect to the le'al claims of
another party. 2ne example is a homeo%ner that o%ns a home that is su"-ect to
(encum"ered "y) the claims of the mort'a'e holder.
ENCUMBRANCE is a) a ri'ht or interest in land o%ned "y someone other than the
o%ner of the land itself* examples include easements, leases, mort'a'es, and restrictive
covenants* or, ") in accountin', an encum"rance is an anticipated expenditure, or funds
restricted for anticipated expenditures, such as for outstandin' purchase orders.
ENDING INVENTORY is inventory at the end of the accountin' period.
ENDOWMENT is a permanent fund %here 'ifts to the fund are held in perpetuity and
%here earnin's are used in accordance %ith the donorDs specified %ishes.
ENGINEERED COSTS are those costs havin' a clear lin)a'e to output, e.'., direct
materials costs.
ENROLLED AGENT is any individual %ho is enrolled under the provisions of
$reasury 1epartment #ircular 3o. HA: to practice "efore the (5!.
ENTERPRISE is an or'ani&ation created for "usiness ventures.
ENTERPRISE RESOURCE PLANNING (ERP) is an information system or process
that inte'rates all operational data and related applications for an entire enterprise. E5P
systems permit or'ani&ations to mana'e resources across the enterprise.
ENTERPRISE VALUE (EV) is a measure of a company+s value. Enterprise value is
calculated "y7 mar)et capitali&ation plus de"t and preferred shares minus cash and cash
e,uivalents. (n effect, enterprise value is the theoretical ta)eover price, i.e., in the event
of a "uyout an ac,uirer %ould have to ta)e on the company+s de"t "ut %ould poc)et its
cash.
ENTERPRISE ZONE is a depressed nei'h"orhood, usually in an ur"an area, %here
"usinesses are 'iven tax incentives and are not su"-ect to some 'overnment re'ulations.
$hese advanta'es are desi'ned to attract ne% "usiness in the &one.
ENTITY, in "usiness, is a separate or self8contained existence that provides 'oods or
services.
ENTITY BOUNDARY is that %hich is le'ally included %ithin or excluded from a
defined entity.
ENTITY ASSUMPTION is the assumption that financial statements are prepared for an
entity that is separate and distinct from its o%ners.
ENTITY CONCEPT is the concept that financial accountin' and reportin' relates only
to the activities of a specific "usiness entity and not to the activities of the o%ners of that
entity.
ENTITY THEORY is %here a le'al entity is re'arded as havin' a separate existence
from the o%ners. $he financial statements are prepared from the perspective of the entity,
not its o%ners. !ee P52P5(E$A50 $CE250.
ENTREPRENEUR is the person %ho assumes the financial ris) of the initiation,
operation and mana'ement of a 'iven "usiness or underta)in'. CeB!he is primarily a
financial andBor professional ris) ta)er almost to the extreme.
EOM is End of Month.
EOY is End 2f 0ear.
EOZ is Environmental 2pportunity Lones.
EPS see EA53(3G! PE5 !CA5E.
EPU see EU(/A6E3$ 3($ 2. P521#$(23.
EQUIPMENT is 'enerally determined "y the meetin' of three tests7 a. Cas an
ac,uisition cost that is e,ual to or more than the cost hurdle for classifyin' capitali&ed
assets. (ncludes7 (nvoice amount, sales tax, frei'ht costs, installation costs, costs for the
initial complement of supplies needed to place the asset into service, accessory and
auxiliary apparatus necessary to ma)e it usa"le for the purpose for %hich it %as ac,uired*
less trade or trade in discounts andBor educational allo%ances Excludes7 .ederal Excise
tax, duty, insurance, maintenance and %arranty costs* and, ". Cas a useful life of t%o or
more years (f the item %ill not have a useful life of more than t%o years it is considered
expenda"le material, even if it costs more than the level for determinin' a capital asset*
and, c. (s a stand alone item. $he item is not permanently attached to or inte'rated into a
"uildin' or structure.
EQUIPMENT LOAN is a loan used for the purchase of capital e,uipment.
EQUITY is, normally, o%nership or percenta'e of o%nership in a company or items of
value.
EQUITY ACCOUNTING is the practice of sho%in' in a company+s accounts the share
of undistri"uted profits of another company in %hich it holds e,uity o%nership (usually
"elo% N:O). $he share of profit sho%n is usually e,ual to its share of the e,uity in the
other company. $he profit may not actually "e paid over, "ut the e,uity holdin' company
has a ri'ht to this share of the undistri"uted profit.
EQUITY CAPITAL is a form of financin' %here e,uity in a "usiness is sold to private
investors.
EQUITY FINANCING is a method of an entity o"tainin' funds "y issuin' either
common or preferred stoc), or "oth. 5eceipts can "e throu'h cash, services, or property.
(t is in the entities "est interest to issue shares %hen the mar)et price for the stoc) is at its
hi'hest.
EQUITY FUND is a mutual fund %hose portfolio consists primarily of common stoc)s.
EQUITY FUNDING see EU($0 #AP($A6.
EQUITY HOLDING is a holdin' of the nominal share capital in a company %here the
shareholdin' entitles the shareholder to a ri'ht to votes, to profits availa"le for
distri"ution to shareholders and to assets availa"le for distri"ution on a %indin' up of that
company. A holdin' of shares held as tradin' stoc) for the purpose of a trade does not
constitute a participatin' holdin'.
EQUITY INSTRUMENT covers any share (or part thereof) in the e,uity share capital
of a company (or a compara"le mem"erDs interest in a close corporation). $he term also
includes share options and any other financial instrument converti"le into a share (such as
a converti"le de"enture).
EQUITY METHOD is a method of accountin' for investments in associated
companies.
EQUITY MULTIPLIER (EM) sho%s the amount of assets o%ned "y the firm for each
e,uivalent monetary unit o%ner claims held "y stoc)holders, i.e., the e,uity multiplier
measures ho% many dollars of assets an institution supports %ith each dollar of capital. (f
a firm is totally financed "y e,uity, the e,uity multiplier %ill e,ual 9.::, %hile the lar'er
the num"er the more hi'hly levera'ed is the firm. EM compares assets %ith e,uity7 lar'e
values indicate a lar'e amount of de"t financin' relative to e,uity. EM, thus, measures
financial levera'e and represents "oth profit and ris) measurement. EM affects a firmDs
profit "ecause it has a multiplier impact on 5eturn on Assets (52A) to determine the
firmDs 5eturn on E,uity (52E). EM is also a ris) measure "ecause it reflects ho% many
assets can 'o into default "efore a company "ecomes insolvent. $he EM ratio is "est
compared to industry avera'es.
EQUITY SHARE see #2MM23 !$2#<.
EQUITY SHARE CAPITAL is capital raised "y an entity throu'h the sale of common
shares.
EQUITY OFFERING see EU($0 #AP($A6.
EQUITYTOASSET RATIO expresses the proportion of total assets financed "y the
o%nerDs e,uity capital. (t is the reciprocal of the de"t8to8asset ratio.
EQUIVALENT UNIT OF PRODUCTION (EPU) is "ased on the idea that if 9:: units
are all ;:O complete, then ;: %hole units could have "een completed.
ERISA, in the .!., refers to the Employee 5etirement (ncome !ecurity Act of 9>@;.
E5(!A is a ma-or .!. la% %hich 'uarantees certain cate'ories of employees a pension
after some period at their employer* there had "een more am"i'uity "efore a"out %hat
rules an employer could put on %hich employees could 'et a pension.
ERP can mean either Enterprise 5esource Plannin' or Early 5etirement Pro'ram. !ee
E3$E5P5(!E 5E!25#E P6A33(3G.
ERROR OF COMISSION is an error that occurs as a result of an action ta)en. (n
accountin', the error occurs %hen one or "oth of the dou"le entries are made in the
correct class of account "ut the %ron' account %ithin that class.
ERROR OF OMISSION is an error %hich occurs as a result of an action not ta)en. (n
accountin', the error occurs %hen "oth the entries re,uired for a transaction are
completely omitted from the "oo)s.
ERROR OF ORIGINAL ENTRY, in accountin', occurs %hen the dou"le entry is made
"ut usin' an incorrect fi'ure.
ERROR OF PRINCIPLE, in accountin', occurs %hen one or "oth of the entries are
made in the %ron' class or cate'ory of account.
ESCHEAT is the reversion of property to the state ('overnment) in the a"sence of le'al
heirs or claimants.
ESCROW ACCOUNT see $5!$ A##23$.
ESTATE is the entire 'roup of assets o%ned "y an individual at the time of his or her
death. $he estate includes all funds, personal effects, interests in "usiness enterprises,
titles to property8real estate and chattels, and evidences of o%nership such as stoc)s,
"onds and mort'a'es o%ned, notes receiva"le, etc. All claims a'ainst an estate must "e
duly filed %ith the Executor or Administrator of the estate, and approved "y the court of
la% under %hich the %ill is "ein' pro"ated or the line of herita'e is "ein' determined
"efore the inde"tedness may "e satisfied.
ESTATE TAXES are the .ederal taxes levied on the transfer of property from the
deceased to his or her heirs, le'atees or devisees.
ETC (EXPORT TRADING COMPANY) is a private company that usually purchases
items from domestic manufacturers, then sells them to forei'n mar)ets. $he difference
"et%een an EM# and an E$# is sometimes insi'nificant, i.e., an EM# may occasionally
ta)e title of 'oods, %hile an E$# may sometimes %or) strictly on commission %ithout
purchasin' the 'oods. $he difference is %hat the company normally does.
ETHICAL STANDARDS, in accountin', is a %ritten document containin' "asic
principles and essential procedures to'ether %ith related 'uidance in the form of
explanatory and other material.
ETHICS, in "usiness, are moral and professional principles.
EUROBOND see G62BA6 B231.
EUROIZATION is the use of the euro "y a country as its o%n currency* the lin)in' of a
currencyDs value to that of the euro* or, the use of the euro for accountin' purposes.
EV (1)(-(<*) 8+3/1) is the value of an asset derivin' from its a"ility to 'enerate income.
EVA see E#232M(# /A6E A11E1.
EVENT RISK is the ris) that the a"ility of an issuer to ma)e interest and principal
payments %ill chan'e "ecause of rare, discontinuous, and very lar'e, unanticipated
chan'es in the mar)et environment such as (9) a natural or industrial accident or some
re'ulatory chan'e or (H) a ta)eover or corporate restructurin'.
EX is not includin' or %ithout, e.'. a stoc) price ex dividend. (n "usiness7 free of any
transport or handlin' char'es incurred "efore removal from a 'iven location, e.'., "ou'ht
the 'oods ex %arehouse.
EXCEPTIONAL ITEMS are material items %hich derive from events or transactions
that fall %ithin the ordinary activities of the reportin' entity and %hich individually or, if
of a similar type, in a''re'ate, need to "e disclosed "y virtue of their si&e or incidence if
the financial statements are to 'ive a true and fair vie%.
EXCESS OF REVENUE OVER EXPENSES in the not8for8profit sector. $here is a
common misconception that not8for8profit or'ani&ations are not allo%ed to have a
financial cushion as they are Snot8for8profitT. (n this context it is useful to remem"er that
not8for8profit or'ani&ations are also Snot8for8lossT or'ani&ations. An or'ani&ation cannot
sustain losses over the lon' term %ithout ceasin' to operate or 'oin' "an)rupt. Excess of
revenue over expenses is the planned financial position that there %ill al%ays "e a
sufficient amount of funds on hand to continue to run the not8for8profit entity for some
period %ithout additional fundin'* usually A8; months.
EXCHANGE is a. a %or)place for "uyin' and sellin'* open only to mem"ers, e.'. 3e%
0or) !toc) Exchan'e* or, ". reciprocal transfer of e,uivalent sums of money especially
the currencies of different countries, e.'. forei'n exchan'e mar)ets.
EXCHANGE RATE is the rate at %hich one currency can "e traded for another.
EXCHANGE RATE RISK, in forei'n exchan'e, is the varia"ility of a firmDs value due
to uncertain chan'es in the rate of exchan'e.
EXCISE TAX is a tax imposed "y federal, state, and local 'overnments on an act,
occupation, privile'e, manufacture, sale, or consumption that is not deducti"le (e.'.,
to"acco, 'asoline and spirits). $his term is in increasin' usa'e to descri"e almost every
tax other than income tax and property tax.
EXECUTOR is a le'al entity, fre,uently an individual, )no%n "efore death to a testator,
%ho is named in the testator+s %ill to carry out the desires of the deceased after his death
as desi'nated in the %ill. Executors must "e approved "y the court of la% pro"atin' the
%ill. An executor pays all inde"tedness as claimed "y creditors of the estate, %ith the
approval of the court of la%, and then carries out or executes the %ill accordin' to the
terms set forth "y the testator.
EXEMPT is "ein' freed from or not su"-ect to an o"li'ation, lia"ility, tax, etc.* excused.
Examples7 exempt 'ifts or tax8exempt "onus.
EXFACTORY is %here a seller+s responsi"ility ends %hen the "uyer at point of ori'in,
i.e., factory, accepts merchandise. $his can also "e %ritten as Ex8Karehouse, Ex8%or)s,
etc.
EXISTING USE VALUE (EUV) is the price at %hich a property can "e sold on the
open mar)et assumin' that it can only "e used for the existin' use for the foreseea"le
future.
EXPECTED ANNUAL CAPACITY is the planned activity levels or output for a 'iven
year ta)in' into account efficiency and idle capacity.
EXPECTED VALUE OF PERFECT INFORMATION (EVPI) is the difference
"et%een the expected value %ith (additional) perfect information and the expected value
%ith current information. $he expected value of perfect information is the maximum
amount a decision ma)er should pay for additional information that 'ives a perfect si'nal
as to the state of nature.
EXPENDABLE is somethin' that can "e used and discarded %ithout hurtin' the end
product or the company+s via"ility.
EXPENDABLE TRUST FUND is a 'overnmental fiduciary fund held in a trustee
capacity "y a 'overnmental a'ency that accounts for assets and activities restricted to a
specific purpose in accordance to formal intent. $he principal of the fund can "e
expended to%ards only the activity specified, e.'., nemployment #ompensation .und,
Employee Benefits .und, etc.
EXPENDITURE is a cost incurred in the normal course of "usiness to 'enerate
revenues. !ee expenses.
EXPENSE is the amount of assets or services used durin' a period.
EXPENSES are the daily costs incurred in runnin' and maintainin' a "usiness. !ee
expenditure.
EXPIRED EXPENSE is an expense havin' come to an end or "ecome void after
passa'e of a period of time.
EXPLORATORY RESEARCH is a method used %hen 'atherin' primary information
for a mar)et survey %here tar'eted consumers B customers are as)ed very 'eneral
,uestions 'eared to%ard elicitin' a len'thy ans%er.
EXPORT BROKER is an entity that "rin's to'ether forei'n "uyers %ith domestic
manufacturers for a fee, 'enerally providin' little other services. An EM#, %ho is also a
middleman, often provides extensive services to complete the transaction as %ell.
EXPORT DECLARATION is the official paper%or) re,uired of exporters so trade
transactions and 'oods can "e trac)ed.
EXPORT LICENSE is the 'overnmentally issued le'al permit to export merchandise. (n
the .!., it is either a 'eneral license re,uirin' no additional paper%or) or a validated
license for certain federally controlled items.
EXPOSURE, 'enerally, is the extent to %hich a product is )ept in the pu"lic eye throu'h
the press, radio, television, and pu"lic appearances. (n finance, exposure refers to the
amount that a "usiness or person can lose. .or example7 in forei'n exchan'e, it refers to
the de'ree to %hich a company is affected "y exchan'e rate chan'es.
EXPROPRIATION is the ta)in' of property or ri'hts "y 'overnmental authority such as
eminent domain, possi"ly includin' an emer'ency situation, such as ta)in' a person+s
truc) or "ulldo&er to "uild a levee durin' a flood. (n such a case -ust compensation
eventually must "e paid to the o%ner, %ho can ma)e a claim a'ainst the ta)er.
EXTERNAL is from or "et%een other countries, e.'. external commerce* or, happenin',
arisin' or located outside or "eyond a company, e.'. external influences.
EXTERNAL AUDIT is an audit conducted "y an individual or firm that is independent
of the company "ein' audited. $hese independent auditors audit the "oo)s of a company
'enerally once per year (see (3$E5(M A1($) after the completion of the company+s
fiscal year. $heir role is to 'ive an opinion of the financials statement+s reflection of the
status and operations of the company "ein' audited. Based on %hat they %itness durin'
the audit they %ill also produce, for mana'ement and "oard utili&ation, a mana'ement
letter. Althou'h a financial statement audit is the most common type of external audit,
external auditors may also conduct special purpose audits %hich mi'ht include*
performin' specific tests and procedures and reportin' on the results, a less intensive
revie%, and compilations.
EXTERNAL AUDITOR is an auditor, usually %or)in' for an audit firm, that is
completely independent of the company it is auditin'. External auditors should al%ays "e
certified "y a professional association of accountants, and should "e selected "y, and
report to, the corporationDs "oard of directors.
EXTERNAL DEBT is the total private and pu"lic de"t o%ed "y a country to
individuals, households, firms, and 'overnments in other countries.
EXTINGUISHMENT OF DEBT is the de"tor+s satisfaction of the o"li'ation to a
creditor, either le'ally or in8su"stance. A de"t shall "e accounted for as havin' "een
extin'uished in a num"er of circumstances, includin' %hen it has "een settled throu'h
repayment or replacement "y another lia"ility.
EXTRAORDINARY EXPENSE see E4$5A251(3A50 ($EM!.
EXTRAORDINARY ITEMS are material items that are unusual in nature and occur
infre,uently. Both characteristics must exist for an item to "e classified as an
extraordinary item on the income statement.
EXTRATERRITORIAL INCOME EXCLUSION is the amount excluded from a
taxpayer+s 'ross income for certain transactions that 'enerate forei'n tradin' 'ross
receipts. (n 'eneral, forei'n tradin' 'ross receipts include 'ross receipts from the sale,
exchan'e, lease, rental, or other disposition of ,ualifyin' forei'n trade property. .orei'n
tradin' 'ross receipts also include receipts from certain services provided in connection
%ith such property, as %ell as en'ineerin' and architectural services for construction
pro-ects outside the nited !tates. Uualifyin' forei'n trade property 'enerally includes
property that is held primarily for sale or lease for direct use or consumption outside the
nited !tates. .orm MM@A is attached to the taxpayer+s income tax return. Both corporate
and non8corporate taxpayers %ho have ,ualifyin' transactions may no% "e re,uired to
file .orm MM@A. $he exclusion reported on .orm MM@A %as created "y the .orei'n !ales
#orporation (.!#) 5epeal and Extraterritorial (ncome Exclusion Act of H:::. $he ne%
exclusion applies to certain transactions entered into after !eptem"er A:, H:::, "ut is
su"-ect to transition rules for forei'n corporations %ith a valid .!# election in effect on
!eptem"er A:, H:::.
FACTORING is the practice of "uyin' de"t at a discount, e.'., if some"ody o%es you
=9:,::: paya"le %ithin a year, a factorin' lender may pay you =>,::: for the de"t. 0ou
receive =>,::: cash ,uic)ly, "ut at the cost of the =9,::: discount.
FACTORY OVERHEAD is the costs of operatin' a factory %hich cannot "e assi'ned
directly to a specific department or product.
FAIR LABOR STANDARDS ACT is a .!. federal la% that enforces a 'roup of
minimum standards that employers must a"ide "y %hen hirin' employees.
FAIR MARKET VALUE is the price at %hich a %illin' seller %ill sell and a %illin'
"uyer %ill "uy, in an arms8 len'th transaction, %hen neither is under compulsion to sell
or "uy and "oth have reasona"le )no%led'e of relevant facts.
FAIR VALUE, under GAAP, is the amount at %hich an asset could "e "ou'ht or sold in
a current transaction "et%een %illin' parties, other than in li,uidation. 2n the other side
of the "alance sheet, the fair value of a lia"ility is the amount at %hich that lia"ility could
"e incurred or settled in a current transaction "et%een %illin' parties, other than in
li,uidation.
F&A is .acilities and Administrative #osts (a)a (ndirect #osts or 2verhead), .a"rication
& Assem"ly, .inance & Administration, or .inance & Accountin'.
F5A5S5 (FREE ALONG SIDE), e.'. SF.A.S. New York, means that, for instance, if
'oods are shipped from the !tate of 3evada in the .!. to Madrid, !pain, no char'es for
shipment are made to the importer until the 'oods are ?free alon'side the vessel? in 3e%
0or). After this point, char'es may "e applied to the importer.
FASB see .inancial Accountin' !tandards Board.
FAVORABLE VARIANCE is a variance created "y usin' or spendin' less of a 'iven
resource than specified "y the standard, often cate'ori&ed as rate (spendin' less per hour
for la"or for a 'iven amount of production), efficiency (usin' less hours for a 'iven
amount of production), usa'e (usin' less materials for a 'iven amount of production) or
price (payin' less to a vendor for a 'iven purchased item).
FBWT, in finance, is .und Balance Kith $reasury.
FCIA (FOREIGN CREDIT INSURANCE ACT) is an EximBan) pro'ram that offers
credit insurance a'ainst losses due to political conflict or "uyer default.
FCPA, in Australia and else%here, is .ello% #ertified Practicin' Accountant.
FEDERAL UNEMPLOYMENT TAX ACT (FUTA) is a .!, federal la% providin'
'uidelines for the unemployment compensation system. A .ederal tax is paid "y all lia"le
employers to fund the administration of .ederal and !tate unemployment insurance
pro'rams and the extended "enefits pro'ram. .$A provides for payments of
unemployment compensation to %or)ers %ho have lost their -o"s. Most employers pay
"oth a federal and a state unemployment tax.
FEE ABSOLUTE see .EE !(MP6E.
FEE ACCOUNTANT is an individual %ho performs manual or automated "oo))eepin'
services andBor maintains the official accountin' records.
FEE SIMPLE is a"solute o%nership of real property* o%ner is entitled to the entire
property. $his includes unencum"ered ri'ht of disposition durin' hisBher life and upon
death the real property passes to hisBher heirs. Also )no%n as .EE !(MP6E AB!26$E
and .EE AB!26$E.
FEE SIMPLE ABSOLUTE see .EE !(MP6E.
FF&E is .urniture, .ixtures & E,uipment (in real estate).
FFO FUNDS FROM OPERATIONS is used "y real estate and other investment trusts
to present the cash flo% from trust operations i.e., earnin's plus depreciation and
amorti&ation.
FGAR is .lorida Government Accounta"ility 5eport.
FGI see .(3(!CE1 G221! (3/E3$250.
FICA (FEDERAL INSURANCE CONTRIBUTIONS ACT) is the .!. la% re,uirin'
.!. employers to match the amount of !ocial !ecurity tax deducted from an employee+s
paychec).
FICTITIOUS ASSET is de"it "alance includes on "alance sheets as assets that do not
conform to the definition of an asset. (ntentional includes of assets )no%n to "e fictitious
assets may "e ruled as fraud.
FICTITIOUS NAME is often referred to as a 1BA, ?1oin' Business As,? a fictitious
name is fre,uently used "y sole proprietors or partnerships to provide a name, other than
those of the o%ners or partners, under %hich the "usiness %ill operate.
FIDDLY is re,uirin' close attention to detail, i.e. to "e fussy (primarily used in Great
Britain).
FIDUCIARY is a person or "usiness (for example, a "an) or stoc) "ro)era'e) %ho has
the po%er and o"li'ation to act for another (often called the "eneficiary) under
circumstances %hich re,uire total trust, 'ood faith and honesty.
FIFO (.*6',*-# .*6',(/,) is an inventory cost flo% %here"y the first 'oods purchased are
assumed to "e the first 'oods sold so that the endin' inventory consists of the most
recently purchased 'oods.
FINANCE CHARGE is the total dollar amount your loan %ill cost you. (t includes all
interest payments for the life of the loan, any interest paid at closin', your ori'ination fee
and any other char'es paid to the lender andBor "ro)er. (n real estate, appraisal, credit
report and title search fees are normally not included in the finance char'e calculation.
FINANCE LEASE, typically, is a full8payout, non8cancela"le a'reement, in %hich the
lessee is responsi"le for maintenance, taxes, and insurance.
FINANCIAL ANALYSIS is analysis of a company+s financial statement, usually "y
accountants or financial analysts.
FINANCIAL ACCOUNTING is the area of accountin' concerned %ith reportin'
financial information to interested external parties.
FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) is a professional
or'ani&ation %hich develops accountin' principles.
FINANCIAL BUDGET is focused on capital expenditures and on a "usinessDs "ud'eted
cash position7
9. #AP($A6 B1GE$ forecasts lar'e expenditures for items such as machinery.
1ifferent companies set different thresholds for %hat ,ualifies as a capital expenditure
(versus an expense). (f the purchase of an item (such as a piece of machinery) is
classified as a capital expenditure, it is then depreciated (or amorti&ed in some cases)
over a predetermined period of time. $he #apital Bud'et covers #apital Expenditures,
1is"ursements for #apital Expenditures, and 1epreciation Bud'ets.
H. #A!C B1GE$ trac)s a "usinessDs anticipated cash receipts and dis"ursements. $his
is a very detailed and important schedule that dra%s on information in the 2peratin'
Bud'et.
FINANCIAL CONSULTANT see #CA5$E5E1 .(3A3#(A6 #23!6$A3$.
FINANCIAL ENGINEERING is a process involvin' the creation and com"ination of a
variety of financial instruments in order achieve a defined financial o"-ective %ithin
certain cost, tax and le'al constraints, e.'. com"inin' or dividin' existin' financial
products to create ne% financial products.
FINANCIAL GEARING reflects any "orro%in' that the company may have
underta)en. 2peratin' income %ill "ecome more volatile %ith increased financial 'earin'
("orro%in'). $hus the shares %ill have more ris) attached to them. More "orro%in',
more ris). !ee GEA5(3G and 2PE5A$(23A6 GEA5(3G.
FINANCIAL GUARANTEE INSURANCE is insurance created to cover losses from
specified financial transactions.
FINANCIAL INCOME is that income that is contained %ithin the financial statements
of an entity. .inancial income normally is not in ali'nment %ith taxa"le income reported
in income tax returns. !ee $A4AB6E (3#2ME.
FINANCIAL INSTITUTION is an institution (pu"lic or private) that collects funds
(from the pu"lic or other institutions) and invests them into financial assets.
FINANCIAL LEVERAGE is the use of de"t to increase the expected return on e,uity.
.inancial levera'e is measured "y the ratio of de"t to de"t plus e,uity.
FINANCIAL MANAGEMENT is the process of mana'in' financial resources,
includin' mana'ement decisions concernin' accountin' and financial reportin',
forecastin', and "ud'etin'.
FINANCIAL PLANNER is a investment professional %ho assists individuals %ith lon'8
and short8term financial 'oals.
FINANCIAL POSITION is the status of a firm+s or individual+s assets, lia"ilities, and
e,uity positions as reflected on its financial statement.
FINANCIAL RATIO is the result of dividin' one financial statement item "y another.
5atios help analysts interpret financial statements "y focusin' on specific relationships.
FINANCIAL RATIO ANALYSIS is7 a. an easy and valua"le %ay to interpret and
understand the num"ers found in your financial statements. nderstandin' the
relationships "et%een the num"ers can help you ans%er critical ,uestions a"out your
"usiness 88 and if you monitor the ratios on a re'ular "asis you+ll 'ain insi'ht into ho%
effectively you are mana'in' your "usiness. And7 ". lenders also li)e to evaluate ris) "y
usin' several sets of ratios* ratios of assets to lia"ilities, and ratios of lender8investor
dollars to o%ner8investor dollars. 5eco'ni&e that ratios are indicators and that only you
can tell the full story a"out your "usiness. !o the more adept you are at explainin' your
financial ratios to your investorBlender, the "etter sheBhe %ill understand your "usiness as
heBshe ma)es a investmentBcredit decision.
FINANCIAL REPORT could contain financial statements, annual report, !E# .orm
9:8<, andBor prospectus amon' other documents, i.e. there is no set format.
FINANCIAL REPORTING RELEASE (FRR), in the .!., is the policy releases and
pronouncements from the !E# (!ecurities and Exchan'e #ommission).
FINANCIAL RESTRUCTURING is a process 'eared at avoidin' the li,uidation of the
#ompany. sually it involves a'reement "y third parties to satisfy creditors+ claims under
certain terms and conditions. .inancial restructurin' may also "e carried out "y
concludin' an a'reement %ith all creditors of the #ompany under %hich creditors %ill "e
paid on some%hat different terms than those initially accepted "y the #ompany %hen
credit and loans %ere extended. $his form of financial restructurin' ena"les the #ompany
to continue its operations and minimi&e creditorsD losses. !ee also 5E!$5#$5(3G.
FINANCIAL RESULTS usually refers to the summary financial statements provided in
compliance to the GAAP 'uidelines. $hey can cover any period(s), "ut usually cover
either7 sin'le month, ,uarter, or annual periods.
FINANCIAL RISK is the possi"ility of %hether a "ond issuer %ill default, "y failin' to
repay principal andBor interest in a timely manner. sually "onds issued "y the federal
'overnment, for the most part, are immune from default (if the 'overnment needs
money... more is printed). Bonds issued "y corporations are more pro"a"le to "e
defaulted on, since companies often 'o "an)rupt. Municipalities occasionally default as
%ell, "ut it is much less common. #an also "e called default ris) or credit ris).
FINANCIALS see .(3A3#(A6 !$A$EME3$.
FINANCIAL SCHEDULE, contained in an audited annual report, summari&es the
audited financial position of the audited entity. 2ther application of the term is the
schedulin' of amounts, not necessarily "y date, of ma-or financial events "y any 'iven
cate'ory as to pro-ected receipts, payments, costs, etc.
FINANCIAL STATEMENT is a %ritten report %hich ,uantitatively descri"es the
financial health of a company. $his includes an income statement and a "alance sheet,
and often also includes a cash flo% statement. .inancial statements are usually compiled
on a ,uarterly and annual "asis.
FINANCIAL STATEMENT ANALYSIS is analysis of a company+s financial
statement, usually "y accountants or financial analysts. sually includes indepth financial
ratio analysis comparisons over time periods.
FINANCIAL VIABILITY is the a"ility of an entity to continue to achieve its operatin'
o"-ectives and fulfill its mission over the lon' term.
FINANCING COST is the difference "et%een the cost of financin' the purchase of an
asset and the assets cash yield. Positive carry means that the yield earned is 'reater than
the financin' cost* ne'ative carry means that the financin' cost exceeds the yield earned.
FINANCING MARGIN RATIO (FMR) is the mar'in to "e maintained "et%een the
de"it "alance and the actual security value as stipulated in the .acility 6etter or any other
mar'in as stipulated "y a lendin' "an) from time to time as the .M5.
FINISHED GOODS INVENTORY is that portion of 'oods in inventory %hich have
completed manufacture and are availa"le for sale.
FISCAL is "elon'in' to the pu"lic treasury* or, pertainin' to pu"lic finance and financial
transactions.
FISCALIST is an economist %ho prefers that the 'overnment affect the economy "y
raisin' and lo%erin' taxation andBor 'overnment spendin'.
FISCAL LEVERAGE is the a"ility of a 'overnment to affect economic conditions
andBor actions of others throu'h fiscalist policies.
FISCAL QUARTER is any of the four financial accountin' ,uarters %ithin a fiscal year.
!ee .(!#A6 0EA5.
FISCAL YEAR is the declared accountin' year for a company, "ut it is not necessarily
in conformance to a calendar year (Ganuary throu'h 1ecem"er). Co%ever, it does cover
t%elve months, NH %ee)s, AFN days. .or example, the .!. 'overnment fiscal year ends
!eptem"er A:, i.e. 2cto"er 9 throu'h !eptem"er A: is their fiscal or accountin' year.
FIT is .ederal (ncome $ax.
FIXED ASSET is a lon'8term tan'i"le asset that is not expected to "e converted into
cash in the current or upcomin' fiscal year, e.'., "uildin's, real estate, production
e,uipment, and furniture. !ometimes called P6A3$.
FIXED ASSETS are those assets of a permanent nature re,uired for the normal conduct
of a "usiness, and %hich %ill not normally "e converted into cash durin' the ensurin'
fiscal period. .or example, furniture, fixtures, land, and "uildin's are all fixed assets.
Co%ever, accounts receiva"le and inventory are not. !ometimes called P6A3$.
FIXED ASSETS (NET) is all property, plant, leasehold improvements and e,uipment,
net of accumulated depreciation or depletion.
FIXED ASSETS (NET) / NET WORTH measures li,uidity "y comparin' ?fixed?
assets %ith ?fixed? capital. A lo%er ratio indicates proportionately smaller investment and
a "etter ?cushion? for creditors in case of li,uidation. $his may "e important if the fixed
assets are not easily used in other "usinesses. $he presence of su"stantial leased fixed
assets (not sho%n on the "alance sheet) may deceptively lo%er this ratio. $herefore
smaller is "etter, i.e., 'reater than .@N (@NO) should merit caution.
FIXED ASSET TURNOVER measures mana'ement+s a"ility to 'enerate revenues from
investments in fixed assets. .A$ considers only the firm+s investment in property, plant
and e,uipment and is extremely important in hi'h asset firms such as manufactures and
telecommunications companies. Generally, the hi'her this ratio7
the smaller the investment re,uired to 'enerate sales, thus the more profita"le the
firm.
indicates the firm has less money tied up in fixed assets for each dollar of sales
revenue.
A declinin' ratio may indicate that the firm has over8invested in plant, e,uipment, or
other fixed assets.
FIXED BOND pays an income stream and redemption payment at maturity than is fixed
in monetary terms* ho%ever, hi'h inflation %ill erode the real value of these payments.
FIXED BUDGET is a "ud'et that is not ad-usted for chan'es in the volume of service.
!ee .6E4(B6E B1GE$.
FIXED CHARGE is those expenses incurred each time a "atch of product is produced.
Primarily consists of orderin' cost for the ra% material, en'ineerin' costs for machine
setup and preparation for the production run, and %or) order processin' cost* also )no%n
as !E$P #2!$.
FIXED CHARGE RATIO is calculated7 total fixed costsBtotal expenses.
FIXED COST is a cost that does not vary dependin' on production or sales levels, such
as rent, property tax, insurance, or interest expense.
FIXED COSTS are operatin' expenses that are incurred to provide facilities and
or'ani&ation that are )ept in readiness to do "usiness %ithout re'ard to actual volumes of
production and sales. .ixed costs remain relatively constant until chan'ed "y mana'erial
decision. Kithin 'eneral limits they do not vary %ith "usiness volume. Examples of fixed
costs consist of rent, property taxes, and interest expense.
FIXED FEE is a set price for the completion of a pro-ect. (t is easier for the customer to
"ud'et, "ut provides hi'her ris) for the contractor due to cost overruns.
FIXED INCOME is any type of investment that yields a re'ular (fixed) payment. .or
example, if you "orro% money and have to pay interest once a month, you have issued a
fixed income security. Khen a company does this, it is called a "ond (althou'h +preferred
stoc)+ is also sometimes considered to "e fixed income). $he term fixed income is also
applied to people+s income %hich is invariant each period. $his could include income
derived from fixed income investments such as "onds and preferred stoc)s or pensions
that 'uarantee a fixed income. !ee 3238.(4E1 (3#2ME.
FIXED OVERHEAD is those costs li)e rent, utilities, "asic telephone, loan payments,
etc., that stay the same %hether sales 'o up or do%n. /aria"le overhead, on the other
hand, are those costs %hich vary directly %ith production.
FIXED EXPENSES in the operation of a "usiness are those expenses that remain the
same re'ardless of production or sales volume, i.e. do not fluctuate %ith sales volume.
#ontrast %ith /A5(AB6E E4PE3!E!.
FLASH REPORT provides hi'hli'hts of )ey information promptly to the responsi"le
mana'erial accountant* also called E4#EP$(23 5EP25$.
FLAT INTEREST refers to char'in' interest on the full ori'inal loan amount, rather
than on the declinin' "alance. Kith 'roup "ased loans, for example, a common ?interest
rate? is ?AO per month, flat, for ; months?. $his means that a =9:: principal amount lent
is multiplied "y AO, and then "y ; months to come up %ith =9H in interest. $hus, =99H
%ould "e repaid over ; months in e,ual installments.
FLAT LEASE is a lease %here the cost is fixed for a specific period of time.
FLAT RATE is a per unit price that remains constant re'ardless of the volume
purchased.
FLEXIBLE BUDGET is "ased upon different levels of activity. (t is a very useful tool
for comparin' actual costs experienced to the cost allo%a"le for the activity level
achieved, i.e. it is dynamic in nature as compared to static. A series of "ud'ets can "e
readily developed to fit any activity level. .lexi"le "ud'etin' distin'uishes "et%een fixed
and varia"le cost, there"y allo%in' for a "ud'et that can "e automatically ad-usted to the
level of activity actually attained.
FLOAT is 9. the time "et%een the deposit of chec)s in a "an) and %hen the amount is
truly accessi"le* H. the amount of funds represented "y chec)s that have "een %ritten "ut
not yet presented for payment. !ome entities %ill +play the float+ "y %ritin' chec)s
althou'h there are insufficient funds actually on deposit to cover the chec)s* and, A. to
issue ne% securities throu'h an under%riter.
FLOATING RATE CONVERTIBLE NOTE (FRCN) is a de"t instrument that is a
short8term de"t o"li'ation %here the interest rate is varia"le "ecause it is lin)ed to a
mar)et rate such as the A8month $8"ill rate or 6ondon (nter"an) 2ffer 5ate (6(B25), and
conditionally allo%s for the note to "e exercised into the security of the de"tor in
accordance %ith the conditions set forth in the de"t instrument.
FLOATING RATE NOTE (FRN) is a short8term de"t o"li'ation %here the interest rate
is varia"le "ecause it is lin)ed to a mar)et rate such as the A8month $8"ill rate or 6ondon
(nter"an) 2ffer 5ate (6(B25).
FLP is .amily 6imited Partnership.
FLSA is .air 6a"or !tandards Act.
FMLA is .amily and Medical 6eave Act of 9>>A.
FMR see .(3A3#(3G MA5G(3 5A$(2.
FOOTING, in accountin', is the sum of a column of fi'ures.
F5O5B5 (FREE ON BOARD) is a transportation term that indicates that the price for
'oods includes delivery at the sellerDs expense to a specified point and no further. $he
.2B term is used %ith an identified physical location to determine 9) the responsi"ility
and "asis for payment of frei'ht char'es, and H) the point a t%hich title for the shipment
passes from seller to "uyer.$he .2B location terms, 2ri'in and 1estination, may "e
,ualified "y modifiers. $he modifier determines the payment of the transportation
char'es. Modifiers denote nothin' a"out the title of the 'oods or filin' of claims. $he
most three common modifiers are7 #ollect, Prepaid & Add, and Prepaid & Allo%.
#ollect7 $he carrier collects the transportation char'es from the "uyer. Prepaid & Add7
$he seller prepays the transportation char'es, "ut adds the char'es to the invoice for
reim"ursement from the "uyer .Prepaid & Allo%7 $he seller prepays the transportation
char'es and they are already included in the contract price5
F5O5B5 DESTINATION is %here the seller retains title and control of 'oods until they
are delivered and the contract of carria'e has "een completed. $he seller selects the
carrier and is responsi"le for the ris) of transportation.
FOB POINT OF ORIGIN is %here the supplier is responsi"le for all shippin' costs to
the point of havin' the 'oods loaded unto the vessel for shipment to its destination. $he
purchaser, from that point for%ard, is responsi"le for all further shippin' costs to the
point of destination, e.'., insurance, transportation, etc.
FOLIO, dependent upon application, is a. a "oo) (or manuscript) consistin' of lar'e
sheets of paper folded in the middle to ma)e t%o leaves or four pa'es* or, ". a sheet of
any %ritten or printed material (especially in a manuscript or "oo))* or, c. the system of
num"erin' pa'es* or, d. in investments, an unstructured "as)et of common stoc) that may
represent a stoc) index, a sector or theme, or even an actively8mana'ed portfolio at
inception, "ut %hich may "e modified "y an investor or an advisor to meet the tax and
spendin' needs of its o%ner. $he rationale for the folio is to ta)e advanta'e of
diversification and the a"ility to reali&e tax losses in a separately mana'ed account. (n
'eneral, an investor %ill have to devote a fair amount of time to the folio or en'a'e the
services of a speciali&ed advisor.
FOOTING is the sum of a column of fi'ures.
F5O5R5 (FREE ON RAILROAD) is %here 'oods %ill "e delivered "y the exporter to a
rail%ay station. $he importer is responsi"le from this point on.
FORECAST is to estimate or calculate expected "usiness results in advance. $o plan the
"usiness course for the future. A document that sets do%n the plan. !ee B!(3E!!
P6A3, P52GE#$(23, B1GE$.
FOREIGN is of concern to, or concernin' the affairs of, other nations (other than your
o%n) (Example7 .orei'n trade or companies).
FOREIGN CURRENCY TRANSLATION is the process of restatin' forei'n currency
accounts of su"sidiaries into the reportin' currency of the parent company in order to
prepare consolidated financial statements in the native currency of the parent company.
FOREIGN SALES AGENT (6 REPRESENTATIVE is an entity that %or)s to sell
your merchandise in a forei'n country. E,uivalent to the SManufacturer+s 5epresentativeT
in the .!.
FORENSIC ACCOUNTING provides for an accountin' analysis that is suita"le to a
court of la% %hich %ill form the "asis for discussion, de"ate and ultimately dispute
resolution. .orensic accountin' encompasses investi'ative accountin' and liti'ation
support. .orensic accountants utili&e accountin', auditin' and investi'ative s)ills %hen
conductin' an investi'ation. E,ually critical is the a"ility to respond immediately and to
communicate financial information clearly and concisely in a courtroom settin'.
FOREX is .orei'n Exchan'e Mar)et. .25E4 is a mar)et in %hich "ro)ers located in
various parts of the %orld trade currencies for many nations. .25E4 transactions are not
traded in futures mar)ets.
FORM $;>? (S)017/31 K$) is the domestic partnership income tax return form used in
the .!.
FORM $$@; is the income tax return form used "y corporations in the .!.
FORESEEABLE is %hat may "e reasona"ly anticipated.
FORMULA is a standard procedure for solvin' a class of mathematical pro"lems.
FORWARD INTEREST RATE AGREEMENT is %here t%o entities a'ree to a fixed
interest rate in the future. (f the actual rate is different than the fixed rate, one party %ill
pay the other party the present value of the difference "et%een the interest cash flo%s.
Essentially the t%o entities are 'am"lin' on %hich %ay the interest rate of an index %ill
chan'e. $hese contracts are not traded on an esta"lished exchan'e "ut rather are private
contracts "et%een parties.
FORWARD LOOKING STATEMENTS, %ithin the meanin' of the .!. Private
!ecurities 6iti'ation 5eform Act of 9>>N,
are statements made that are not historic and are there"y predictive. 0ou can identify
for%ard8loo)in' statements "y use of the %ords S"elieveT, SexpectT, SanticipateT,
SintendT, SestimateT, SassumeT, Spro-ectT and other similar expressions that predict or
indicate future events and trends or that do not relate to historical matters. !uch for%ard8
loo)in' statements involve )no%n and un)no%n ris)s, uncertainties and other factors
%hich may cause actual results, performance or achievements to "e materially different
from any future results, performance or achievements expressed or implied "y such
for%ard8loo)in' statements.
FORWARD PREMIUM is %hen a currency trade for%ard price is hi'her than its spot
price.
FP, amon' others, means .ixed Price.
FP&A is .inancial Plannin' and Analysis.
FRANCHISE is a le'al arran'ement 'ivin' ri'hts to sell a product or service.
FRAUD is intentional deception resultin' in in-ury to another person or entity
FRCN see .62A$(3G 5A$E #23/E5$(B6E 32$E.
FREE CASH FLOW is net income plus non8cash char'es to income, specifically
depreciation and amorti&ation less capital expenditures, to sustain the "asic "usiness.
FREE TRADE AGREEMENT is an a'reement "et%een countries that %ill result, over
an a'reed period of time, in an elimination of duties for 'oods flo%in' "et%een the
si'natories.
FREE TRADE ZONE (FTZ) is an area, usually a port of entry, desi'nated "y the
country for duty8free entry of 'oods. As lon' as the 'oods do not 'o into the country
from the .$L, no duty is assessed. Khile in the .$L, 'oods may "e processed, pac)a'ed,
serviced or displayed.
FREIGHT FORWARDER is an individual or firm that provides for the pac)in' and
shippin' of merchandise. Generally they also assist %ith export and other documentation.
FREIGHT OUT is the handlin', pac)a'in', and shippin' costs of product* normally
considered a sellin' cost.
FRIENDLY TAKEOVER consists of a strai'ht "uyout of a company, and happens all
the time. $he shareholders receive cash or (more commonly) an a'reed8upon num"er of
shares of the ac,uirin' company+s stoc).
FREQUENCY, in advertisin', is the num"er of times you hope to reach your tar'et
audience throu'h your advertisin' campai'n.
FRESH START ACCOUNTING, upon emer'ence from "an)ruptcy, the consolidated
financial statements of the ?!uccessor #ompany? apply the provisions of fresh start
accountin' in accordance %ith Generally Accepted Accountin' Principles (GAAP).
nder fresh start accountin', a ne% reportin' entity, the S!uccessor #ompanyT, is
deemed to "e created, and the recorded amounts of assets and lia"ilities are ad-usted to
reflect their fair value. As a result, the reported historical financial statements of the
SPredecessor #ompanyT 'enerally are not compara"le to those of the ?!uccessor
#ompany?.
FRF is an acronym for .rench .rancs.
FRINGE BENEFIT an incidental "enefit a%arded for certain types of employment
(especially if it is re'arded as a ri'ht) (Example7 employer supplied health insurance or
t%o %ee)s paid vacation per year).
FRN see .62A$(3G 5A$E 32$E.
FRR see .(3A3#(A6 5EP25$(3G 5E6EA!E.
FRS $$ sets out the principles and methodolo'y for accountin' for impairments of fixed
assets and 'ood%ill. (t replaces the previous approach %here"y diminutions in value %ere
reco'ni&ed only if they %ere re'arded as permanent. (nstead, the carryin' amount of an
asset is compared %ith its recovera"le amount and, if the carryin' amount is hi'her, the
asset is %ritten do%n.
FRS $A is a deferred tax standard. (n summary7
A. 1eferred tax is provided on timin' differences relatin' to7
8 accelerated capital allo%ances and depreciation
8 accruals for and payments of pension and other post retirement "enefits
8 the elimination of unreali&ed intra 'roup profits
8 unrelieved tax losses
8 Sfair value revaluationsT that are ta)en annually to the profit and loss account
8 other short8term timin' differences
B. 1eferred tax is not provided on timin' differences relatin' to7
8 other fixed asset revaluations, %here there is no intention to sell
8 'ains that are rolled over
8 unremitted overseas earnin's, %here there is no intention to remit.
$he .5! 9> !tandard also includes further, detailed measurement and disclosure rules.
FSA has several possi"le meanin's, e.'. .lexi"le !pendin' Account (employee "enefit
offered "y some companies) or .undin' !tandard Account.
FULL ABSORPTION COSTING see AB!25P$(23 #2!$(3G.
FULL CHARGE BOOKKEEPER is someone %ho can do it all 8 includin' compilin'
the data into the General 6ed'er and preparin' financial statements.
FULL COSTING see AB!25P$(23 #2!$(3G.
FULL COST RECOVERY is ad-ustin' feesBprices for 'oodsBservices to %here all cost
of operations and maintenance are covered for supplyin' the 'iven 'oods or services.
FULL DISCLOSURE, 'enerally, is the re,uirement to disclose all relevant or material
facts to a transaction.
FULLY DEPRECIATED is %hen an asset has already "een char'ed %ith the maximum
amount of depreciation allo%ed "y the taxin' authority for accountin' purposes.
FUNCTIONALBASED ACCOUNTING focuses on or'ani&ational units such as
departments and plants, uses financial outcome measures and static standards and
"enchmar)s to evaluate performance, and emphasi&es status ,uo and or'ani&ational
sta"ility. 2n the other hand, activity8"ased accountin' focuses on processes, uses "oth
operational and financial measures and dynamic standards, and emphasi&es and supports
continuous improvement. Activity8"ased accountin' adds a process perspective.
FUNCTIONAL CURRENCY, 'enerally, is the currency of record for any 'iven entity.
Kithin the context of forei'n currency, it is the currency %hich a forei'n su"sidiary
handles on a day8to8day "asis in 'eneratin' net cash flo%s. (t is normally the currency of
the country in %hich the su"sidiary operates, "ut may "e the currency of the parent
company.
FUND is a pool of money normally set apart for a purpose, for example, a pension fund
to provide pensions.
FUND ACCOUNTING is a method of accountin' and presentation %here"y assets and
lia"ilities are 'rouped accordin' to the purpose for %hich they are to "e used. Generally
used "y 'overnment entities and not8for8profits.
FUNDAMENTAL ANALYSIS is a method used to evaluate the %orth of a security "y
studyin' the financial data of the issuer. Performin' fundamental analysis %ill teach you
a lot a"out a company, "ut virtually nothin' a"out ho% it %ill perform in the stoc)
mar)et. Apply this analysis on t%o competin' companies or in comparisone to its
industry and it "ecomes clearer %hich the "est investment choice is. !ee
.31AME3$A6!.
FUNDAMENTALS are factors %hich are SfundamentalT to the %or)in' of a companyDs
"usiness, its profita"ility, operatin' costs, product prices, technical innovations, etc.
#ompany analysis ta)in' into account these fundamental factors facilitates share
valuation. !ee .31AME3$A6 A3A60!(!.
FUNDED DEPRECIATION ACCOUNT is a reserve setup to cover the replacement
cost of those capital assets covered %ithin the depreciation schedule.
FUND MANAGEMENT is the professional, in many cases re'ulated, careta)er of client
assets for a fee. 1ependent upon type of fund, the fund may "e authori&ed to put assets
%ithin the fund at ris) in the pursuit of profits for the asset o%ners (clients).
FUNDS EMPLOYED, normally, is the avera'e of 3et Kor)in' #apital plus .ixed
Assets held at the "e'innin' and end of the financial year.
FUNDS FLOW is the funds 'enerated from operations* normally expressed as +cash flo%
from operations+ or +%or)in' capital from operations+.
FUND THEORY vie%s the or'ani&ation as a series of funds or su"8funds represented "y
various services or departments.
FUTA see .E1E5A6 3EMP620ME3$ $A4 A#$.
FUTURES are contracts to "uy or sell specific ,uantities of a commodity or financial
instrument at a specified price %ith delivery set at a specified time in the future.
FUTURE VALUE is the amount of money that an investment made today (the present
value) %ill 'ro% to "y some future date. !ince money has time value, %e naturally expect
the future value to "e 'reater than the present value. $he difference "et%een the t%o
depends on the num"er of compoundin' periods involved and the 'oin' interest rate.
FX ACCOUNT (.orei'n Exchan'e Account) is a tradin' account usually "ased in
forei'n currencies.
FYE is .or 0ear Endin'.
GAAP see GE3E5A660 A##EP$E1 A##23$(3G P5(3#(P6E!.
G&A usually refers to the indirect overhead costs contained %ithin the General and
Administrative expense B cost cate'ories (see also !G&A).
GAI is Guaranteed Annual (ncome.
GAIN is7 a. the amount "y %hich the revenue of a "usiness exceeds its cost of operatin'*
". rise in rate or price* c. earn on some commercial or "usiness transaction* d. earn as
salary or %a'es.
GAO is the investi'ative arm of the nited !tates #on'ress char'ed %ith examinin'
matters relatin' to the receipt and payment of pu"lic funds.
GARBAGE IN# GARBAGE OUT (GIGO) is an often used computer and soft%are
industry sayin' meanin' that if the data 'oin' into a system is suspect, the resultin' data
output %ill "e suspect.
GASB stands for Government Accountin' !tandards Board. $he GA!B is a nonprofit
or'ani&ation responsi"le for esta"lishin' and improvin' accountin' and financial
reportin' standards for 'overnmental units.
GATT (GENERAL AGREEMENT ON TARIFFS AND TRADE) is a multilateral
treaty that aims to reduce trade "arriers and increase trade. $he GA$$ %as an interim
treaty process that has no% culminated in the Korld $rade 2r'ani&ation (K$2).
GBP is nited <in'dom Pound !terlin' (#urrency #ode).
GDP see G52!! 12ME!$(# P521#$.
GEARING is the proportion of the capital employed of a company that is financed "y
lenders rather than shareholders.
GEARING RATIO measures the percenta'e of capital employed that is financed "y
de"t and lon' term financin'. $he hi'her the 'earin', the hi'her the dependence on
"orro%in' and lon' term financin'. Khereas, the lo%er the 'earin' ratio, the hi'her the
dependence on e,uity financin'. $raditionally, the hi'her the level of 'earin', the hi'her
the level of financial ris) due to the increased volatility of profits. .inancial mana'er face
a difficult dilemma. Most "usinesses re,uire lon' term de"t in order to finance 'ro%th, as
e,uity financin' is rarely sufficient, on the other hand, the introduction of de"t and
'earin' increases financial ris). A hi'h 'earin' ratio is positive* a lar'e amount of de"t
%ill 'ive hi'her return on capital employed "ut the company dependent on e,uity
financin' alone is una"le to sustain 'ro%th. Gearin' can "e ,uite hi'h for small
"usinesses tryin' to "ecome esta"lished, "ut in 'eneral they should not "e hi'her than
N:O. !hareholders "enefit from 'earin' to the extent that return on the "orro%ed money
exceeds the interest cost so that the mar)et value of their shares rise.
GENERAL ACCOUNTING involves the "asic principles, concepts and accountin'
practice, recordin', financial statement preparation, and the use of accountin'
information in mana'ement.
GENERAL EXPENSE is expense not directly connected %ith any sin'le department.
GENERAL !OURNAL is the most "asic of -ournals. (t is a chronolo'ical list of
transactions. (t has a very specific format for recordin' each transaction. Each transaction
is recorded separately and consists of7 9.) a date* H.) any and all accounts to receive a
de"it entry are listed first %ith an amount in the appropriate column, then* A.) any and all
accounts to receive a credit entry are indented and listed next %ith an amount in the
appropriate column* ;.) a clear description of the transaction. At least one line is then
s)ipped to visually separate recorded transactions.
GENERAL LEDGER is the record of all account entries.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) is a reco'ni&ed
common set of accountin' principles, standards, and procedures. GAAP is a com"ination
of accepted methods of doin' accountin' and policy "oard set authoritative standards.
GENERALLY ACCEPTED AUDITING STANDARDS (GAAS), in the !, are the
"road rules and 'uidelines set do%n "y the Auditin' !tandards Board of the American
(nstitute of #ertified Pu"lic Accountants (A(#PA). (n carryin' out %or) for a client, a
certified pu"lic accountant %ould apply the 'enerally accepted accountin' principles
(GAAP)* if they fail to do so, they can "e held to "e in violation of the A(#PA+s code of
professional ethics.
GENERAL LEDGER is the led'er that contains all of the financial accounts of a
"usiness* contains offsettin' de"it and credit accounts (includin' control accounts).
GENERAL PARTNERSHIP is one or more partners %ho are -ointly and severally
responsi"le or lia"le for the de"ts of the partnership.
GEOGRAPHICAL SEGMENT is a component of an enterprise that (a) provides
products and services %ithin a particular economic environment and (") that is su"-ect to
ris)s and returns that are different from those of components operatin' in other economic
environments.
GFOA is Government .inance 2fficers+ Association.
GI, amon' others, is an acronym for7 Government (ssue, General (ncrease, General
(nformation, or General (ssue.
GILT is a "ond issued "y the < 'overnment. Gilts are e,uivalent to a .!. $reasury
security.
GLOBAL BOND is a "ond issued and traded outside the country %hose currency it is
denominated in, and outside the re'ulations of a sin'le country* usually a "ond issued "y
a non8European company for sale in Europe* also called Euro"ond.
GLOBAL CUSTODY is a term used %ithin the investment "an)in' industry in definin'
securitiesBmonetary instruments that are traded internationally "y Glo"al #ustodians.
$hose securities %ould "e held in ?Glo"al #ustody?. #hase Ban) ori'inated the concept
of providin' Glo"al #ustody tradin' services for institutional investors tradin' in forei'n
mar)ets in 9>@;. Ban)s reco'ni&ed as Glo"al #ustodians provide their customers %ith
Glo"al #ustody services in respect to securities traded and settled not only in the country
in %hich the Glo"al #ustodian is located "ut also in numerous other countries throu'hout
the %orld.
GLOBAL DEPOSITORY RECEIPTS are receipts evidencin' o%nership in the
underlyin' shares of a forei'n company. Generally, .!. "an)s and trusts issue American
depository receipts (A15) and American depository shares (A1!). $hey hold the forei'n
company securities underlyin' the receipts in their vaults. (n addition to the underlyin'
securities, the receipts entitle the shareholder to all dividends and capital 'ains. $he "an)
or trust company issuin' the receipts may have denominated the receipts in a currency
other than the currency underlyin' the forei'n security. .!. and European "an)s and
trust companies usually issue 'lo"al depository receipts (G15), %hich are receipts in the
shares of 'lo"al offerin' of a forei'n issuer %ho has issued t%o securities simultaneously
in t%o mar)ets, usually pu"licly in non8.!. mar)ets and privately in the .!. mar)et.
European "an)s and trust companies 'enerally issue European depository receipts (E15),
sometimes called continental depository receipts (#15) %hen issued in "earer form,
%hich evidence o%nership in forei'n securities.
GLOBALIZATION is the name for the process of increasin' the connectivity and
interdependence of the %orld+s mar)ets and "usinesses. (n its literal sense, 'lo"ali&ation
is a social chan'e, an increased connectivity amon' societies and their elements due to
transculturation* the explosive evolutions of transport and communication technolo'ies to
facilitate international cultural and economic exchan'e are examples of 'lo"ali&ation.
GLOBAL MUTUAL FUND, also Bond .und, is a mutual fund that can invest in stoc)s
and "onds throu'hout the %orld. !uch funds typically have a portion of their assets in
American mar)ets as %ell as Europe, Asia, and developin' countries. Glo"al funds differ
from (3$E53A$(23A6 M$A6 .31!, %hich invest only in non8#anadian
securities. $he advanta'e of 'lo"al funds is that the fund mana'ers can "uy stoc)s or
"onds any%here they thin) has the "est opportunities for hi'h returns. $hus if one mar)et
is underperformin', they can shift assets to mar)ets %ith "etter potential. $hou'h some
'lo"al funds invest in "oth stoc)s and "onds, most funds speciali&e in either stoc)s or
"onds.
GMP is either Good Manufacturin' Practice(s) or Gross Maximum Price.
GMROI is an acronym for Gross Mar'in 5eturn 2n (nvestment (retail).
GNP see G52!! 3A$(23A6 P521#$.
GOAL is the milestone the or'ani&ation aims to achieve that evolves from strate'ic
issues or operational improvement plannin'. $hey transform strate'ic issues into specific
performance tar'ets that impact the entire or'ani&ation, or operational improvement that
is more locali&ed in nature. $hey can "e ,ualitative or ,uantitative. 1ependent upon
usa'e, G2A6! are 'eneral in nature, %hile 2BGE#$(/E! are specific, measura"le and
time8"ased. (n some or'ani&ations, the meanin's for G2A6 and 2BGE#$(/E are
reversed.
GOING CONCERN refers to the li,uidity of a concern. (f the concern is illi,uid, the
via"ility of that concern "ein' a"le to continue to operate is in dou"t.
GOING CONCERN CONCEPT is the underlyin' assumption that any accountant
ma)es %hen he prepares a set of accounts. $hat the "usiness under consideration %ill
remain in existence for the foreseea"le future.
GOING CONCERN PRINCIPLE assumes that the accountin' entity %ill maintain
proper accountin' records from the date of its esta"lishment to the date of its li,uidation.
GOING PUBLIC refers to those activities that relate to offerin' a private company+s
shares to the 'eneral investin' pu"lic includin' re'isterin' %ith the !E#.
GOING RATE is an expression that means the cost of the avera'e of suppliers of li)e
products or services. $he connotation is that the cost %ill "e ?no more expensive than the
competition.?
GOLDEN RULES OF ACCOUNTING are7 9. 1e"its A6KA0! EUA6 #redits* H.
(ncreases 12 32$ 3E#E!!A5(60 EUA6 1ecreases* and, A. Assets 8 6ia"ilities E
2%ner+s E,uity ($he Accountin' E,uation).
GOODWILL is that intan'i"le possession %hich ena"les a "usiness to continue to earn a
profit that is in excess of the normal or "asic rate of profit earned "y other "usinesses of
similar type. $he 'ood%ill of a "usiness may "e due to a particularly favora"le location,
its reputation in the community, or the ,uality of its employer and employees. $he
evidence that 'ood%ill exists is the proven a"ility to earn excess profits. Good%ill is
created on the "oo)s of a ne%ly purchased company to the extent that the purchase price
of the company is 'reater than the value of its net tan'i"le assets. $here are a num"er of
methods for valuin' 'ood%ill7 a. !imple #apitali&ation 8 $he net profit of the "usiness is
capitali&ed to determine the total value of the "usiness. $he value of all the tan'i"le
assets is su"tracted from the total value to esta"lish the value of the intan'i"le assets, or
'ood%ill. ". Excess Earnin's 8 the amount of earnin's that are in excess of those
normally earned "y a similar "usiness are capitali&ed to determine the value of 'ood%ill.
c. (ncome $ax Method 8 $he past five years net income is avera'ed and a reasona"le
expected rate of return for tan'i"le assets and salary re,uirements are su"tracted. $he
resultin' value is then capitali&ed to arrive at the 'ood%ill value. d. Mar)et /alue 8 $he
price a %illin' seller %ould accept and a %illin' "uyer %ould pay for 'ood%ill. e. Buy
B!ell A'reement 8 $he value of 'ood%ill is esta"lished "y a formula in the "uyB sell
a'reement. f. 5ule of $hum" 8 Good%ill is %orth one years 'ross income.
GOVERNMENT ACCOUNTABILITY OFFICE (GAO) is the or'ani&ation in the
.!. #on'ress that investi'ates the performance of the federal 'overnment. GA2
evaluates the use of pu"lic funds and the performance of federal pro'rams, %hile also
providin' analytical, investi'ative and le'al services in order to support to #on'ress in its
policy formulation and decision ma)in' processes. Most GA2 reports are initiated at the
re,uest of #on'ress, %hile some are initiated "y the a'ency itself or are re,uired "y la%.
GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) is a nonprofit
or'ani&ation responsi"le for esta"lishin' and improvin' accountin' and financial
reportin' standards for 'overnmental units.
GRACE PERIOD is the period of time "et%een your statement date and the due date.
GRADUATED TAX see P52G5E!!(/E $A4.
GRANTEE is the person or entity to %hom property or assets are transferred.
GRANTOR is the person or entity %ho transfers property or assets.
GREEN BOOK is a pu"lication entitled .!. 2verseas 6oans and Grants and Assistance
from (nternational 2r'ani&ations. $his data, %hich is 'rouped "y country and 'eo'raphic
re'ion, includes assistance from !A(1, military assistance, P.6. ;M:, Export8(mport
Ban), etc. from 9>;N to the last completed fiscal year.. $his pu"lication is released
shortly after the #on'ressional Presentation is distri"uted.
GREEN SHOE OPTION is a clause contained in the under%ritin' a'reement of an
initial pu"lic offerin' ((P2). $he 'reen shoe option, %hich is also often referred to as an
over8allotment provision, allo%s the under%ritin' syndicate to "uy up to an additional
9NO of the shares at the offerin' price if pu"lic demand for the shares exceeds
expectations and the stoc) trades a"ove its offerin' price.
GROSS is7 a. the entire amount of income "efore any deductions are made* or, ". any
total amount "efore any deductions (examples7 'ross income or 'ross la"or).
GROSS CONTRIBUTION is the startin' amount prior to any relevant deductions have
"een made to the 'ross amount, e.'., Gross Contribution to ar!in.
GROSS DOMESTIC PRODUCT (GDP) is the value of all the 'oods and services
produced "y %or)ers and capital located %ithin a country (or re'ion), such as the nited
!tates, re'ardless of nationality of %or)ers or o%nership. 1omestic measures relate to the
physical location of the factors of production* they refer to production attri"uta"le to all
la"or and property located in a country. $he national measures differ from the domestic
measures "y the net inflo% 88 that is, inflo% less outflo% 88 of la"or and property incomes
from a"road. Gross 1omestic Product includes production %ithin national "orders
re'ardless of %hether the la"or and property inputs are domestically or forei'n o%ned.
GROSS MARGIN is the ratio of 'ross profit to sales revenue. (sometimes used as a
synonym for 'ross profit). .or a manufacturer, 'ross mar'in is a measure of a company+s
efficiency in turnin' ra% materials into income* for a retailer it measures their mar)up
over %holesale. G52!! MA5G(3 is 'ross income divided "y net sales, expressed as a
percenta'e.
GROSS NATIONAL PRODUCT (GNP) is the total dollar value of all final 'oods and
services produced for consumption in society durin' a particular time period. $he G3P
does include allo%ances for depreciation and indirect "usiness taxes such as those on
sales and property. Gross national product is the output of la"or and property of !
nationals re'ardless of the location of the la"or and property. Gross 3ational Product
includes income earned "y the factors of production (assets and la"or) o%ned "y a
country+s residents "ut excludes income produced %ithin the country+s "orders "y factors
of production o%ned "y nonresidents.
GROSS NEGLIGENCE is any action or an omission in rec)less disre'ard of the
conse,uences to the safety or property of another. !ometimes referred to as ?very 'reat
ne'li'ence? and it is more then -ust ne'lect of ordinary care to%ards others or -ust
inadvertence. Also )no%n as the 6atin term culpa lata.
GROSS PAY is employee salary prior to the application of taxes and other deductions.
GROSS PROFIT is net sales minus cost of sales.
GROSS PROFIT MARGIN ANALYSIS indicates %hat the company+s pricin' policy is
and %hat the true mar)8up mar'ins are. #alculated "y7 5evenue 8 #ost of Goods !old B
5evenue. !ee G52!! P52.($ MA5G(3 23 !A6E! for more in8depth definition.
GROSS PROFIT MARGIN ON SALES (GPM) is one of the )ey performance
indicators. $he 'ross profit mar'in 'ives an indication on %hether the avera'e mar)up on
'oods and services is sufficient to cover expenses and ma)e a profit. GPM sho%s the
relationship "et%een sales and the direct cost of productsBservices sold. (t measures the
a"ility of "oth to control costs and to pass alon' price increases throu'h sales to
customers. $he 'ross profit mar'in should "e sta"le over time. A persistent 'radual
decrease is li)ely to indicate that productivity needs to "e increased to return profita"ility
"ac) to previous levels.
GROSS PROFIT METHOD is an inventory estimate "ased on 'ross mar'in.
GROSS RECEIPTS is the total amount received prior to the deduction of any
allo%ances, discounts, credits, etc.
GROSS REVENUE is income (at invoice values) received for 'oods and services over
some 'iven period of time. !ee also G52!! !A6E!.
GROSS SALES is the total revenue at invoice value prior to any discounts or
allo%ances. !ee also G52!! 5E/E3E.
GROSS SURPLUS RATIO measures the mar'in on each dollar of operatin' revenue
for the entity in ,uestion. $he operatin' results "efore interest and depreciation, or 'ross
surplus, are calculated as a percenta'e of total operatin' revenue. $he 'ross surplus ratio
sho%s the 'ross surplus as a percenta'e of the entity+s turnover. (f the percenta'e is hi'h
this could "e interpreted as a si'n that the entity is operatin' efficiently.
GROSS WEIGHT is the %ei'ht of a shipment includin' pac)in' material.
GROUP is a num"er of individual companies assem"led to'ether* often havin' some
unifyin' relationship.
GROUP ACCOUNTS are the financial statements of a 'roup of companies. $hese are
usually presented in the form of consolidated accounts.
GUARANTEE see KA55A3$0
HARD COSTS is the purchase price of actual assets. .or example, the purchase price of
a ne% printin' press %ould "e the hard cost. $he soft costs are additional fees for items
li)e factorin'8invoiced installation, prepaid and extended %arranties, or service contracts
for the ne% e,uipment.
HARMONIZED SYSTEM is an internationally a'reed upon classification system for
trade. (t provides code num"ers to specify a 'oods classification* there"y ma)in' customs
duty determination more predicta"le.
HEADCOUNT is the act of countin' people in a certain %ay or in a particular 'roup.
HEAD OF HOUSEHOLD is a .!. income tax filin' status that can "e used "y an
unmarried person %ho maintains a home for a dependent (or nondependent relative)
durin' the tax year.
HEDGE, in securities, is a transaction that reduces the ris) of an investment.
HEDGE FUND is a special type of investment fund %ith fe%er restrictions on the types
of investments it can ma)e. 2f note is a hed'e fund+s a"ility to sell short. (n exchan'e for
the a"ility to use more a''ressive strate'ies, hed'e funds are more exclusive, i.e., fe%er
people, usually only the %ealthy, are allo%ed to invest in hed'e funds.
HEDGING is strate'y focused upon reducin' exposure to ris) of loss resultin' from
fluctuations in exchan'e rates, commodity prices, interest rates etc. Ced'in' in securities
is ta)in' t%o positions that %ill offset each other if prices chan'e, there"y limitin'
financial ris).
HELD TO MATURITY normally refers to a lon' term security (note or "ond held for
more than one year) that has a predetermined maturation event.
HI is Cealth (nsurance.
HIDDEN ASSET is any valued asset that is not included in the "oo) value of a
company. #ompanies have hidden assets such as intellectual property, or customer lists
%hich are of 'reat value, "ut not reflected in the "oo) value.
HIGHLOW METHOD is an al'e"raic procedure used to separate a semi8varia"le cost
into the varia"le and fixed components. $he method calls for usin' the extreme data
points (hi'hest and lo%est x 8 y pairs) in the #2!$8/26ME .25M6A y E a Q "x*
%here a E fixed cost portion and " E the varia"le rate.
HIRE AND PURCHASE AGREEMENT is a contract (more fully called contract of
hire %ith an option of purchase) in %hich a person hires 'oods for a specified period and
at a fixed rent, %ith the added condition that if he shall retain the 'oods for the full period
and pay all the installments of rent as they "ecome due the contract shall determine and
the title vest a"solutely in him, and that if he chooses he may at any time durin' the term
surrender the 'oods and "e ,uit of any lia"ility for future installments upon the contract.
(n the nited !tates such a contract is 'enerally treated as a conditional sale, and the term
hire purchase is also sometimes applied to a contract in %hich the hirer is not free to
avoid future lia"ility "y surrender of the 'oods. (n En'land, ho%ever, if the hirer does not
have this ri'ht the contract is a sale.
HISTORICAL COST ACCOUNTING is an accountin' principle re,uirin' all
financial statement items to "e "ased on ori'inal cost. (t is usually "ased upon the dollar
amount ori'inally exchan'ed in an arm+s8len'th transaction* an amount assumed to reflect
the fair mar)et value of an item at the transaction date.
HISTORICAL EXCHANGE RATES are -ust that7 $he historical data on currency
exchan'e rates.
HOLDING COMPANY is a company %hich o%ns or controls other companies.
(#ontrol can occur throu'h the o%nership of N: per cent or more of the votin' ri'hts or
throu'h the exercise of a dominant influence.)
HORIZONTAL FINANCIAL ANALYSIS allo%s comparison of one company+s ratios
to the ratios of other companies as %ell as to avera'e industrial ratios and internal
industrial deviation of these ratios.
HOSTILE TAKEOVER occurs %hen a company attempts to "uy out another %hether
they li)e it or not. A hostile ta)eover can occur only throu'h pu"licly traded shares, as it
re,uires the ac,uirer to "ypass the "oard of directors and purchase the shares from other
sources. $his is difficult unless the shares of the tar'et company are %idely availa"le and
easily purchased (i.e., they have hi'h li,uidity). A hostile ta)eover may presa'e a
corporate raid.
HUMAN CAPITAL is the uni,ue capa"ilities and expertise of individuals that are
productive in some economic context.
HURDLE RATE is a term used in the "ud'etin' of capital expenditures meanin' the
5EU(5E1 5A$E 2. 5E$53 in a 1(!#23$E1 #A!C .62K analysis. (f the
e"pected rate o# return on an investment is "elo% the hurdle rate, the pro-ect is not
underta)en. $he hurdle rate should "e e,ual to the (3#5EME3$A6 #2!$ 2.
#AP($A6.
HYBRID INSTRUMENT is a pac)a'e containin' t%o or more different )inds of ris)
mana'ement instruments that are usually interactive.
HYPOTHECATION, in securities, is the pled'in' of securities to "ro)ers as collateral
for loans made to cover short sales or purchase securities. (n "an)in', it is the pled'in' of
property to secure a loan.
IAS is (nstitute of Asset Mana'ement (<).
IASC is (nternational Accountin' !tandards #ommittee.
IBA, amon' others, can mean7 (ndividual Bro)era'e Account, (ndividually Billed
Accounts, (nstitute of Business Appraisers, (nternational Bar Association, or,
(nternational Business Advisors.
IBNR is (ncurred But 3ot 5eported.
IDENTIFIABLE ASSETS +-7 LIABILITIES are those assets and lia"ilities of a
"usiness that can "e disposed of %ithout disposin' of the entire "usiness. (t includes "oth
tan'i"le and intan'i"le assets.
ILLIQUID is %hen cash flo%s 'enerated "y the firm are insufficient to meet the de"t
service. Khen spea)in' of money or an economy7 "ein' very li,uid means it is driven "y
primarily "y cash, chec)in'Bsavin' accounts, treasury "ills, stoc)s and "onds, etc* %hile
"ein' very illi,uid means it is driven primarily "y human capital.
IMA, in accountin', refers to the (nstitute of Mana'ement Accountants.
IMAD, dependent upon usa'e, is (nput Messa'in' Accounta"ility 1ata7 A time stamp
that is assi'ned to a .ed%ire messa'e %hen it is processed "y the .ederal 5eserve Ban)
.unds $ransfer application* or, (nformation Mana'ement Assimilation & 1elivery* or,
(ndustrial Mana'ement and 1istri"ution !ystem.
IMMATERIALITY is of complete irrelevance re,uirin' no further consideration.
IMMOVABLE is a. not a"le to "e moved or chan'ed* or, ". assets consistin' of land,
"uildin's, or other permanent items.
IMPAIRED ASSETS, in "an)in', applies to all pro"lem assets %hich "an)s hold, and is
not limited to pro"lem loans. (n addition to loans, it also captures off8 "alance sheet
exposures and assets %hich have come onto "an)s "alance sheets throu'h enforcement of
security conditions. !ee (MPA(5ME3$ 2. /A6E.
IMPAIRED GOODWILL is the reco'nition of the reduction in value of the intan'i"le
asset )no%n as 'ood%ill.
IMPAIRMENT see .5! 99.
IMPAIRMENT OF VALUE is the permanent decline in the value of an asset. $he entry
is to de"it the loss account and credit the asset for the loss in utility. !ee also .5! 99.
IMPLICIT RATE OF INTEREST is %hen the stated interest rate is not indicative of
the mar)et rate at the time a note is ne'otiated, the value of the asset (cash or non8cash)
or service exchan'ed for the note esta"lishes the mar)et rate.
IMPOSTA VALORE AGGIUNTO TAX (IVA TAX), in (taly, li)e most other
European countries, (taly imposes a value added tax (/A$) on most 'oods and services
purchased in the country. (n (taly, the value added tax is )no%n as the (mposta sul /alore
A''iunto or (/A. $his tax is normally included or "uilt into the price of most 'oods and
services. $he 'eneral rate of tax is 9>O of the sale price.
IMPREST see PE$$0 #A!C.
IMPREST BASIS, in cash accounts, means that the exact amount of fund expenditures
is replaced periodically.
IMPUTED COSTS refer to the cost of an asset, service, or company that is not
physically recorded in any accounts "ut is implicit in the product.
IMPUTED VALUE is the lo'ical or implicit value that is not recorded in any accounts,
e.'., in the pro-ection of annual fi'ures, values are imputed for months for %hich the
actual values are not yet )no%n.
INBR see (3#55E1 B$ 32$ 5EP25$E1* could also mean (nsurance Bro)er.
INCOME is money received "y a person or or'ani&ation "ecause of effort (%or)), or
from return on investments.
INCOME CAPITALIZATION" .irst you must determine the capitali&ation rate 8 a rate
of return re,uired to ta)e on the ris) of operatin' the "usiness (the ris)ier the "usiness,
the hi'her the re,uired return). Earnin's are then divided "y that capitali&ation rate. $he
earnin's fi'ure to "e capitali&ed should "e one that reflects the true nature of the
"usiness, such as the last three years avera'e, current year or pro-ected year. Khen
determinin' a capitali&ation rate you should compare %ith rates availa"le to similarly
ris)y investments.
INCOME GEARING RATIO is (nterest Expense B 2peratin' Profit.
INCOME SMOOTHING refers to measures ta)en to reduce the pro"a"ility of income
shoc)s "efore they occur, and includes strate'ies li)e diversifyin' income sources*
ma)in' lo%8ris) production and employment choices* "uildin' up physical, human, and
social assets* and ensurin' 'ood financial mana'ement.
INCOME STATEMENT see P52.($ A31 62!! !$A$EME3$.
INCOME SUMMARY ACCOUNT is the account in the 'eneral led'er used to
summari&e the revenue and expenses for the fiscal period.
INCOME TAXES PAYABLE is income taxes due includin' current portion of deferred
taxes.
INCOME THEORIES try to identify the real profit of an or'ani&ation. $he difficulty
here is that you need to define %hose income you are measurin', and that limitin' income
measurements to thin's that can "e 'iven a price devalues 'oods and services that are
difficult or impossi"le to price.
INCOMPETENCE is lac) of physical or intellectual a"ility or ,ualifications.
INCORPORATED is a le'al entity that has under'one incorporation throu'h approval
"y a state 'overnment.
INCORPORATION is a le'al process throu'h %hich a company receives a charter and
the state in %hich it is "ased allo%s it to operate as a corporation.
INCREMENTAL is increasin' 'radually "y re'ular de'rees or additions.
INCREMENTAL COST is the increase or decrease in costs as a result of one more or
one less unit of output.
INCREMENTAL COST OF CAPITAL is the %ei'hted cost of the additional capital
raised in a 'iven period. Kei'hted cost of capital, also called composite cost o# capital, is
the %ei'hted avera'e of costs applica"le to the issues of de"t and classes of e,uity that
compose the firmDs capital structure. Also called mar!inal cost o# capital.
INCUR is ac,uirin' or 'ettin' into somethin' undesira"le or ma)in' oneself su"-ect to*
"rin' upon oneself* "ecome lia"le to, e.'. to incur a cost or de"t.
INCURRED BUT NOT REPORTED (IBNR), in insurance, losses occurrin' over a
specified period that have not "een reported to the insurer. (B35 losses are often
calculated as a percenta'e of claims paid and claims outstandin' and are reported in an
insurer+s annual report. 5einsurers esta"lish (B35 reserves as a part of their ratin' plans
under a facultative reinsurance treaty, lest an overly optimistic vie% of treaty results lead
to further under8ratin' on a "oo) of "usiness. Example7 Product lia"ility losses are
seldom reported durin' a policy year. $his ?tail? of claims %ill upset any ratin' plan,
unless an (B35 reserve is esta"lished and factored into the profit picture.
INDEFEASIBLE not lia"le to "ein' annulled or voided or undone, usually in reference
to an interest in real property (e.'., an indefeasi"le o%nership interest in a piece of
property).
INDENTURE is an a'reement "et%een lender and "orro%er %hich details specific terms
of the "ond issuance. !pecifies le'al o"li'ations of "ond issuer and ri'hts of "ondholders.
$here is usually a indenture document spellin' out the specific terms of a "ond as %ell as
the ri'hts and responsi"ilities of "oth the issuer of the security and the holder.
INDEXLINKED BOND provides a secure investment in real terms, as the coupon
payments and the redemption proceeds are lin)ed to movements in the 5P( (the 5etail
Prices (ndex).
INDEX STOCK is a security listed on a stoc) index. !ee !$2#< (31E4.
INDIFFERENCE CURVE, in microeconomics, an indifference curve is a 'raph
sho%in' com"inations of t%o 'oods to %hich an economic a'ent (such as a consumer or
firm) is indifferent, that is, it has no preference for one com"ination over the other.
INDIFFERENCE POINT is that point on the indifference curve %here the compared
values intersect. !ee (31(..E5E3#E #5/E.
INDIRECT COST is that portion of cost that is indirectly expended in providin' a
product or service for sale (cannot "e traced to a 'iven cost o"-ect in an economically
feasi"le manner) and is included in the calculation of #2!$ 2. G221! !261, e.'.
rent, utilities, e,uipment maintenance, etc. 2pposite of direct cost.
INDIRECT SHAREHOLDING is %hen one entity directly holds shares of another
entity that o%ns shares of a third "ut different entity, for example, !hareholder A %ould
have an indirect shareholdin' of #ompany # if !hareholder A directly o%ns shares of
#ompany B %hile #ompany B o%ns shares of #ompany #.
INDUCEMENT is a re%ard for a specific "ehavior, desi'ned to encoura'e that
"ehavior* also called incentive. $o provide the first months rent free %ould "e a ?lease
inducement?.
INDUCTIVE ACCOUNTING THEORY (scientific method) assumes accountin'
standards are some%hat li)e evolution of a species in nature 888 survival of the fittest. (t
relies heavily upon controlled experimentation (e.'., "ehavioral accountin' research) and
statistical testin' (e.'., capital mar)ets ?events? studies of the impact of accountin'
information on mar)et prices and volume of transactions).
INDUSTRIAL REVENUE BOND (I5R5B5) is a "ond issued "y local 'overnment
a'encies in favor of corporations.
INDUSTRY is the people or companies en'a'ed in a particular )ind of commercial
enterprise.
INDUSTRY ANALYSIS includes, "ut is not limited to7 a. 1efinition of the industry* ".
(ndustry 6ife #ycle 8 'ro%th, maturity or decline* c. (ndustry Cistory 8 ho% old is the
industry* d. (n8depth historical financial performance ratio analysis* e. (ndustry $rends 8
cyclical or seasonal, increased competition etc.* f. (ndustry (nfluential .actors 8 does
economy, 'overnment, or competition effect industry* '. Primary #ompetitors alon' %ith
entry ris) and "arriers to entry* and, h. Pro-ected (ndustry !ales 8 total sales in the
industry.
INFLATION is an increase in the 'eneral price level of 'oods and services*
alternatively, a decrease in the purchasin' po%er of the dollar or other currency.
INFLATION ACCOUNTING is a system of accountin' %hich, unli)e historical cost
accountin!, ta)es into account chan'in' prices.
INFLATION AD!USTMENT is %henever any fi'ure is ad-usted for inflationBdeflation.
(t simply means that all fluctuations in price (up%ard or do%n%ard) that are directly
attri"uta"le to inflationBdeflation are reflected into that fi'ure throu'h either addin' or
su"tractin' the amount that is directly caused "y inflationBdeflation.
INFORMATION / INFORMATIONAL RETURN is one of many returns that only
communicates to the (nternal 5evenue !ervice information relevant to tax lia"ility and
does not compute the actual lia"ility of any taxpayer or accompany the actual payment of
tax* used for sale of property, dividends, and others (e.'., K8H and .orms 9:>>).
INFORMATION THEORY is a "ranch of mathematics that overlaps into
communications en'ineerin', "iolo'y, medical science, sociolo'y, and psycholo'y. $he
theory is devoted to the discovery and exploration of mathematical la%s that 'overn the
"ehavior of data as it is transferred, stored, or retrieved.
INFRASTRUCTURE is the resources (as personnel, "uildin's, or e,uipment) re,uired
for an activity.
INITIATE is to set 'oin' "y ta)in' the first step, e.'., initiate contract ne'otiations.
INKIND is the value of 'oods or services provided for %hich money %ould have
other%ise "een paid.
INSERTION ORDER, in mar)etin', is an a'reement that specifies aspects related to an
advertisin' campai'n.
INSIDER TRADING is the tradin', primarily of securities, "y mana'ement or others
%ho have special access to unpu"lished information. (f the information is used to ille'ally
ma)e a profit, there may "e lar'e fines and possi"le -ail sentences.
INSOLVENCY occurs %hen a "usiness is una"le to pay de"ts as they fall due.
INSTALLEMENT AGREEMENT see (3!$A66ME3$ !A6E.
INSTALLMENT SALE is sellin' property and receivin' the sales price over a series of
payments, instead of all at once at the close of the sale, is an installment sale. As the
seller, unless you elect out, you %ill report the 'ain on that transaction as you receive it
throu'h the series of payments. As the "uyer, you %ill usually pay interest on the unpaid
"alance.
INSURABLE EARNINGS, as it pertains to unemployment insurance, is the total
amount of earnin's that an insured person has from insura"le employment7 a. the total of
all amounts, %hether %holly or partly paid in le'al tender, received or en-oyed "y the
insured person that are paid to the person "y the person+s employer in respect of that
employment, and ". the amount of any 'ratuities that the insured person is re,uired to
declare under tax le'islation.
INSURANCE CLAIM is a %ritten notification to an insurance company re,uestin'
payment of an amount due under the terms of the policy.
INTANGIBLE ASSET is an asset that is not physical in nature. Examples are thin's
li)e copyri'hts, patents, intellectual property, or 'ood%ill. An intan'i"le asset is the
opposite of tan'i"le asset.
INTANGIBLES (NET) are intan'i"le assets, includin' 'ood%ill, trademar)s, patents,
catalo's, "rands, copyri'hts, formulas, franchises, and mailin' lists, net of accumulated
amorti&ation.
INTEGRATED FINANCIAL MODEL is normally a spreadsheet "ased financial
model that inte'rates all pro-ected revenues and costs from all activity into financial
performance pro8forma pro-ections over time. 1ependent upon the complexity of the
model, the output can "e at a very hi'h level (non8complex) to hi'hly 'ranular output
(hi'her de'ree of complexity).
INTEGRATED LEDGER see E3$E5P5(!E 5E!25#E P6A33(3G.
INTELLECTUAL CAPITAL (ntellectual capital "undles )no%led'e resources (ho%
the Pproduction functionsT, that is the constellation of employees, users, processes and
technolo'ies, %or)). (ntellectual capital ena"les a company to ma)e a difference to users
via its )no%led'e resources.
INTELLECTUAL CAPITAL STATEMENT (ICS) provides7 a. (nsi'hts into the
userDs situation (E the customers situation)* ". (nsi'ht into the collea'ueDs s)ills and
improvements of team%or)* c. (nsi'ht in the practical s)ills e.'. craftsmanship7 from
)no%in' ho% to develop and improve production methods to "e capa"le of handlin'
information technolo'y etc.* d. (nsi'hts in the )no%8ho% represented in the companyDs
processes and systems and ho% these can "e used to improve the ,uality of products or
services* e. (nsi'ht in the motivation or commitment as re'ards the further development
of the companyDs products and services* f. (nsi'ht in the future needs for )no%led'e* '.
(nsi'ht in the s)ills, competencies and ,ualification that can ma)e a difference to the
company.
INTELLECTUAL PROPERTY is intan'i"le property that is the result of creativity,
e.'. patents, trademar)s or copyri'hts.
ITEMIZED DEDUCTIONS is amounts paid "y an individual taxpayer for personal and
,uasi8"usiness expenses that can "e deducted in computin' taxa"le income, such as
medical expenses, property and income taxes, mort'a'e and investment interest,
charita"le contri"utions, movin' expenses, casualty and theft losses, and certain
miscellaneous expenses. !ee !$A31A51 1E1#$(23!.
INTENSITY DRIVERS are used to directly char'e for the resources used each time an
activity is performed.
INTERCOMPANY (6 INTERCORPORATE means occurrin' "et%een companies.
INTEREST, in la%, is a ri'ht or le'al share of somethin' or a financial involvement %ith
somethin'* in finance, it is a fixed char'e for "orro%in' money* usually a percenta'e of
the amount "orro%ed.
INTERESTBEARING means payin' interest.
INTEREST CONVERAGE is a ratio %hich indicates the a"ility of a company to cover
net interest expenses %ith income "efore net interest and taxes. (t is calculated "y
dividin' income "efore interest and taxes "y interest.
INTEREST EARNINGS is amounts from interest on all interest8"earin' deposits and
accounts* accrued interest on investment securities sold* interest on funds held for
construction* and interest related pu"lic de"t for private purposes. Excludes interest on
deposits and investments of employee retirement and other insurance trust funds*
dividends from investments* accrued interest on "onds issued "y the 'overnment*
recorded profits on sale of investments* and accrued interest on the purchase of
investments.
INTERESTED PARTY is any person that has a real and direct interest in any
proceedin' or action "ein' proposed or ta)en.
INTEREST EXPENSE is the cost of "orro%in' funds in the current period. (t is sho%n
as a financial expense item %ithin the income statement.
INTEREST PAYABLE see PA0AB6E.
INTEREST RATE is the rate of interest char'ed for the use of money, usually
expressed as an annual rate. $he rate is derived "y dividin' the amount of interest "y the
amount of principal "orro%ed. .or example, if a "an) char'ed =9:: a year to "orro%
=9,:::, the interest rate %ould "e 9:O. (nterest rates are ,uoted on "ills, notes, "onds,
credit cards and many )inds of consumer and "usiness loans. 5ates in 'eneral tend to rise
%ith inflation and in response to the .ederal 5eserve raisin' )ey short8term rates. A rise
in interest rates has a ne'ative effect on the stoc) mar)et "ecause investors can 'et more
competitive returns from "uyin' ne%ly issued "onds instead of stoc)s. (t also hurts the
secondary mar)et for "onds "ecause rates loo) less attractive compared to ne%er issues.
INTEREST RATE SWAP (IRS) is a contractual arran'ement "et%een t%o counter8
parties %ho a'ree to exchan'e interest payments on a defined principal amount for a
fixed period of time.
INTEREST RATE SWAPTION is an option on an interest rate s%ap. (t 'ives the
holder the ri'ht "ut not the o"li'ation to enter into an interest rate s%ap at a specific date
in the future, at a particular fixed rate and for a specified term.
INTERFUND LOAN is an authori&ed (usually) short term loan from one fund to
another.
INTERIM AUDIT is an audit conducted durin' the fiscal year usually as a means of
minimi&in' the %or) and time involved in concludin' the audit after the fiscal year. A
corporation mi'ht have an interim audit coverin' the first nine months of the fiscal year
so that at the end of the fiscal year most of the auditin' %ill focus on the last three
months of the fiscal year thus allo%in' for a comprehensive audit and early completion of
the audit reports. An interim audit does not usually yield any formal reports from the
external auditors.
INTERIM DIVIDEND is the declaration and payment of a dividend prior to annual
earnin's determination.
INTERIM EARNINGS see (3$E5(M !$A$EME3$.
INTERIM STATEMENT is a financial report coverin' only a portion of a fiscal year
(prepared "y accountants, "ut usually unaudited). Uuarterly statements from pu"licly
traded companies are one example of an interim statement. (nterim statements are not as
detailed or as exact as annual statements.
INTERMEDIARY is the person or institution empo%ered to "e the intermediary in
ma)in' investment decisions for others. Examples7 "an)s, savin's and loan institutions,
insurance companies, "ro)era'e firms, mutual funds, and credit unions.
INTERMEDIATION COST, in finance, is the cost involved in the placement of money
%ith a financial intermediary. $he person or institution empo%ered as the intermediary to
ma)e investment decisions for others. Examples7 "an)s, savin's and loan institutions,
insurance companies, "ro)era'e firms, mutual funds, and credit unions.
INTERNAL is inside the country, e.'. a nation+s internal politics* or, happenin', arisin'
or located inside a company, e.'. internal re,uirements or transactions.
INTERNAL AUDIT is an independent appraisal function esta"lished %ithin an
or'ani&ation to examine and evaluate its activities as a service to the or'ani&ation. $he
o"-ective of internal auditin' is to assist mem"ers of the or'ani&ation in the effective
dischar'e of their responsi"ilities. $o this end, internal auditin' furnishes them %ith
analyses, appraisals, recommendations, counsel, and information concernin' the activities
revie%ed. $he audit o"-ective includes promotin' effective control at reasona"le cost.
2ccasionally a corporation may contract an external auditor or firm to conduct its internal
audit function.
INTERNAL AUDITOR is an auditor %ho %or)s directly for a company auditin' its
activities throu'hout the year. (nternal auditors of corporations are often not certified
auditors, thou'h they usually have si'nificant accountin' experience. $hey should report
directly to the "oard of directors of the corporation.
INTERNAL CONTROLS include policies and procedures that (a) pertain to the
maintenance of accurate and reasona"ly detailed records, (") provide reasona"le
assurance that transactions are properly recorded and authori&ed, and (c) safe'uard assets.
INTERNALLY GENERATED refers to the creation of either tan'i"le or intan'i"le
results %ithin the confines of one entity, e.'. internally 'enerated funds are those funds
that are reali&ed throu'h the efforts or operations of the entity itself, i.e. the funds %ere
not "orro%ed or reali&ed throu'h other external means.
INTERNAL RATE OF RETURN (IRR) is also called the dollar8%ei'hted rate of
return* the interest rate that ma)es the present value of the cash flo%s from all the su"8
periods in an evaluation period plus the terminal mar)et value of the portfolio e,ual to
the initial mar)et value of the portfolio.
INTERPERIOD TAX ALLOCATION is the process of apportionin' income taxes
amon' accountin' periods.
INTERSEGMENT REVENUE is revenue 'enerated %ithin a se'ment* %hether it "e a
"usiness or 'eo'raphical se'ment.
IN THE BLACK means ma)in' money* the opposite of ?in the red.?
INTHEMONEY OPTION is an expression used for any option series %ith intrinsic
value, i.e., the option+s stri)e (exercise) price and mar)et price of the underlyin' security
are such that the holder can exercise the option at a profit. .or example, if a call option
%ith a stri)e price of A: and the underlyin' stoc)+s mar)et price is currently AA, the call is
in the money. A put option is considered in the money %hen the underlyin' stoc) is
sellin' "elo% the stri)e price. Premiums and other transaction costs are not considered in
determinin' %hether the option is in the money or out of the money. !ee 2$82.8$CE8
M23E0 2P$(23.
IN THE RED means losin' money* the opposite of ?in the "lac).?
INTRACOMPANY means occurrin' %ithin or ta)in' place "et%een "ranches or
employees of a company.
INTRINSIC VALUE, 'enerally, is the value of a resource unto itself, re'ardless of its
value to humans* often considered the ethical value of a resource, or the ri'ht of the
resource to exist, e.'., in securities, it is the perceived actual value of a security, as
opposed to its mar)et price or "oo) value.
INVENTORY for companies7 includes ra% materials, items availa"le for sale or in the
process of "ein' made ready for sale (%or) in process)* for securities7 it is securities
"ou'ht and held "y a "ro)er or dealer for resale.
INVENTORY ACCUMULATION is a "uildup of inventory caused primarily "y
unplanned events, e.'., sales not meetin' expectation.
INVENTORY AND PURCHASES BUDGET represents %hat a "usiness plans to "uy
and ho% much inventory it intends to hold over a 'iven timeframe, is "ased on three
factors7 a "usinessDs desired endin' inventory, cost of 'oods sold, and "e'innin'
inventory. A "usinessDs desired endin' inventory %ill drive that "usinessD "ud'eted
purchases over a 'iven period of time. A lar'er desired endin' inventory %ill typically
lead to a lar'er Purchases Bud'et and vice8versa. Khile the Purchases Bud'et, a
component of the (nventory and Purchases Bud'et, represents an estimate of future
purchases, this is an accrual8"ased accountin' fi'ure, and it is the 1is"ursements for
Purchases Bud'et (another component of the (nventory and Purchases Bud'et) that drives
a companyDs cash flo%s.
INVENTORY LOAN is loan that is extended "ased upon the, usually, discounted B
factored value of a "usiness+ inventory.
INVENTORY OBSOLESCENCE is %hen inventory is no lon'er sala"le. Possi"ly due
to too much inventory on hand, out of fashion or demand. $he true value of the inventory
is seldom exactly %hat is sho%n on the "alance sheet. 2ften, there is unreco'ni&ed
o"solescence.
INVENTORY PROFITS is a capital8'ains8li)e element in profits. (t results from an
increase in inventory prices.
INVENTORY SHRINK, as used in retail, is reduction in physical inventory caused
primarily "y shopliftin' and employee theft.
INVENTORY SHRINKAGE is a reduction in the physical amount of inventory that is
not easily explaina"le. $he most common cause of shrin)a'e is theft.
INVENTORY TRANSFER can "e a process "y %hich inventory is physically trac)ed
from location to location, e.'. from %arehouse to shop floor* or, the transfer of assets
from one account to another %ithin the same or an alternate entity.
INVENTORY TURNOVER is a ratio that sho%s ho% many times the inventory of a
firm is sold and replaced over a specific period.
INVENTORY TURNS (P16*(7 A816+91) measures the avera'e efficiency of the firm in
mana'in' and sellin' inventories durin' the last period, i.e., ho% many inventory turns
the company has per period and %hether that is 'ettin' "etter or %orse. (t is imperative to
compare a companyDs inventory turns to the industry avera'e. A company turnin' their
inventory much slo%er than the industry avera'e mi'ht "e an indication that there is
excessive old inventory on hand %hich %ould tie up their cash. $he faster the inventory
turns, the more efficiently the company mana'es their assets. Co%ever, if the company is
in financial trou"le, on the ver'e of "an)ruptcy, a sudden increase in inventory turns
mi'ht indicate they are not a"le to 'et product from their suppliers, i.e., they are not
carryin' the correct level of inventory and may not have the product on hand to ma)e
their sales. (f loo)in' at a ,uarterly statement, there pro"a"ly are more or less turns than
an annual statement due to seasonality, i.e., their inventory levels %ill "e hi'her -ust
"efore the "usy season than -ust after the "usy season. $his does not mean they are
mana'in' their inventory any differently* the ratio is -ust s)e%ed "ecause of seasonality.
NOTE" #omparin' the t%o INVENTORY TURNS (Period Avera'e and Period End)
su''ests the direction in %hich inventories are movin', there"y allo%in' an analysis of
efficiency improvements andBor potential "ur'eonin' inventory pro"lems.
INVENTORY TURNS (P16*(7 E-7) measures the endin' efficiency of the firm in
mana'in' and sellin' inventories durin' the last period, i.e., ho% many inventory turns
the company has per period and %hether that is 'ettin' "etter or %orse. (t is imperative to
compare a companyDs inventory turns to the industry avera'e. A company turnin' their
inventory much slo%er than the industry avera'e mi'ht "e an indication that there is
excessive old inventory on hand %hich %ould tie up their cash. $he faster the inventory
turns, the more efficiently the company mana'es their assets. Co%ever, if the company is
in financial trou"le, on the ver'e of "an)ruptcy, a sudden increase in inventory turns
mi'ht indicate they are not a"le to 'et product from their suppliers, i.e., they are not
carryin' the correct level of inventory and may not have the product on hand to ma)e
their sales. (f loo)in' at a ,uarterly statement, there pro"a"ly are more or less turns than
an annual statement due to seasonality, i.e., their inventory levels %ill "e hi'her -ust
"efore the "usy season than -ust after the "usy season. $his does not mean they are
mana'in' their inventory any differently* the ratio is -ust s)e%ed "ecause of seasonality5
32$E7 #omparin' the t%o (3/E3$250 $53! (Period Avera'e and Period End)
su''ests the direction in %hich inventories are movin', there"y allo%in' an analysis of
efficiency improvements andBor potential "ur'eonin' inventory pro"lems.
INVENTORY VALUATION is the process of assi'nin' a financial value to on8hand
inventory, "ased on standard cost, first8in, first8out (.(.2), last8in, first8out (6(.2),
avera'e list price or other method. $he method used is determined "y a re,uirement to
meet le'al or other standards specified "y a third party, or "y an operational measure
found to "e useful in analy&in' inventory positions.
INVENTORY VARIANCE see /A5(A3#E.
INVESTEE is the le'al entity into %hich an investor has made an e,uity investment.
INVESTMENT is the purchase of real property, stoc)s, "onds, collecti"le annuities,
mutual fund shares, etc, %ith the expectation of reali&in' income or capital 'ain, or "oth,
in the future. (nvestment is lon'er term and usually less ris)y than speculation.
INVESTMENT BANKER is an under%riter %ho serves as a middleman "et%een a
corporation issuin' ne% securities and the pu"lic. sually, an investment "an)er, or
several investment "an)ers in a syndicate, "uy the securities issue outri'ht, then sell the
securities to individuals or institutions.
INVESTMENT CAPITAL is capital reali&ed from issuance of lon' term de"t, common
shares, or preferred shares.
INVESTMENT CENTER is the responsi"ility center %ithin an or'ani&ation that has
control over revenue, cost, and investment funds. (t is a profit center %hose performance
is evaluated on the "asis of the return earned on invested capital, e.'. corporate
head,uarters or a division of a lar'e decentrali&ed or'ani&ation.
INVESTMENT EXPENSE is any cost of investment reali&ed aside from the principal
investment itself. .or example", in mutual funds, investment expesne is normally
contained %ithin five types of investment costs that must "e measured to determine your
total investment expense7 a. Annual mutual fund expenses (i.e. the expense ratio)* ".
.ront or "ac) end sales loads* c. Portfolio turnover and tradin' costs for the fund (i.e.
"idBas) spread, premium for lar'e "loc) trades, etc.)* d. Bro)era'e commissions* and, e.
2ther (i.e., %rap account fees, annuity mortality & expense char'es, etc.).
INVESTMENT MANAGER is an individual, firm, or committee responsi"le for
ma)in' day8to8day decisions to "uy, hold, or sell assets* also )no%n as money mana'ers.
INVESTMENT OPPORTUNITY SET is a 'raphical depiction of the #apital
Allocation 6ine* %hich depicts expected rates of return "et%een ris)y and ris)8free
assets.
INVESTMENT TAX CREDIT is a tax credit in the nited !tates that allo%s
"usinesses to %rite8off a portion of the cost of purchasin' e,uipment for "usiness use.
INVESTMENT TURNOVER is a profita"ility measure used to calculate the num"er of
times per year an investment or assets revolve.
INVOICE is a detailed list of 'oods shipped or services rendered, %ith an account of all
costs* an itemi&ed "ill.
INVOICE# COMMERCIAL is a le'al document that functions internationally as a "ill
of sale. (t usually contains the exportin' company, contents of the shipment, amount
char'ed, name of carryin' vessel, order num"er and payment terms.
INVOICE# CONSULAR is an invoice stamped or endorsed "y the consulate of the
country re,uirin' such.
IOU is an informal de"t instrument in the form of a %ritten promise to pay "ac) money
o%ed* e.'., personal loans and professional services.
IPO (INITIAL PUBLIC OFFERING) is the first or primary offerin' of stoc) to the
pu"lic.
IRC is (nternal 5evenue #ode of 9>MF (formerly 9>N;).
IRCA is (nternational 5e'ister of #ertified Auditors.
IRR see (3$E53A6 5A$E 2. 5E$53.
IRRELEVANT COST, in mana'erial accountin' decision8ma)in' situations, is any
positive or ne'ative implications phenomenon %hich is not conse,uent upon the
production process, %hether it is denominated in money terms or not.
IRREVOCABLE LETTER OF CREDIT is a letter of credit in %hich the specified
payment is 'uaranteed "y the issuin' "an) if all terms and conditions are met "y the
dra%ee. (t is as 'ood as the issuin' "an).
IRS is (nternal 5evenue !ervice* also see (3$E5E!$ 5A$E !KAP.
ISSUE, in securities, is stoc) or "onds sold "y a corporation or a 'overnment* or, the
sellin' of ne% securities "y a corporation or 'overnment throu'h an under%riter or
private placement.
ISV can mean7 (ndependent !oft%are /endor, (ndependent !olution /endor, or
(nformation !ervice /endor.
IVA TAX see (MP2!$A /A625E AGG(3$2 $A4.
!BO is Goint Bac) 2ffice (stoc) tradin').
!CO is Gustification for #ontinued 2peration.
!IT see G!$ (3 $(ME.
!OB COSTING, 'enerally, it is the allocation of all time, material and expenses to an
individual pro-ect or -o"* specifically, G2B #2!$(3G is normally soft%are "ased and
provides for "ud'etin', forecastin', collectin' and reportin' on the expenditure and
revenue associated %ith specific pro-ects or -o"s.
!OINT COSTS are costs incurred to produce a certain amount of t%o or more products
%here the cost of producin' one product cannot "e lo'ically isolated and cost allocation
is ar"itrary. !implified, they are the costs of a sin'le production process that yields
multiple products simultaneously.
!OINT PAYEE ENDORSEMENT, normally, %hen a "an) draft is made out to t%o
parties "oth parties are re,uired to endorse the "ac) of the "an) draft "efore it %ill "e
honored "y the "an).
!OINT PRODUCT is a sin'le production process that yields multiple products
simultaneously.
!OINT RETURN is a ! income tax filin' status that can "e used "y a married couple.
$he married couple must "e married as of the last day of their tax year in order to ,ualify
for this filin' status. A married couple can also elect to file as married, filin' separate
returns.
!OINT STOCK COMPANY is a company that has some features of a corporation and
some features of a partnership. $his type of company has access to the li,uidity and
financial reserves of stoc) mar)ets as a corporation, ho%ever, as in a partnership* the
stoc)holders are lia"le for company de"ts and have additional restrictions of a
partnership.
!OINT VENTURE is a venture "y a partnership or con'lomerate desi'ned to share ris)
or expertise. !ee also /E3$5E.
!OINT VENTURES & INVESTMENTS is the total of investments and e,uity in -oint
ventures.
!OURNAL, in accountin' transactions, is %here transactions are recorded as they occur.
!OURNAL ENTRY is the "e'innin' of the accountin' cycle. Gournal entries are the
lo''in' of "usiness transactions and their monetary value into the t8accounts of the
accountin' -ournal as either de"its or credits. Gournal entries are usually "ac)ed up %ith a
piece of paper* a receipt, a "ill, an invoice, or some other direct record of the transaction*
ma)in' them easy to record and to maintain tracea"ility for each transaction.
!UNK BOND is a "ond %ith a speculative credit ratin' of BB or lo%er. !uch "onds offer
investors hi'her yields than "onds of financially sound companies. $%o a'encies,
!tandard & Poor+s and Moody+s (nvestor !ervices, provide the ratin' systems for
companies+ credit.
!USTINTIME (!IT) is a mana'ement philosophy that strives to eliminate sources of
manufacturin' %aste and cost "y producin' the ri'ht part in the ri'ht place at the ri'ht
time.
!V is Gournal /oucher or Goint /enture.
KAIZEN BUDGETING is a "ud'etin' approach that pro-ects costs on the "asis of
future improvements, rather than current practices and methods. $he )ey point is that the
"ud'et cannot "e achieved unless improvements are made.
KAIZEN COSTING means ?improvements in small steps? (i.e., continuous
improvement). (t %as developed in Gapan "y 0ashuhiro Monden. <ai&en #ostin' is
applied to product that it already under production.
KEEPWELL AGREEMENTS, also )no%n as comfort letters, are documents from one
party %ritten to another party in re'ards to contin'ent lia"ility. #omfort letters have "een
held "y courts to "e le'ally enforcea"le commitments if they meet certain standards
criteria of lan'ua'e. #omfort letters meetin' these standards are loss contin'encies in that
they are construed to 'uarantee a financial commitment and must "e reported under
!tatement of .inancial Accountin' !tandard N as a 'uarantee. Auditors should revie% the
lan'ua'e of all comfort letters and see) to discover contin'ent lia"ilities not disclosed in
financial statements in situations %here comfort letters exist. !ources of information
concernin' the contin'ent lia"ilities of comfort letters include7 mana'ement and third
parties. Auditors should document %ithin the client representations letter mana'ement
assurances that loss contin'encies have "een reported.
KEOGH is a pension plan in the nited !tates that allo%s a "usiness to contri"ute a
portion of profits into a tax8sheltered account.
KEYNESIAN GROWTH MODELS are models in %hich a lon' run 'ro%th path for an
economy is traced out "y the relations "et%een savin', investin' and the level of output.
KEYNESIAN MACROECONOMICS is the theory that sho%s ho% a mar)et8"ased
capitalist economy may reach e,uili"rium %ith lar'e scale unemployment and ho%
'overnment spendin' may "e used to raise it out of this to a ne% e,uili"rium at the full8
employment level of output.
KIKIN, in Gapan, is a capital foundation fund.
KITING, %hen used in the context of "an)in', refers to the practice of depositin' and
dra%in' chec)s at t%o or more "an)s and ta)in' advanta'e of the time it ta)es for the
second "an) to collect funds from the first "an). #an also refer to ille'ally increasin' the
face value of a chec) "y chan'in' the printed amount of the chec). Khen used in the
context of securities, it refers to the manipulation and inflation of stoc) prices.
KNOWHOW is the )no%led'e and s)ill re,uired to do somethin' correctly.
KNOWLEDGE ACQUISITION is the process of ac,uirin' )no%led'e from a human
expert for an expert system, %hich must "e carefully or'ani&ed into (.8$CE3 rules or
some other form of )no%led'e representation.
LABOR BUDGET see 1(5E#$ 6AB25 B1GE$.
LABOR INTENSIVE is used to descri"e industries or sectors of the economy that relies
relatively heavily on inputs of la"or, usually relative to capital "ut sometimes to human
capital or s)illed la"or, compared to other industries or sectors.
LABOR THROUGHPUT VARIANCE reveals potential constraints on throu'hput
caused "y chan'es in the mix of products "ein' produced. (t is computed the %ay the
traditional la"or ?efficiency? variance is computed "ut a''re'ated at a fairly hi'h level
(e.'., total plant or total department) and expressed as percent of actual cloc)ed
production hours vs. standard production hours.
LAG TIME is the period of time "et%een t%o closely related events, phenomena, etc., as
"et%een stimulus and response or "et%een cause and effect7 a time8la' "et%een the
declaration of %ar and full %ar production.
LAND, in terms of accountin', is the value of real estate less the value of improvements,
e.'. "uildin's.
LANDED COST is the total expense of receivin' 'oods at place of retail sale, includin'
retail purchase price, transportation costs, duties, value added taxes, excise tax and other
taxes.
LANDING COST is the initial char'es for landin' imported 'oods, such as those for
receivin' 'oods from doc)side vessels or from "ar'es to li'hters. $hey may also cover
%harfa'e or delivery from the doc) to land conveyance or %arehouse.
LARGECAP is a stoc) %ith a level of capitali&ation of at least =N "illion mar)et value.
LATIN AMERICAN MODEL is an accountin' model. $here are other accountin'
systems %hich differ from the .!. accountin' model. .!. GAAP and .A!B standards
are not the only accountin' principles used internationally* for example, many countries
reverse the .!. de"it and credit system. Many countries %ith hi'h rates of inflation
account for inflation in financial reports much more than the .!. does. Also, for any
company operatin' internationally there is the currency exchan'e translation pro"lem
%hen consolidatin' financial statements.
LBO see 6E/E5AGE1 B082$.
LCL see 6E!! $CA3 #23$A(3E5 62A1.
LCM is 6o%er of #ost or Mar)et.
LCM RULE is an a""reviation for lo%er8of8cost8or8mar)et rule. 6#M re,uires that an
asset "e reported on the financial statements at the lo%er of purchase cost or mar)et
value.
LEADTIME is the time "et%een the initial sta'e of a pro-ect or policy and the
appearance of results, for example, the lon' lead8time in oil production "ecause of the
need for ne% field exploration and drillin'.
LEASE is a contract %here a party "ein' the o%ner (lessor) of an asset (leased asset)
provides the asset for use "y the lessee at a consideration (rentals), either fixed or
dependent on any varia"les, for a certain period (lease period), either fixed or flexi"le,
%ith an understandin' that at the end of such period, the asset, su"-ect to the em"edded
options of the lease, %ill "e either returned to the lessor or disposed off as per the lessor+s
instructions.
LEASEHOLD is an a'reement "et%een the lessee and lessor specifyin' the lessee+s
ri'hts to use the leased property for a specific purpose and 'iven time at a specified rental
payment.
LEASEHOLD IMPROVEMENTS are those repairs and B or improvements, usually
prior to occupancy, made to a leased facility "y the lessee. $he cost is then added to fixed
assets and amorti&ed over the life of the lease.
LEASE RATE FACTOR is the periodic lease or rental payment expressed as a
percenta'e (or decimal e,uivalent) of e,uipment cost. sed to calculate payments 'iven
the cost of e,uipment (e.'. A lease rate factor of :AF: on an e,uipment cost of =N,:::.::
re,uires a monthly payment of =9M:.:: (:AF:x=N,:::.::E=9M:.::).
LEDGER is a "oo) of accounts in %hich data from transactions recorded in -ournals are
posted and there"y classified and summari&ed5
LEGAL ENTITY is a person or or'ani&ation that has the le'al standin' to enter into
contracts and may "e sued for failure to perform as a'reed in the contract, e.'., a child
under le'al a'e is not a le'al entity, %hile a corporation is a le'al entity since it is a
person in the eyes of the la%.
LEGITIMACY THEORY posits that "usinesses are "ound "y the social contract in
%hich the firms a'ree to perform various socially desired actions in return for approval of
its o"-ectives and other re%ards, and this ultimately 'uarantees its continued existence.
LEHMAN FORMULA is a compensation formula ori'inally developed "y investment
"an)ers 6ehman Brothers for investment "an)in' services7
[ NO of the first million dollars involved in the transaction for services rendered
[ ;O of the second million
[ AO of the third million
[ HO of the fourth million
[ 9O of everythin' thereafter (a"ove =; million)
32$E7 Most investment "an)ers no% re,uire an additional multiplier to offset inflation.
LESSEE is the party to %hom the possession of specified property has "een conveyed
for a period of time in return for rental payments.
LESSOR is the party %ho conveys specified property to another for a period of time in
return for the receipt of rent.
LESS THAN CONTAINER LOAD (LCL) is a shipment in %hich the frei'ht does not
completely fill the container* or a particular consi'nor+s frei'ht %hen com"ined %ith
others to produce a full container load.
LETTER OF AUTHORIZATION (LOA) is a form that permits a 1onor to provide
%ritten instructions to transfer a stoc) certificate in the 1onorDs name in full or in part to
another party, such as a charita"le or'ani&ation, %ithout usin' a transfer a'ent. $his form
'iven to the charita"le or'ani&ation %ith the desi'nated stoc) certificate and a separate
!toc) Po%er is usually executed "y the charita"le or'ani&ationDs "ro)era'e to expedite
the sale and receipt of proceeds from the 'ift of securities.
LETTER OF AWARENESS is a formal letter %ritten to a lender, normally "y a parent
company, ac)no%led'in' its relationship %ith another 'roup company and its a%areness
of a loan "ein' made to that company. (t is the %ea)est form of comfort letter. !uch
letters do not constitute a 'uarantee, "ut may nevertheless involve a si'nificant moral
commitment on the part of the %riter.
LETTER OF CREDIT (LOC) is a le'al document issued "y a "uyerDs "an) that upon
presentation of re,uired documents payment %ould "e made. sually confirmed "y the
seller+s "an), protection is 'iven to the seller that payment %ill "e made if the 'oods are
shipped correctly, and protection is 'iven to the "uyer that the 'oods %ill "e shipped
"efore payment is made.
LETTER OF CREDIT# CONFIRMED is a letter of credit that is 'uaranteed "y a "an)
that is accepta"le to a seller (usually a local "an)), re'ardless of "uyer+s "an).
LETTER OF CREDIT# IRREVOCABLE is a letter of credit %here payment is
'uaranteed as lon' as the seller meets all conditions stipulated. A revoca"le letter of
credit can "e cancelled or altered "y the "uyer %ithout permission of the seller.
LEVERAGE is property risin' or fallin' at a proportionally 'reater amount than
compara"le investments. .or example, an option is said to have hi'h levera'e relative to
the underlyin' stoc) "ecause a price chan'e in the stoc) may result in a relatively lar'e
increase or decrease in the value of the option. (n 'eneral, in finance, levera'e is the use
of de"t financin'. 6evera'e, %ithin a corporation, is the use of "orro%ed money to
increase the return on investment. .or levera'e to "e positive, the rate of return on the
investment must "e hi'her than the cost of the money "orro%ed.
LEVERAGED BUYOUT (LBO) is a transaction used for ta)in' a pu"lic corporation
private, financed throu'h the use of de"t funds7 "an) loans and "onds. Because of the
lar'e amount of de"t relative to e,uity in the ne% corporation, the "onds are typically
rated "elo% investment 'rade, properly referred to as hi'h8yield "onds or -un) "onds.
(nvestors can participate in an 6B2 throu'h either the purchase of the de"t (i.e., purchase
of the "onds or participation in the "an) loan) or the purchase of e,uity throu'h an 6B2
fund that speciali&es in such investments.
LEVERAGED LEASE is a lease arran'ement under %hich the lessor "orro%s a lar'e
proportion of the funds needed to purchase the asset and 'rants the lender a lien on the
assets and a pled'e of the lease payments to secure the "orro%in'.
LEVERAGE HYPOTHESIS is the theory that mana'ers have incentive to avoid
technical default of loan covenants "ecause it could result in increases in the firmDs cost
of capital.
LEVERAGE RATIOS measures the relative contri"ution of stoc)holders and creditors,
and of the firm+s a"ility to pay financin' char'es. /alue of firm+s de"t to the total value of
the firm.
LEVIED is a char'e imposed and collected.
LEVY is to impose and collect a char'e.
LIABILITY, in insurance, is a term used %hen analy&in' insurance ris)s that descri"es
possi"le areas of financial exposure B loss. Presently, there are three forms of lia"ility
covera'e that insurers %ill under%rite7 $he first is 'eneral lia"ility, %hich covers any
)ind of "odily in-ury to non8employees except that caused "y automo"iles and
professional malpractice. $he second is product lia"ility, %hich covers in-ury to
customers arisin' as a direct result of 'oods purchased from a "usiness. $he third is
pu"lic lia"ility, %hich covers in-ury to the pu"lic %hile they are on the premises of the
insured.
LIABILITY, in accountin', is a loan, expense, or any other form of claim on the assets
of an entity that must "e paid or other%ise honored "y that entity.
LIBOR see 623123 (3$E5BA3< 2..E5E1 5A$E.
LICENSE is a le'al document 'ivin' official permission to do somethin'.
LIEN is the ri'ht to ta)e another+s property if an o"li'ation is not dischar'ed.
LIFO (3+',*-# .*6',(/,) is an inventory cost flo% %here"y the last 'oods purchased are
assumed to "e the first 'oods sold so that the endin' inventory consists of the first 'oods
purchased.
LIFO LIQUIDATION is a reduction in the reported value of inventory "elo% levels
esta"lished in prior years under the 6(.2 method* arises %hen purchases for the period
are not sufficient to offset the sale of inventory in the period.
LIFO RESERVE is the difference "et%een the endin' inventory under 6(.2 and .(.2
(or other method that mi'ht "e chosen).
LIFTING & OPERATING EXPENSE (LOE), in the oilBener'y industry, %ithin any
accountin' period, it is all cash costs incurred in connection %ith the runnin' and
maintenance of production %ells.
LIKE KIND, in taxes, refers to property that is similar to another for %hich it has "een
exchan'ed7 real estate exchan'ed for real estate, for instance. $he definitions of li)e )ind
properties can "e found in the ! $ax #ode at !ection 9:A9.
LIMITATION, in contracts, is a certain period limited "y statute after %hich actions,
suits, or prosecutions cannot "e "rou'ht in the courts.
LIMITED LIABILITY is one that does not 'o "eyond the o%ner+s investment in the
"usiness.
LIMITED PARTNER is a partner in a venture %ho has no mana'ement authority and
%hose lia"ility is restricted to the amount of his or her investment.
LIMITING FACTOR is a factor or condition that, either temporarily or permanently,
impedes 'oal accomplishment.
LINE ITEM is one item from a 'roup of many items, e.'. one inventory item from the
list of all inventoried items or one "ud'eted item from a financial "ud'et.
LINE ITEM BUDGET is a "ud'et initiated "y 'overnment entities in %hich "ud'eted
financial statement elements are 'rouped "y administrative entities and o"-ect. $hese
"ud'et item 'roups are usually presented in an incremental fashion that is in comparison
to previous time periods. 6ine item "ud'ets are also used in private industry for
comparison and "ud'etin' of selected o"-ect 'roups and their previous and future
expenditure levels %ithin an or'ani&ation.
LINE OF CREDIT is an a'reement %here"y a financial institution promises to lend up
to a certain amount %ithout the need to file another loan application. $he "orro%er is
re,uired to reduce the de"t %henever the limit of the full amount of credit has "een
reached.
LINKED ACCOUNT 'ives you the flexi"ility of openin' minor or custom account(s)
that are lin)ed to your primary account. $ransactions "et%een lin)ed accounts are usually
controlled throu'h the pass%ord of the primary account. 6in)ed accounts are possi"le
throu'h either commercial or consumer accounts, e.'. a consumer may have hisBher
chec)in', savin's and over8draft protection accounts lin)ed so that transactions can "e
easily made "et%een them.
LIP ACCOUNT see 62A38(38P52#E!! A##23$.
LIQUID is to "e in a state of li,uidity, i.e., maintain sufficient assets in the form of cash
or assets easily converti"le to cash to satisfy current lia"ilities. Khen spea)in' of money
or an economy7 "ein' very li,uid means it is driven "y primarily "y cash,
chec)in'Bsavin' accounts, treasury "ills, stoc)s and "onds, etc* %hile "ein' very illi,uid
means it is driven primarily "y human capital.
LIQUID ASSET is cash and any asset that can ,uic)ly "e converted into cash (e.'.,
cash, chec)s and easily8converti"le securities).
LIQUIDATING DIVIDENDS are dividends paid "y a corporation that is in the process
of li,uidationB"an)ruptcy. 6i,uidatin' 1ividends are paid from the capital of the
corporation as opposed to earnin's. 5ecipients of 6i,uidatin' 1ividends are typically
shareholders, "ond holders andBor creditors. (n the .!. such dividends are 'enerally
nontaxa"le under the (nternal 5evenue #ode.
LIQUIDATION is the sellin' of all the assets of a de"tor and the use of the cash
proceeds of the sale to pay off creditors.
LIQUIDATION VALUE is a type of valuation similar to an ad-usted "oo) value
analysis. 6i,uidation value is different than "oo) value in that it uses the value of the
assets at li,uidation, %hich is often less than mar)et and sometimes "oo). 6ia"ilities are
deducted from the li,uidation value of the assets to determine the li,uidation value of the
"usiness. 6i,uidation value can "e used to determine the "are "ottom "enchmar) value of
a "usiness, since this should "e the funds the "usiness may "rin' upon valuation.
LIQUIDITY is a company+s a"ility to meet current o"li'ations %ith cash or other assets
that can "e ,uic)ly converted to cash.
LIQUIDITY RATIO see #A!C 5A$(2.
LISTED COMPANY is a pu"lic company listed or ,uoted on a stoc) exchan'e.
LISTED INVESTMENTS are those investments %hich are listed or ,uoted on a stoc)
exchan'e.
LISTING is a %ritten contract "et%een an a'ent and a principal 'ivin' authori&ation to
the a'ent to perform services for the principal involvin' the principalDs property* or, a
record of a property for sale "y a "ro)er %ho has "een authori&ed "y the o%ner of the
property to "e sold.
LLC is 6imited 6ia"ility #orporation.
LLCR is 6oan 6ife #overa'e 5atio.
LMA, amon' others, is an acronym for 6ease Mana'ement A'reement, 6ocal Mar)etin'
A'reement or 6e'al Mar)etin' Association.
LOADED LABOR RATE is the employee hourly rate plus employee "enefits, capital
expenses, and other overhead.
LOAN is an a'reement under %hich an o%ner of assets (the lender) allo%s another entity
(the "orro%er) to use the assets for a specified time period. (n return, the "orro%er a'rees
to pay the lender a payment (interest) and return the assets (cash) at the end of the a'reed
upon time period.
LOAN COVENANT is a le'ally enforcea"le promise or restriction in a mort'a'e. .or
example, the "orro%er may covenant to )eep the property in 'ood repair and ade,uately
insured a'ainst fire and other casualties. A "reach of covenant in a mort'a'e usually
creates a default, defined "y the mort'a'e, and can "e the "asis for foreclosure.
LOANINPROCESS ACCOUNT (LIP ACCOUNT) serves as a deposit account for
construction funds. $he "uyer+s do%n payment is deposited into this account and is used
for the initial construction dra%s. 1is"ursements of actual loan funds "e'in once the
"uyer+s money is depleted. (nterest on the "orro%ed funds %ill "e "illed monthly on the
amount %ithdra%n. pon completion of the house, the "uyer %ill "e as)ed to furnish a
homeo%ner+s insurance policy and monies for completin' the escro% account. 2nce final
dis"ursements to the "uilder are made, monthly payments "e'in "ased on amorti&ation of
the "alance at that time.
LOAN STOCK is stoc) "earin' a fixed rate of interest. nli)e a de"enture, loan stoc)
may or may not "e secured.
LOAN TO VALUE RATIO, in real estate, is the percenta'e value for the relationship
"et%een the amount of the mort'a'e loan and the appraised value of the property. 6oan8
to8value ratio is expressed to a potential purchaser of a property in terms of the
percenta'e a lendin' institution is %illin' to finance.
LOC see 6etter of #redit.
LOCKBOX is 9. a fireproof metal stron'"ox (usually in a "an)) for storin' valua"les
e.'., a safety deposit "ox* and, H. a service offered "y "an)s to companies in %hich the
company receives payments "y mail to a post office "ox and the "an) pic)s up the
payments several times a day, deposits them into the company+s account, and notifies the
company of the deposit. $his ena"les the company to put the money to %or) as soon as
it+s received, "ut the amounts must "e lar'e in order for the value o"tained to exceed the
cost of the service.
LOE see 6(.$(3G & 2PE5A$(3G E4PE3!E.
LOGGING is the practice of recordin' data, in some medium, se,uential input, often in
a time8associated format.
LOI is 6etter of (ntent.
LONDON INTERBANK OFFERED RATE (LIBOR) is the rate that the most
credit%orthy international "an)s that deal in Eurodollars char'e each other for lar'e
loans. (t is e,uivalent to the federal funds rate in the .!.
LONGLIVED ASSETS are usually those assets that are not consumed durin' the
normal course of "usiness, e.'. land, "uildin's and e,uipment, etc.
LONGTERM is a lon' period of time. (n securities, for a "ond it is 9: or more years or
as it relates to a "uy and hold investment strate'y. (n accountin', it is thou'ht of as "ein'
in excess of 9H months, e.'. lon'8term lia"ilities. !ee !C25$8$E5M.
LONG TERM DEBT is all senior de"t, includin' "onds, de"entures, "an) de"t,
mort'a'es, deferred portions of lon' term de"t, and capital lease o"li'ations.
LONGTERM DEBT TO EQUITY expresses the relationship "et%een lon'8term
capital contri"utions of creditors as related to that contri"uted "y o%ners (investors). As
opposed to 1EB$ $2 EU($0, 6on'8$erm 1e"t to E,uity expresses the de'ree of
protection provided "y the o%ners for the lon'8term creditors. A company %ith a hi'h
lon'8term de"t to e,uity is considered to "e hi'hly levera'ed. But, 'enerally, companies
are considered to carry comforta"le amounts of de"t at ratios of :.AN to :.N:, or =:.AN to
=:.N: of de"t to every =9.:: of "oo) value (shareholders e,uity). $hese could "e
considered to "e %ell8mana'ed companies %ith a lo% de"t exposure. (t is "est to compare
the ratio %ith industry avera'es.
LONGTERM LIABILITIES are lia"ilities of a "usiness that are due in more than one
year. An example of a lon'8term lia"ility %ould "e a mort'a'e paya"le.
LONGTERM RECEIVABLE, in accountin', is any receiva"le that is scheduled or
pro-ected for receipt in 'reater than a 9H8month period, e.'. notes receiva"le or a
receiva"le in liti'ation.
LOSS, in finance, is %hen expenses exceed sales or revenues, i.e. 'oods or services are
sold for less than their cost.
LOSS LEADER is a featured article of merchandise sold at a loss in order to dra%
customers.
LOT can "e7 9. A 'roup of items %hich are "ou'ht or sold to'ether* H. Multiple shares
held or traded to'ether, usually in units of 9::* or, A. A parcel of land.
LOT COSTING see BA$#C #2!$(3G.
LRIC is an acronym for 6on' 5un (ncremental #ost. A service costin' methodolo'y
used primarily in the telecommunications industry.
LTM means 6ast $%elve Months.
LUMPSUM is an a'reed upon sum of money, %hich is paid in full settlement all at one
time.
M$ is the narro%est measure of the .!. money supply* includes currency in circulation
plus demand deposits (chec)in' account "alances).
M@ is a measure of the .!. money supply that includes M9, plus savin's and small time
deposits, overni'ht repos at commercial "an)s, and non8 institutional money mar)et
accounts. MH is a )ey economic indicator used to forecast inflation.
MB is the "roadest measure of the .!. money stoc) that consists of MH, time deposits of
=9::,::: or more at all depository institutions, term repurchase a'reements in amounts of
=9::,::: or more, certain term Eurodollars and "alances in money mar)et mutual funds
restricted to institutional investor.
MACRS is Modified Accelerated #ost 5ecovery !ystem.
MAINTENANCE is the activity involved in maintainin' somethin' in 'ood %or)in'
order. May include replacement of si'nifcant portions of the item(s) "ein' maintained.
MAINTENANCE OF ACCOUNTS, in accountin', ensures that all transactions and
accountin' records are in accordance %ith 'enerally accepted accountin' principles and
applica"le la%s, and shall "e in sufficient detail to permit an annual audit.
MAKER is a. the producer of a product, or, ". the person %ho si'ns a chec) or
promissory note, %hich ma)es himBher responsi"le for payment.
MALPRACTICE INSURANCE see E&2 (3!5A3#E.
MANAGEMENT ACCOUNTING is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of financial
information used "y mana'ement to plan, evaluate, and control %ithin an or'ani&ation
and to assure appropriate use of and accounta"ility for its resources. Mana'ement
accountin' also comprises the preparation of financial reports for non8mana'ement
'roups such as shareholders, creditors, re'ulatory a'encies, and tax authorities.
MANAGERIAL ACCOUNTING is a system usin' financial accountin' records as
"asic data to ena"le "etter "usiness decisions in the areas of plannin' and control.
MANAGEMENT BY OB!ECTIVES (MBO) is a mana'ement theory that calls for
mana'in' people "ased on documented %or) statements mutually a'reed to "y mana'er
and su"ordinate. Pro'ress on these %or) statements is periodically revie%ed, and in a
proper implementation, compensation is usually tied to MB2 performance.
MANAGEMENT CONTROL SYSTEM is essentially a strate'ic tool for holdin'
mana'ers accounta"le and responsi"le for their performance. Existence of such a system
also provides feed"ac) for mana'ers to )no% ho% they perform, in %hich direction the
or'ani&ation is headin', and %hat type of course correction may "e re,uired to stay on
course.
MANAGEMENT EXPENSE is the mana'ement fee deducted from a fund+s avera'e net
assets to pay an advisor or su"advisor. $his fee is normally on a slidin' scale. As the net
assets of the fund increase, the percenta'e deducted for mana'ement fees decreases. A
fund can also have a fixed rate or flat fee to compensate the advisor.
MANAGEMENT INFORMATION SYSTEM (MIS) is a %ell8developed data
mana'ement system that provides uniform or'ani&ational information from all areas of
the entity %ithin a data"ase. (nformation %ithin the data"ase is manipulated to help
mana'ement reach accurate and rapid or'ani&ational decisions.
MANAGEMENT LETTER identifies issues not re,uired to "e disclosed in the Annual
.inancial 5eport "ut represent the auditor+s concerns and su''estions noted durin' the
audit.
MANDATORY TRANSFERS are transfers from the current (operatin') fund 'roup to
other fund 'roups arisin' out of "indin' le'al a'reements related to the financin', e.'., in
education7 de"t retirement, interest, and 'rant a'reements %ith federal a'encies and other
or'ani&ations to match 'ifts and 'rants. Khereas non8mandatory transfers %ould "e
transfers from the current (operatin') fund 'roup to other fund 'roups made at the
discretion of mana'ement to serve various o"-ectives, e.'., additions to loan funds,
endo%ment funds, plant additions, and voluntary rene%al and replacement of plant.
MANNING VARIANCE is the difference "et%een the amount of time that %as
expected to "e %or)ed at a machine8paced %or)center, "ased on the amount of receipts
of the parent part, and the actual amount of la"or hours recorded at the %or)center.
MANUAL TAG SYSTEM is a inventory trac)in' system used in inventory
mana'ement that trac)s inventory usin' ta's removed at the point of purchase.
MANUFACTURING ACCOUNT is an accountin' statement that is an inte'ral part of
the final accounts of a manufacturin' or'ani&ation. .or any particular period, it indicates,
amon' other thin's, prime cost of manufacturin', manufacturin' overhead, the total
manufacturin' cost, and the manufacturin' costs of finished 'oods.
MANUFACTURING CONCERN is an entity that derives its products for sale, there"y
revenue, throu'h the direct manufacture of those products.
MANUFACTURING OVERHEAD is the total cost of indirect la"or, indirect materials,
and other indirect expenses associated %ith manufacturin' products.
MANUFACTURING STATEMENT see MA3.A#$5(3G A##23$.
MAP can mean Manufacturin' Application Protocol, Merchant Account Provider,
Minimum Advertised Price, or Ma-or Accounts Processin' amon' many others.
MARGIN see G52!! MA5G(3.
MARGIN (S,()=') allo%s investors to "uy securitiesBassets "y "orro%in' money from a
"ro)erB"an)er. $he mar'in is the difference "et%een the mar)et value of a stoc)Basset and
the loan a "ro)erB"an)er ma)es.
MARGIN ACCOUNT (S,()=') is a levera'ea"le account in %hich stoc)s can "e
purchased for a com"ination of cash and a loan. $he loan in the mar'in account is
collaterali&ed "y the stoc) and, if the value of the stoc) drops sufficiently, the o%ner %ill
"e as)ed to either put in more cash, or sell a portion of the stoc). Mar'in rules are
federally re'ulated, "ut mar'in re,uirements and interest may vary amon' "ro)erBdealers.
MARGINAL is -ust "arely ade,uate or %ithin a lo%er limit.
MARGINAL COST is a calculation sho%in' the chan'e in total cost as a result of a
chan'e in volume, e.'. if one more item of output increases the total cost "y =HN, the
mar'inal cost is =HN. (t is usually useful to determine mar'inal cost "ecause it can aid in
determinin' if the rate of production should "e altered.
MARGINAL PROFIT is the chan'e in the total profit that results from the sale of an
additional unit.
MARGINAL REVENUE is the chan'e in total revenue as a result of producin' one
additional unit of output.
MARGINAL TAX RATE is the top rate of income tax that is char'ed to individuals on
their earnin's.
MARGIN ANALYSIS see #23$5(B$(23 MA5G(3 A3A60!(! or G52!!
P52.($ MA5G(3 A3A60!(!.
MARGIN CALL (S,()=') is a demand for additional funds "ecause of adverse price
movement is a stoc).
MARGIN LENDING, in securities, is %here the lender, usually a "an), %ill lend you
"et%een approximately ;:O and @:O of the value of approved shares and mana'ed
funds. .or example, if you have =A:,::: in cash, you could "orro% up to =@:,::: and
"uy a =9::,::: portfolio (assumin' a lendin' ratio of @:O). $his portfolio then "ecomes
the security for your mar'in lendin' facility.
MARINE INSURANCE is insurance covera'e protectin' a'ainst loss or dama'e of
'oods transported "y sea.
MARK ENDORSEMENT, normally, it is %hen a si'natory (payee) cannot endorse %ith
their si'nature, due to illiteracy or an infirmary, the si'natory is allo%ed to ma)e a mar)
that identifies that the si'natory has si'ned. !uch mar) endorsements are normally
%itnessed %ith the %itness endorsin' the mar) endorsement.
MARKETABLE SECURITY is a readily trada"le e,uity or de"t security %ith ,uoted
prices* to include commercial paper and $reasury "ills. (t is a ?close to cash? asset %hich
is classified as a current asset.
MARKET CAPITALIZATION is the total dollar value of all outstandin' shares. (t is
calculated "y multiplyin' the num"er of shares times the current mar)et price. $he term
is commonly referred to as Smar)et capT.
MARKET DISCOUNT is the stated redemption price of a "ond at maturity minus your
"asis in the "ond immediately after you ac,uire it. Mar)et discount arises %hen the value
of a de"t o"li'ation decreases after it+s issue date.
MARKET DISCOUNT BOND is any "ond havin' mar)et discount except7 short8term
o"li'ations %ith fixed maturity dates of up to 9 year from the date of issue, tax8exempt
o"li'ations that you "ou'ht "efore May 9, 9>>A, .!. savin's "onds, and certain
installment o"li'ations
MARKETING LEVER is anythin' that provides positional advanta'e or po%er to act
effectively7 Potential levers may "e price, "rand name, corporate ima'e, "road
distri"ution, effective advertisin', etc.
MARKET MULTIPLE see P5(#EBEA53(3G! 5A$(2.
MARKET POSITION, from a mar)etin' context, is the stren'th of an entity or product
%ithin the tar'et mar)et. (n investin', it is the amount andBor depth and "readth of
holdin's %ithin identified sectors of the capital mar)et.
MARKET SHARE is the percenta'e of sales a company captures for a particular
product line, i.e., the percenta'e of total industry sales that a particular company controls
%ithin a 'iven mar)et.
MARKET TO BOOK VALUE is calculated "y dividin' the mar)et value (M/) of a
company, i.e., the total value of all its outstandin' shares, "y the value of its tan'i"le
assets ($A). Also )no%n as $2B(3 5A$(2 E M/B$A.
MARKET VALUE, in 'eneral, is the price at %hich "uyers and sellers trade similar
items in an open mar)etplace. (n the a"sence of a mar)et price, it is the estimated hi'hest
price a "uyer %ould "e %arranted in payin' and a seller -ustified in acceptin', provided
"oth parties %ere fully informed and acted intelli'ently and voluntarily. !ee also 2PE3
MA5<E$ /A6E (2M/).
MARKTOMARKET (MTM) is the recordin' of the price or value of a security,
portfolio, or account on a daily "asis, to calculate profits and losses or to confirm that
mar'in re,uirements are "ein' met. $his is done most often in futures accounts to ma)e
sure that mar'in re,uirements are "ein' met. (f the current mar)et value causes the
mar'in account to fall "elo% its re,uired level, the trader %ill "e faced %ith a mar'in call.
Mutual funds are mar)ed to mar)et on a daily "asis at the mar)et close so that investors
have an idea of the fund+s 3A/.
MARKUP is the amount added to the cost of 'oods in order to produce the desired
profit.
MARSHALLING is to ma)e ready for action or use, e.'., marshal resources.
MASTER BUDGET formali&es the %hole "ud'et system into one sin'le final document
in %hich all the operational "ud'ets flo%* its 'oal is to draft the main economic and
financial statements. Co%ever, dependent upon the individual or 'eo'raphic location, is
variously contains the cash "ud'et only* or the income statement and the "alance sheet
com"ined* or the income statement and the "alance sheet and the cash "ud'et com"ined.
MAT is Mana'ement, Administrative, and $echnolo'ical.
MATCHING, in accountin', is the matchin' of invoices to purchase orders and delivery
notes prior to payment.
MATCHING CONCEPT is the accountin' principle that re,uires the reco'nition of all
costs that are directly associated %ith the reali&ation of the revenue reported %ithin the
income statement.
MATCHING PRINCIPLE see MA$#C(3G #23#EP$.
MATERIALITY is the importance of information or an event that influences a
company+s price of stoc).
MATERIALITY PRINCIPLE re,uires accountants to use 'enerally accepted
accountin' principles except %hen to do so %ould "e expensive or difficult, and %here it
ma)es no real difference if the rules are i'nored. (f a rule is temporarily i'nored, the net
income of the company must not "e si'nificantly affected, nor should the reader+s a"ility
to -ud'e the financial statements "e impaired.
MATERIAL MISSTATEMENT is accidental or intentional untrue financial statement
information that influences a company+s value or price of stoc).
MATERIAL REQUISITION PLANNING (MRP) entire purpose is to plan for
materials that are re,uired for a particular purpose. An M5P is usually automated usin'
transaction codes. M5P can "e done for a sin'le material item or a multilevel plan can "e
run for a material %ithin a plant. M5P creates purchase re,uisitions, purchase orders, or
planned orders for the material. $his is done on the "asis of the settin's selected in the
transactions. $o ta)e an example, a particular material item may "e procured externally,
in such a case, an M5P run creates re,uirements for that material throu'h the respective
plant from a sales document.
MATERIALS are physical 'oods (and their cost) used in the manufacture of a product,
often separated into 1(5E#$ MA$E5(A6 (that %hich 'oes directly into the product such
as cream into ice cream, or steel into cars) and (31(5E#$ MA$E5(A6 (that %hich is
used in maintainin' the manufacturin' environment such as cleanin' fluids or oil for
lu"rication of manufacturin' e,uipment). (ndirect materials are usually part of the
overhead component of cost. $he term material, %hen used %ithout the direct or indirect
,ualifier, usually refers to direct materials.
MATERIAL WEAKNESS is a condition that could potentially result in the material
misstatement of the financial statements.
MATRIX ORGANIZATION is %here a company superimposes a 'roup or
interdisciplinary team of pro-ect specialists on a functional or'ani&ational desi'n. (n a
matrix or'ani&ation the mem"ers have dual alle'iances, i.e., to that particular assi'nment
or pro-ect as %ell as their normal or'ani&ational department.
MATURITY DATE of a financial asset is the date at %hich that asset is converted into a
specified amount of money or physical assets, e.'. the date on %hich an issuer of a "ond
promises to repay the full amount "orro%ed.
MATURITY VALUE, in securities, is the amount that %ill "e received at the time a
security is redeemed at its maturity. .or most securities, maturity value e,uals par value*
in insurance, it is the amount paya"le under a %hole life insurance policy if the insured
person lives to the last a'e on the mortality ta"le on %hich the values of the contract %ere
"ased.
MBO see MA3AGEME3$ B0 2BGE#$(/E!.
MD&A is an acronym for Mana'ement 1iscussion and Analysis. M1&A usually refers
to that section of a corporate annual or ,uarterly report that provides mana'erial
comment on corporate performance for the time period in ,uestion.
MEAN is the measure of central tendency* also called the +avera'e+. (t is calculated "y the
sum of the data points divided "y the num"er of data points.
MEASUREMENT THEORY involves the assi'nment of numerals to o"-ects or events
in order to represent certain attri"utes, or properties, of those o"-ects and events.
MEDIAN is the value of the midpoint varia"le %hen the data are arran'ed in ascendin'
or descendin' order.
MEDIA PLAN, in advertisin', is the plan that details the usa'e of media in an
advertisin' campai'n includin' costs, runnin' dates, mar)ets, reach, fre,uency,
rationales, and strate'ies.
MEDIUM TERM usually encompasses a calendar of H8A years or less.
MEDIUM TERM ASSETS, usually, are those assets that are expected of havin' a
useful life of "et%een six months and t%o years of the present.
MEMO ENTRY is supplemental or explanatory information on a reportin' schedule. (t
is used for clarification of sometimes complex entries.
MEMORANDUM ACCOUNT see !PE#(A6 MEM25A31M A##23$.
MEMORANDUM FOR RECORD (MR) is an in8house memo coverin' information
that %ould other%ise not "e recorded in %ritin'.
MER (M+-+91<1-, ECD1-'1 R+,*() is the percenta'e of the assets that %ere spent to
run a mutual fund. (t includes thin's li)e mana'ement and advisory fees, travel costs and
9H"89 fees. $he expense ratio does not include "ro)era'e costs for tradin' the portfolio.
Also referred to as the Expense 5atio.
MERCHANDISE is commodities offered for sale or to en'a'e in the trade of
commodities that are for sale.
MERGER is the union of t%o or more commercial interests or corporations. $he
distinction "ein' that identity of the mer'ed companies, product lines, etc., may or may
not lose its individual identity.
MEZZANINE FINANCING usually is a class of investment that is a sta'e intermediate
"et%een venture capital and an initial pu"lic offerin'* or, su"ordinated de"t used in
levera'ed "uyouts (6B2s).
MIDCAP is a stoc) %ith a capitali&ation, total e,uity value, "et%een =N:: million and
=N "illion.
MIDDLE MARKET COMPANY" see M(18#AP.
MILLAGE is a rate (as of taxation) expressed in mills per dollar.
MINIMUM WAGE is the lo%est compensation you are allo%ed to pay an employee for
hourly %or). (t is defined "y .ederal, state, and sometimes local la%s. !tate or local la%s
may "e more restrictive than .ederal la%, and certainly may differ.
MINORITY INTEREST is the interest or percenta'e o%nership of a 'roup of
stoc)holders %ho, in total, o%n less than N:O of the shares in the corporation.
MINOR MATTERS is a term used in accountin' and le'al reports to cover areas
considered to "e cosmetic or superficial* there"y deemed "y the author to "e of little
conse,uence.
MIS see MA3AGEME3$ (3.25MA$(23 !0!$EM.
MISAPPROPRIATON is a nonviolent criminal ta)in' of property. (ncludes
em"e&&lement, theft, and fraud. 2ften applied to an employeeDs ta)in' of an employerDs
property.
MISCELLANEOUS is a 'roupin' consistin' of a hapha&ard assortment of different
)inds.
MISCELLANEOUS INCOME is that income reali&ed that is not directly related to the
sale of standard products and services.
MMU is Maintained Mar)8p.
MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) is a system
used in accountin' to define the rate and method under %hich a fixed asset %ill "e
depreciated for tax purposes.
MODIFIED ACCRUAL BASIS accountin' is a mixture of the cash and accrual "asis.
$he modified accrual "asis should "e used for 'overnmental funds. $o "e reco'ni&ed as a
revenue or expenditure, the actual receipt or dis"ursal of cash must occur soon enou'h
after a transaction or event has occurred to have an impact on current spenda"le
resources. (n other %ords, revenues must "e "oth measura"le and availa"le to pay for the
current period+s lia"ilities. 5evenues are considered availa"le %hen collecti"le either
durin' the current period or after the end of the current period "ut in time to pay year8end
lia"ilities. Expenditures are reco'ni&ed %hen a transaction or event is expected to dra%
upon current spenda"le resources rather than future resources.
MODIFIED INTERNAL RATE OF RETURN is the rate of return %hich e,uates the
initial investment %ith the terminal value, %here the terminal value is the future value of
the cash inflo%s compounded at the re,uired rate of return (the opportunity cost of
capital).
MONETARY is anythin' pertainin' to or havin' to do %ith money, money creation,
money supply, and the 'overnment mana'ement of money.
MONETARY ASSETS are measured at their collecti"le amounts, %hile nonmonetary
assets are measured at historical costs.
MONEY MEASUREMENT CONCEPT stipulates that all "usiness transactions must
"e expressed in money terms, i.e., if somethin' cannot "e measured in money* it %ill not
"e included in accountin' "oo)s.
MONEY MEASUREMENT PRINCIPLE see M23E0 MEA!5EME3$
#23#EP$.
MONETARY UNIT is the unit used to measure economic activity (e.'., .!. =).
MONITOR, 'enerally, is to )eep ta"s on* )eep an eye on* or, )eep under surveillance. (n
"usiness, it is a person or firm appointed to revie% and report on, %ithout controllin' or
approvin', the day8to8day transactions of a "usiness. Particulars of the en'a'ement are
usually set out in an exchan'e of letters, an a'reement or court order.
MORTGAGE is a conditional conveyance of property as security for the repayment of a
loan.
MORTGAGE BOND is a "ond in %hich the issuer has 'ranted the "ondholders a lien
a'ainst the pled'ed assets.
MOU is Memorandum of nderstandin'.
MR see Memorandum for 5ecord.
MRP see MA$E5(A6 5EU(!($(23 P6A33(3G.
MSCC is Material !upply #hain #ost.
MTM see MA5<8$28MA5<E$.
MUD is Multi nit 1iscount.
MULTINATIONAL is involvin' or operatin' in several nations or nationalities
(Example7 Multinational corporations).
MULTIPLE see P5(#EBEA53(3G! 5A$(2.
MULTIPLIER is a. the investment multiplier %hich ,uantifies the overall effects of
investment spendin' on total income* or, ". the deposit multiplier %hich sho%s the effects
of a chan'e in "an) deposits on the total amount of outstandin' credit and the money
supply.
MUTUAL AGENCY is the ri'ht of all partners in a partnership to act as a'ents for the
normal "usiness operations of the partnership, %ith the authority to "ind it to "usiness
a'reements.
NAGBOR is 3et Ad-usted Gross Box 2ffice 5eceipts.
NASD is 3ational Association of !ecurities 1ealers.
NASDAQ is a computeri&ed system esta"lished "y the 3A!1 to facilitate tradin' "y
providin' "ro)erBdealers %ith current "id and as) price ,uotes on over8the8counter stoc)s
and some listed stoc)s. nli)e the Amex and the 30!E, the 3A!1AU (once an acronym
for the 3ational Association of securities 1ealers Automated Uuotation system) does not
have a physical tradin' floor that "rin's to'ether "uyers and sellers. (nstead, all tradin'
on the 3A!1AU exchan'e is done over a net%or) of computers and telephones. Also,
the3A!1AU does not employ mar)et specialists to "uy unfilled orders li)e the 30!E
does. $he 3A!1AU "e'an %hen "ro)ers started informally tradin' via telephone* the
net%or) %as later formali&ed and lin)ed "y computer in the early 9>@:s. (n 9>>M the
parent company of the 3A!1AU purchased the Amex, althou'h the t%o continue to
operate separately. 2rders for stoc) are sent out electronically on the 3A!1AU, %here
mar)et ma)ers list their "uy and sell prices. 2nce a price is a'reed upon, the transaction
is executed electronically.
NATURAL BUSINESS YEAR is a fiscal year "ased on the cycle of the 'iven "usiness
rather than a calendar year. $he year ends %ith inventories and activities at a lo% level,
e.'., after %inter shipments for a s)i manufacturer.
NATURAL CLASSIFICATION of costs focuses on the nature of the cost item. (n this
classification structure, the total operatin' costs of an activity can "e classified into
manufacturin' costs and commercial costs. Manufacturin' costs include all direct
materials and direct la"or, as %ell as, factory overhead. !uch factory overhead costs
include indirect materials (such as factory supplies & lu"ricants), indirect la"or (such as
supervision and inspection) and other indirect costs (such as rent, insurance, and utilities).
#ommercial expenses include mar)etin' expenses (such as advertisin', printin', and
sales salaries) and administrative ('eneral and administrative (G&A)) expenses (such as
administrative office salaries, rent, and le'al expenses).
NCD is 3e'otia"le #ertificate of 1eposit.
NEARCASH ASSETS are non8cash assets that can "e readily exchan'ed for cash
%ithin a relatively short period (e.'., short8term #1+s and money mar)et funds).
NEBT is 3et Earnin' Before $axes.
NEGATIVE AMORTIZATION is a loan repayment schedule in %hich the outstandin'
principal "alance of the loan increases, rather than amorti&in', "ecause the scheduled
monthly payments do not cover the full amount re,uired to amorti&e the loan. $he unpaid
(nterest is added to the outstandin' principal, to "e repaid later.
NEGATIVE CONTRIBUTOR is any item, activity, or cost that offsets attainment of
positive results, e.'., a rise in unemployment and its effect upon the economy.
NEGATIVE GOODWILL arises %here the net assets at the date of ac,uisition, fairly
valued, exceed the cost of ac,uisition. (t is reflected on the "alance sheet net of other
intan'i"le assets. 3e'ative 'ood%ill is reco'ni&ed as income as follo%s7
$o the extent that ne'ative 'ood%ill relates to expected future losses and
expenses, it is reco'ni&ed in the income statement %hen the future losses and
expenses are reco'ni&ed.
$he amount of ne'ative 'ood%ill relatin' to identifia"le non8monetary assets (not
exceedin' the fair values of such ac,uired assets), is reco'ni&ed as income on a
systematic "asis over the remainin' useful lives of the identifia"le ac,uired
deprecia"leBamorti&a"le assets %ith a maximum of H: years.
$he amount of the ne'ative 'ood%ill in excess of the fair values of the ac,uired
identifia"le non8monetary assets is reco'ni&ed as income immediately.
$he amount of the ne'ative 'ood%ill relatin' to monetary assets is reco'ni&ed as
income immediately
32$E7 (ntan'i"le assets are not revalued.
NEGATIVE PLEDGE CLAUSE is a covenant or promise in an indenture a'reement
that states the corporation %ill not pled'e any of its assets if doin' so %ould result in less
security to the de"t holders covered under the indenture a'reement. Also called covenant
of e,ual covera'e.
NEGATIVE WORKING CAPITAL is %hen current lia"ilities exceed current assets.
NEGLIGENCE is the omission to do somethin' %hich a reasona"le man, 'uided "y
those ordinary considerations %hich ordinarily re'ulate human affairs, %ould do, or the
doin' of somethin' %hich a reasona"le and prudent man %ould not do.
NEGOTIABLE INSTRUMENT can "e a chec), promissory note, "ill of exchan'e,
security or any document representin' money paya"le %hich can "e transferred to
another "y handin' it over (delivery) andBor endorsin' it (si'nin' one+s name on the "ac)
either %ith no instructions or directin' it to another). A ne'otia"le instrument is a
contract and su"-ect to the rules 'overnin' contract la%. Co%ever, a ne'otia"le
instrument may "e distin'uished from an ordinary contract "y the fact that a ne'otia"le
instrument may "e %ritten in a %ay that ma)es it transfera"le. $his ,uality of ne'otiation
can 'enerally allo% the instrument to "e used as a su"stitute for money "y holders in due
course, despite the defensive claims "et%een the ori'inal parties %ho drafted the
ne'otia"le instrument. (n order to "e ne'otia"le, the "ill or note must "e paya"le to order,
or to "earer. !ome promissory notes contain a clause(s) ma)in' them non8ne'otia"le.
NET, in 'eneral, is the fi'ure remainin' after all relevant deductions have "een made
from the startin', or 'ross, amount.
NET ACCOUNTS RECEIVABLE is e,ual to total accounts receiva"le, minusan
estimate for amounts the company "elieves it %ill never collect.
NET ASSETS is the difference "et%een total assets and current lia"ilities includin'
noncapitali&ed lon'8term lia"ilities.
NET ASSETS BASIS is a simple division of net asset attri"uta"le to the class of
shareholders %ith the num"er of shares, i.e. the per share value of net assets.
NET ASSET VALUE (NAV) in securities, except money mar)et funds %hich al%ays
have a 3A/ of =9.::, represents the mar)et value or price of one fund share. (t is
calculated "y the total value of the fund+s portfolio less lia"ilities divided "y the num"er
of shares* or, in corporate valuations, it is a measure of the shareholdersD a''re'ate
%ealth in the company, %hich is defined as the actual or hypothetical mar)et value of the
companyDs assets less its lia"ilities.
NETBACK is lin)a'e of the price of crude oil to the mar)et price of products refined
from it.
NET BOOK VALUE is the current "oo) value of an asset or lia"ility* i.e., its ori'inal
"oo) value net of any accountin' ad-ustments such as depreciation.
NET CASH FLOW e,uals cash receipts minus cash payments over a 'iven period of
time* or e,uivalently, net profit plus amounts char'ed off for depreciation, depletion, and
amorti&ation. also called cash flo%. 3et cash flo% is a measure of a company+s financial
health.
NET CHANGE IN CASH is calculated "y addin' cash from operatin', investin', and
financin' activities and forei'n exchan'e effects from the !tatement of #ash .lo%s.
NET CONTRIBUTION is the amount remainin' after all relevant deductions have "een
made to the 'ross amount, e.'., Net Contribution to ar!in.
NET CURRENT ASSETS see K25<(3G #AP($A6.
NET DEBT is7 de"t Q short term loans less cash on hand.
NET EARNINGS see 3E$ P52.($.
NET INCOME is the difference "et%een a "usinesses total revenue and its total
expenses. $his caption and amount is usually found at the "ottom of a company+s Profit
and 6oss statement. !ame as 3et Profit.
NET INTEREST INCOME see 3E$ (3$E5E!$ MA5G(3.
NET INTEREST MARGIN is the interest income earned on assets less interest expense
paid on lia"ilities and capital. 3E$ (3$E5E!$ MA5G(3 is the 'ross mar'in for
financial institutions.
NET LEASES, typically, there are three net leases7 net lease, dou"le8net lease, and
triple8net lease. A net lease is a "ase rent plus an additional char'e for taxes. A dou"le8
net lease is a "ase rent plus an additional char'e for taxes and insurance. A triple8net
lease is "ase rent plus an additional char'e for taxes, insurance, and common area
expenses.
NET MARGIN see 3E$ P52.($ MA5G(3.
NET OF TAXES means the effect of applica"le taxes (usually income taxes) has "een
considered in determinin' the overall effect of an item on the financial statements. $he
phrase is used %hen a company has items that must "e disclosed in a separate section.
Each such item should "e reported net of the applica"le taxes.
NET OPERATING INCOME (NOI) is income after deductin' for operatin' expenses
"ut "efore deductin' for income taxes and interest.
NET OPERATING LOSS (NOL) is experienced "y a "usiness %hen "usiness
deductions exceed "usiness income for the fiscal year. .or income tax purposes, a net
operatin' loss can "e used to offset income in a prior year, or a taxpayer can elect to
fore'o the carry "ac) and carry the net operatin' loss for%ard.
NET PRESENT VALUE (NPV) is a method used in evaluatin' investments, %here"y
the net present value of all cash outflo%s (such as the cost of the investment) and cash
inflo%s (returns) is calculated usin' a 'iven discount rate, usually 5EU(5E1 5A$E 2.
5E$53. An investment is accepta"le if the 3P/ is positive. (n capital "ud'etin', the
discount rate used is called the C516E 5A$E and is usually e,ual to the
(3#5EME3$A6 #2!$ 2. #AP($A6.
NET PROFIT is the company+s total earnin's, reflectin' revenues ad-usted for costs of
doin' "usiness, depreciation, interest, taxes and other expenses. !ame as 3et (ncome.
NET PROFIT MARGIN (NPM A.,16 T+C) measures profita"ility as a percenta'e of
revenues after consideration of all revenue and expense, includin' interest expenses, non8
operatin' items, and income taxes. .or a "usiness to "e via"le in the lon' term profits
must "e 'enerated* ma)in' the net profit mar'in ratio one of the )ey performance
indicators for any "usiness. (t is important to analy&e the ratio over time. A variation in
the ratio from year8to8year may "e due to a"normal conditions or expenses %hich need to
"e addressed. A decline in the ratio over time may indicate a mar'in s,uee&e su''estin'
that productivity improvements may need to "e initiated. (n some cases, the costs of such
improvements may lead to a further drop in the ratio or even losses "efore increased
profita"ility is achieved.
NET PROFIT MARGIN (NPM P61T+C) incorporates all of the expenses associated
%ith ordinary "usiness (excludin' taxes) thus is a measure of the overall operatin'
efficiency of the firm prior to any tax considerations %hich may mas) performance. .or a
"usiness to "e via"le in the lon' term profits must "e 'enerated* ma)in' the net profit
mar'in ratio one of the )ey performance indicators for any "usiness. (t is important to
analy&e the ratio over time. A variation in the ratio from year8to8year may "e due to
a"normal conditions or expenses %hich need to "e addressed. A decline in the ratio over
time may indicate a mar'in s,uee&e su''estin' that productivity improvements may need
to "e initiated. (n some cases, the costs of such improvements may lead to a further drop
in the ratio or even losses "efore increased profita"ility is achieved.
NET PURCHASES are those items purchased less returns, discounts and allo%ances on
those purchases.
NET RECEIVABLES are a company+s accounts receiva"le (money o%ed to the
company) minus any provisions for "ad de"ts.
NET REVENUE is G52!! 5E/E3E less discounts, allo%ances, sales returns, frei'ht
out, etc.
NET SALES is 'ross sales less discounts, allo%ances, sales returns, frei'ht out, etc.
NET SALES TO GROSS SALES sho%s the percent of all transactions that may "e
considered as ?'ood? net transactions. 1ifferences may arise from returns, "ad product,
or other sales concessions.
NET $;# B;# 1,)5 usually refers to payment terms on an invoice, e.'. +3et 9: HO, A:+,
%ould mean that if a purchaser pays the invoice %ithin 9: days a HO reduction in invoice
amount may "e en-oyed, "ut full invoice amount is due %ithin A: days.
NETTONET LEASE is %here a tenant pays a "asic rental amount typically "ased on
the s,uare foota'e of the leased property plus all or a portion of the char'es associated
%ith the property includin' "ut not limited to property taxes, utilities, insurance,
assessments and property maintenance.
NET WORTH is the difference "et%een $otal 6ia"ilities and $otal Assets. Minority
interest is included here.
NEUTRALITY, in an economic model, is %here money is said to "e neutral in the
model if chan'es in the level of nominal money have no effect on the real e,uili"rium.
NEXUS, dependent upon usa'e, is a. the means of connection "et%een thin's lin)ed in
series* or, ". a connected series or 'roup* or, c. is the sufficient presence %ithin the
-urisdiction of a taxin' authority. $he taxa"le income of a multistate corporation may "e
apportioned to a specific state only if the corporation has a sufficient nexus in the state.
$he nexus for state sales tax re,uires a physical presence in the state, %hereas the nexus
for state income tax purposes re,uires more than -ust solicitations of sales.
NIAT is 3et (ncome After $axes.
NIM is 3et (nterest Mar'in.
NOMINAL means small payment, or value.
NOMINAL ACCOUNTS are those accounts that are closed out each period7 revenue
accounts, expense accounts, and dividend or %ithdra%als accounts.
NOMINAL DOLLARS are dollars that have not "een ad-usted for inflation.
NOMINAL CAPITAL is total face value of authori&ed issua"le capital.
NOMINAL INTEREST RATE is the stated, or named, interest rate in a note or
contract* the nominal interest rate may differ from the true or effective interest rate. !ee
E..E#$(/E (3$E5E!$ 5A$E.
NOMINAL LEDGER is the account "oo) sho%in' expenditure on nominal accounts
i.e. named "usiness accounts such as posta'e, printin', etc.
NOMINAL VALUE is the par, or face, value of somethin' e.'. a share issue.
NONCASH EXPENSE is that expense %hich is reco'ni&ed %ithin the financial
statements %ithout actual cash "ein' dis"ursed (e.'., depreciation, amorti&ation, and
%rite8offs).
NONCASH FINANCING & INVESTING is %here information a"out transactions
and other events that do not result in any cash flo%s durin' the financial year "ut affect
assets and lia"ilities that are reco'ni&ed must "e disclosed in the financial report %here
the transactions and other events7 a. involve parties external to the entity* and ". relate to
the financin' or investin' activities of the entity.
NONCURRENT ASSETS includes PPE (property, plant and e,uipment) as opposed to
current assets %hich includes cash, cash e,uivalents (e.'. securities, short8term notes,
etc.), inventory and accounts receiva"le.
NONDISCRETIONARY means it is mandatory, not up to the individual or company.
NONDISCRETIONARY ACCRUAL is a mandatory expenseBasset that is recorded
%ithin the accountin' system that has yet to "e reali&ed. An example of this %ould "e
payroll taxes.
NONEQUITY SHARE is a share in an entity that a. evidences inde"tedness of the
entity to the holder of the share, and ". does not represent an e,uity interest in the entity.
NONEXPENDABLE PROPERTY is dura"le (e.'., e,uipment and furniture), lastin'
for a year or lon'er, and 'enerally has a hi'h dollar value. 3on8expenda"le property must
"e accounted for throu'hout its useful life.
NONEXPENSE CASH DISBURSEMENT is spendin' not sho%n on the income
statement, i.e., the expenditure of cash on somethin' that does not appear on the profit8
and8loss statement, for example, spendin' on a fixed asset or dischar'in' part or the
entire principal in a de"t.
NONFIXED ASSET is normally e,uipment and furnishin's %ith an ori'inal purchase
value less than some pre8determined value (e.'., \=9,::: in ac,uisition cost assets are
considered to "e non8fixed assets). $hese items are not assi'ned asset inventory ta's.
$ypical examples of non8fixed asset items are calculators, type%riters, chairs, des)s,
filin' ca"inets, shelvin' units and small tools.
NONFIXED INCOME refers to any income that is not fixed, e.'. %a'es, profits
reali&ed on the sale of assets andBor securities. !ee .(4E1 (3#2ME.
NONINTEREST BEARING BOND is a "ond issued at a discount from its par value
and not payin' any interest to the holder. $he interest earned is determined "y the
difference "et%een the redemption price and the purchased price. .!. $reasury "ills are
an example of non8interest "earin' "onds.
NONINTEREST INCOME, in securities, is comprised of service fees and tradin' and
other income, excludin' 'ainsBlosses on securities transactions.
NONMONETARY ASSET see M23E$A50 A!!E$.
NONPERFORMING ASSET is an asset not effectual in the production of income. .or
example, in "an)in', commercial loans >: days past due and consumer loans 9M: days
past due are classified as non8performin'.
NONPROFESSIONAL SUBSCRIBER means any natural person %ho is neither7 (a)
re'istered or ,ualified in any capacity %ith the !E#, the #ommodities .utures $radin'
#ommission, any state securities a'ency, any securities exchan'e or association, or any
commodities or futures contract mar)et or association* (") en'a'ed as an ?investment
advisor? as that term is defined in !ection H:9 (99) of the (nvestment Advisors Act of
9>;: (%hether or not re'istered or ,ualified under that Act)* nor, (c) employed "y a "an)
or other or'ani&ation exempt from re'istration under federal or state securities la%s to
perform functions that %ould re,uire re'istration or ,ualification if such functions %ere
performed for an or'ani&ation not so exempt. !ee P52.E!!(23A6 !B!#5(BE5.
NONPROFIT ORGANIZATION is one that has committed le'ally not to distri"ute
any net earnin's (profits) to individuals %ith control over it such as mem"ers, officers,
directors, or trustees. (t may pay them for services rendered and 'oods provided. Also
)no%n as 32$8.258P52.($ 25GA3(LA$(23.
NONRECURRING is an income statement item that is infre,uent in occurrence or
unusual in nature.
NONTRADE DEBT is that de"t %here invoices are issued to individuals not suppliers
(trade).
NOPAR VALUE CAPITAL STOCK are shares desi'nated in the charter that do not
have a par or assi'ned value printed on the issued stoc) certificate.
NOPAT (NET OPERATING PROFIT AFTER TAX) is a company+s potential cash
earnin's if its capitali&ation %as unlevera'ed. 32PA$ is commonly used in E/A
calculations.
NOPLAT is 3et 2peratin' Profit 6ess Ad-usted $axes.
NORMALIZED EARNINGS is earnin's that have "een ad-usted in order to ta)e into
account the effect of cycles in the economy.
NORMAL LOSS ta)es into account the nature of many process operations is such that
the output volume is fre,uently less than the input volume. Because process operations
are repetitive, the level of PlossesD of materialsBproduct that could reasona"ly "e expected
under efficient operatin' conditions may "e esta"lished. $his is referred to as a PnormalD
loss* one that is an inevita"le conse,uence of the process operation under efficient
operation conditions and is thus considered unavoida"le. 6osses 'reater (AB325MA6
62!!) or less (AB325MA6 GA(3) than normal are referred to as Pa"normalD and result
from reduced or 'reater efficiency.
NORMAL PROFIT is the opportunity cost of usin' entrepreneurial a"ilities in the
production of a 'ood, or the profit that could have "een received "y entrepreneurship in
another "usiness venture. 6i)e the opportunity costs of other resources, normal profit is
deducted from revenue to determine economic profit. (t is, ho%ever, never included as an
accountin' cost %hen accountin' profit is computed.
NORMAL RATE OF RETURN, for individuals, is the avera'e rate of return on all
investments, i.e. the avera'e of all returns yields the normal rate of return. .or capital
investments for "usinesses, it is the profit relative to capital investment.
NORMAL SPOILAGE consists of defective units that arise as part of re'ular
operations. (f normal spoila'e arises from the re,uirements of a specific -o", the cost of
the spoiled units is char'ed to the -o".
NORMATIVE ACCOUNTING THEORY is %here theorists tend to advocate their
opinions on accountin' "ased upon su"-ective opinion, deductive lo'ic, and inductive
methods. (n the final analysis, nearly all standards are "ased upon normative theory.
Generally conclude that some accountin' rule is "etter or %orse than its alternatives.
3ormative theorists tend to rely heavily upon anecdotal evidence (e.'., examples of
fraud) that 'enerally fails to meet tests of academic ri'or. .or example, the Ki&ard
reported that Mont'omery Kard %ould fail. Co%ever, the Ki&ard al%ays reports that
every company %ill fail or lose its self identity in a pattern of ac,uisitions and mer'ers.
Eventually, he %ill al%ays "e correct.
NOSTRO ACCOUNT is an account held "y a "an) in a forei'n country in the currency
of that country e.'., a German "an) %ith an account in 3e% 0or) %ill call the record in
its o%n "oo)s of its 3e% 0or) account a nostro account.
NOTARIAL is relatin' to or done "y a notary pu"lic.
NOTARY PUBLIC is a certifier of le'al documents, i.e., some"ody %ho is le'ally
authori&ed to certify the authenticity of si'natures and documents. Also called notary.
NOTE see P52M(!!250 32$E.
NOTES PAYABLE are all note o"li'ations, includin' "an) and commercial paper. 1oes
not include trade notes paya"le.
NOTES RECEIVABLE is a de"t due from "orro%ers evidenced "y a %ritten promise of
payment. 3ote receiva"le, an entry on the asset side of many corporate "alance sheets,
indicates the dollar amount of loans due to "e repaid "y "orro%ers.
NOTES TO THE FINANCIAL STATEMENTS is a detailed set of notes immediately
follo%in' the financial statements contained in the annual report that expands upon
andBor explains in some depth the information contained in the financial statements.
NOTFORPROFIT ORGANIZATION see 323P52.($ 25GA3(LA$(23.
NPPE is 3et Property, Plant and E,uipment.
NPV is an acronym for 3et Present /alue.
NRGT (N(-R1'1,,+231 G6+-7 T(,+3) is a concept used in retail point of sale (P2!)
terminals that does not allo% the Grand $otal to "e reset, "ut does allo% ad-ustments to
"e entered, e.'., errors, over%rin', etc. (mproved security and control is provided for
independent retail and chain operations %ith a 3on85esetta"le Grand $otal (35G$).
pdated "y all sales, this valua"le audit fi'ure may "e selected "y pro'ramma"ility to
print on the 1aily Business 5eport.
NSF is 3ot !ufficient .unds (return chec) reason code).
NTA can mean either 3et $an'i"le Assets or 3et $otal Assets.
NWC is 3et Kor)in' #apital.
OAC is 2n Approved #redit.
O&M is an acronym for either 2perations & Maintenance or 2perations & Mana'ement.
OASDI is 2ld8A'e, !urvivors, and 1isa"ility (nsurance (! !ocial !ecurity).
OB!ECT CODE desi'nates the type of expense or revenue to "e char'ed to an account.
OB!ECT COST is the total cost of producin' an item7 direct cost (la"or & material) Q
overhead cost E $otal 2"-ect #ost.
OB!ECTIVE is a statement that is %ritten in terms of specific measura"le time8"ased
and verifia"le outcomes that challen'e the or'ani&ation to "e more responsive to the
environment to achieve the desired 'oals. 1ependent upon usa'e, G2A6! are 'eneral in
nature, %hile 2BGE#$(/E! are specific, measura"le and time8"ased. (n some
or'ani&ations, the meanin's for G2A6 and 2BGE#$(/E are reversed.
OB!ECTIVITY PRINCIPLE states that accountin' %ill "e recorded on the "asis of
o"-ective evidence. 2"-ective evidence means that different people loo)in' at the
evidence %ill arrive at the same values for the transaction. !imply put, this means that
accountin' entries %ill "e "ased on fact and not on personal opinion or feelin's.
OBLIGATION, in "usiness, is a le'al duty to pay or do somethin'.
OBLIGATION BOND is a "ond si'ned "y a mort'a'or ("orro%er) for an amount
'reater than the loan amount. !uch a "ond creates a personal o"li'ation on the part of the
"orro%er and assures the lender of recourse in case of nonpayment of property taxes and
insurance or past due interest on the mort'a'e.
OCOGS is 2peratin' #ost of Goods !old.
OCCUPANCY COST is any cost or char'e incurred "y a tenant pursuant to its lease,
such as rent, operatin' expense increases, par)in' char'es, movin' expenses, remodelin'
costs, etc.
OCF is 2peratin' #ash .lo%.
OCOR see 2PP25$3($0 #2!$ 2. 5E/E3E.
OCSE is 2ffice of #hild !upport Enforcement.
OEI is 2utside E,uity (nterest.
OEM is an acronym for 2ri'inal E,uipment Manufacturer.
OFA is 2racle .lexi"le Architecture or 2racle .inancial Accountin'.
OFFBALANCE SHEET ASSET is an item representin' a resource of the entity or
somethin' that is pro-ected to have future economic value. (t is a positive indicator of the
entities financial position even thou'h it is not contained %ithin the "alance sheet.
OFFBALANCE SHEET FINANCING is a method of o"tainin' funds throu'h a lon'8
term non8cancela"le lease that is accounted for as an operatin' lease. $he lease does not
meet the criteria of a +capital lease+. $his "ein' the case, the present value of the lease
o"li'ation in not included in the lessee+s "alance sheet.
OFFBALANCE SHEET LIABIILITY is an item not reported %ithin the "ody of a
financial statement as a lia"ility that may re,uire future payment or services, e.'.,
liti'ation, rene'otiated claims %ithin a 'overnment contract, and 'uarantees of future
performance.
OFFBOOK PARTNERSHIP is a type of "lind trust. (t offers some advanta'es over the
traditional methods of capital procurement. (n some cases there is a fatal lac) of
transparency (e.'. Enron) that allo%s off8"oo) partners to hide de"ts, pump profits,
launder money and enrich insiders, "ut ultimately "an)ruptin' the company and strippin'
assets from its employeesD pension funds. !ee B6(31 $5!$.
OFFER PRICE see A!< P5(#E.
OFFICIAL INTEREST RATE, normally, is the rate of interest char'ed "y the
'overnment or traders %ithin the money mar)et, e.'., federal funds rate and "an)
repurchase a'reement (repo rate).
OFFPEAK is not in the period of most fre,uent or heaviest use7 lo%er rates for
telephone calls made durin' off8pea) hours* travelers %ho ta)e advanta'e of off8pea)
fares. !ee PEA<.
OFFSET is7 a. (n "an)in', the deduction "y a de"tor from a claim or demand of a de"t or
o"li'ation. !uch an offset is "ased upon a counterclaim a'ainst the party ma)in' the
ori'inal claim. Example7 !eller ma)es a claim or files a la%suit as)in' for =H:,::: from
1e"tor as the final payment in purchase of a restaurant* as part of his defense 1e"tor
claims an offset of =9:,::: for alle'ed funds o%ed "y !eller for repairs 1e"tor made on
property o%ned "y !eller, thus reducin' the claim of !eller to =9:,:::* ". in accountin',
the amount e,ualin' or counter"alancin' another amount on the opposite side of the same
led'er or the led'er of another account* c. in securities, the elimination of a lon' or short
position "y ma)in' an opposite transaction. !ee also 2..!E$ A##23$.
OFFSET ACCOUNT is an account that is setup for elimination of a lon' or short
position "y ma)in' an opposite transaction.
OFFSETTING ENTRY see 2..!E$.
OFFSOURCE, slan', is to outsource to an offshore location to primarily save on the cost
of la"or. !ee 2$!25#E.
OMAD is 2utput Messa'e Accounta"ility 1ata. (n !AP transactions, it is the 3um"er
5an'es for Batch 3um"ers.
OMITTED is to leave undone or leave out, i.e. to prevent from "ein' included or
considered or accepted.
ON ACCOUNT is a partial payment made to%ards satisfaction of a de"t.
ONEOFF is a happenin' that occurs only once and is not repeated, e.'. a one8off sale is
a sales event that %ill occur only once.
ONEROUS CONTRACT is one in %hich the unavoida"le costs of meetin' the
o"li'ations under the contract exceed the economic "enefits to "e received under the
contract.
ONESHOTS is slan' for 'overnmental expenditures done on a one time appropriation.
ONEWRITE SYSTEM (also )no%n as PEGB2A51 !0!$EM) is a useful system for
small and home8"ased "usinesses. (t captures information at the time the transaction ta)es
place. $hese 2ne8Krite !ystems are efficient "ecause they eliminate the need for
recopyin' the data and are compati"le %ith electronic data processin' if you should
decide to computeri&e. Many small "usinesses rely totally on the 2ne8Krite !ystem for
simplicity and versatility. Kith only t%o pieces of paper, a chec) and a led'er, you 'et all
the "enefits of sound "oo))eepin'7 accuracy, money distri"ution, chec) control, audit
trail, runnin' "an) "alance, and instant revie%.
OPEN ACCOUNT is a non8'uaranteed payment arran'ement, e.'. similar to department
store credit. Goods are purchased and delivered %ithout payment. .uture payment for
delivered 'oods is dependent on the 'ood faith of the purchaser.
OPEN ALLOTMENT is %here there is no restriction as to an amount that may "e ta)en
from that %hich is "ein' allotted.
OPENBOOK CREDIT is a form of trade credit in %hich sellers ship merchandise on
faith that payment %ill "e forthcomin'.
OPEN INFLATION means that prices are risin' on consumer 'oods and services.
OPENING BALANCE is the "alance of an account at the start of an accountin' period.
OPEN MARKET VALUE (OMV) is an opinion of the "est price at %hich the sale of an
interest in an asset %ould have "een completed unconditionally for cash consideration on
the date of valuation, assumin'7
(a) a %illin' seller*
(") that, prior to the date of valuation, there had "een a reasona"le period (havin' re'ard
to the nature of the asset and state of the mar)et) for the proper mar)etin' of the interest,
for the a'reement of price and terms and for the completion of the sale*
(c) that the state of the mar)et, level of values and other circumstances %ere, on any
earlier assumed date of exchan'e of contracts, the same as on the date of valuation*
(d) that no account is ta)en of any additional "id "y a purchaser %ith a special interest*
and
(e) that "oth parties to the transaction had acted )no%led'ea"ly, prudently and %ithout
compulsion.
OPEN TO BUY is the dollar amount "ud'eted "y a "usiness for inventory purchases for
a specific time period.
OPERATING ALLOWANCE is an advanceBreim"ursement a'ainst certain
costsBexpenses andBor a reduction in amount paya"le to cover those certain
costsBexpenses.
OPERATING BUDGET focuses on the "ud'eted income statement and its supportin'
components and schedules7
9. !A6E! A31 #266E#$(23! B1GE$ represents one of the first steps in the
"ud'etin' process, as items such as inventory levels and operatin' expenses are driven
off of the !ales and #ollections Bud'et. Effective sales "ud'etin' is a )ey factor in
"uildin' a useful and representative financial model for a "usiness. 5e'ardless of the
nature of your "usiness (for example, %hether it is product or service8"ased).
H. #2!$ 2. G221! !261 B1GE$ decomposes, or "rea)s do%n, the components of
a "usinessDs cost of 'oods sold (in some cases referred to as the cost of revenues). $his
"ud'et "rea)s out each separate factor underlyin' the cost of 'oods sold for a "usiness.
A. (3/E3$250 A31 P5#CA!E! B1GE$ represents %hat a "usiness plans to "uy
and ho% much inventory it intends to hold over a 'iven timeframe, is "ased on three
factors7 a "usinessDs desired endin' inventory, cost of 'oods sold, and "e'innin'
inventory. A "usinessDs desired endin' inventory %ill drive that "usinessD "ud'eted
purchases over a 'iven period of time. A lar'er desired endin' inventory %ill typically
lead to a lar'er Purchases Bud'et and vice8versa. Khile the Purchases Bud'et, a
component of the (nventory and Purchases Bud'et, represents an estimate of future
purchases, this is an accrual8"ased accountin' fi'ure, and it is the 1is"ursements for
Purchases Bud'et (another component of the (nventory and Purchases Bud'et) that drives
a companyDs cash flo%s.
;. 2PE5A$(3G E4PE3!E! B1GE$ forecasts all of the elements of a "usinessD
operatin' expenses, such as salaries, rent, depreciation, and others. !ome of these
expenses are fixed and some are varia"le (in other %ords, "ased on another metric, such
as revenues). Khile the 2peratin' Expenses Bud'et represents an estimate of future
expenses, this is an accrual8"ased accountin' fi'ure, and it is the 1is"ursements for
2peratin' Expenses Bud'et, a component of the 2peratin' Expenses Bud'et, that drives
a companyDs cash flo%s.
OPERATING EXPENDITURES is the amount used durin' a particular period directly
in support of day8to8day operations such as %a'es, maintenance, office supplies, etc.
OPERATING EXPENSES is all sellin' and 'eneral & administrative expenses.
(ncludes depreciation, "ut not interest expense.
OPERATING EXPENSES BUDGET forecasts all of the elements of a "usinessD
operatin' expenses, such as salaries, rent, depreciation, and others. !ome of these
expenses are fixed and some are varia"le (in other %ords, "ased on another metric, such
as revenues). Khile the 2peratin' Expenses Bud'et represents an estimate of future
expenses, this is an accrual8"ased accountin' fi'ure, and it is the 1is"ursements for
2peratin' Expenses Bud'et, a component of the 2peratin' Expenses Bud'et, that drives
a companyDs cash flo%s.
OPERATING EXPENSE TO SALES reports the operatin' expenses as a percent of
3et 5evenues. $his then is a measure of the total overhead employed in the firm per 3et
!ales 5evenue 1ollar* there"y 'ivin' an indication of the efficiency of the cost structure
of the company. (t 'ives an indication of the a"ility of a "usiness to convert income into
profit. Generally, "usinesses %ith lo% ratios %ill 'enerate more profit than others. (n
'eneral "usiness operations %ith lar'er and more sta"le cash flo%s can sustain hi'her
ratios than smaller and less sta"le operations. !cale and income sta"ility are important
considerations thou'h it is up to the mana'ement of a "usiness to monitor costs in an
appropriate manner %hatever its si&e.
OPERATING EXPOSURE, in forei'n exchan'e, is currency fluctuations com"ined
%ith price level chan'es that can alter the amounts and ris)iness of a firmDs future
revenues and costs. (t is typified "y evaluatin' real exchan'e 'ains or losses. (t is
prospective and lon'8term in nature.
OPERATING INCOME is revenue less cost of 'oods sold and related operatin'
expenses that are applied to the day8to8day operatin' activities of the company. (t
excludes financial related items (i.e., interest income, dividend income, and interest
expense), extraordinary items, and taxes.
OPERATING INTEREST is the le'al ri'ht to assets used to produce revenue, e.'.,
produce oil or 'as from a %ell, accompanied "y the responsi"ilities to pay production
costs and assume the ris)s.
OPERATING LEASE is a short8term, cancela"le lease.
OPERATING LEVERAGE is fixed operatin' costs divided "y total (fixed plus
varia"le) operatin' costs.
OPERATING MARGIN is the ratio of operatin' income to sales revenue.
OPERATING PROFIT is Gross Profit minus 2peratin' Expenses.
OPERATING PROFIT TO SALES is a useful ratio %hen evaluatin' value of a firm. (t
discounts the effect of varyin' tax rates and "enefits to 'ive a more accurate indication of
the return associated %ith the firm.
OPERATING RATIO measures a firm+s operatin' efficiency* calculated7 company
operatin' expenses divided
"y its operatin' revenues.
OPERATING REVENUE is that revenue reali&ed from the day8to8day operations of the
entity, e.'., sales revenue.
OPERATING RISK is the inherent or fundamental ris) of a firm* %ithout re'ard to
financial ris). (t is the ris) that is created "y operatin' levera'e. !ometimes called
"usiness ris).
OPERATING TRANSFER specifically identifies the transfer of resources from one
fundBaccount to another made to support the normal level of operations of the receivin'
fundBaccount.
OPERATION AGREEMENT, %ithin an 66#, is similar to the constitution of a
corporation. (t is drafted primarily "ecause an 66# only has a "asic Articles of
2r'ani&ation that is very 'eneral in nature. An 2peration A'reement has much more
specificity as to the formation and operation of the 66# or'ani&ation.
OPERATIONAL GEARING is the hi'her the proportion of fixed costs relative to
varia"le operatin' costs, the hi'her the operational 'earin'. $his results in 'reater
"usiness ris). A retailer has hi'h fixed costs relative to varia"le costs, so has a lot of
"usiness ris). !ee GEA5(3G and .(3A3#(A6 GEA5(3G.
OPPORTUNISM is a condition of self8interest see)in' %ith 'uile %here"y one party
has information that the other party does not.
OPPORTUNISTIC BEHAVIOUR occurs %here one party ta)es advanta'e of his
superior )no%led'e, in order to further hisBher interests, "y failin' to disclose such
information to the other party. $his %ould occur, for example, if a supplier of %id'ets
had information a"out a product %hich %as deli"erately %ithheld from the potential
"uyer, in the )no%led'e that such information %ould ne'atively affect the price of the
product or the %illin'ness of the "uyer to purchase it.
OPPORTUNITY COST is %idely used in "usiness plannin' in evaluatin' capital
investment. A company measures the pro-ected return a'ainst the anticipated return it
%ould receive on a hi'hest yieldin' alternative investment that contains a similar ris)
profile.
OPPORTUNITY COST OF REVENUE (OCOR) is %here revenueBmoney held no%
may "e invested to produce more money 8 thus %e consider opportunity cost a return or
more revenue.
OPPORTUNITY LOSS see 2PP25$3($0 #2!$.
OPTIMAL PRICE is the profit maximi&in' price. (t can "e determined throu'h various
methods, "ut 'enerally it is the demand price for the full capacity output of any 'iven
product.
OPTIMISM is a 'eneral disposition to expect the "est in all thin's.
OPTION is the formal reservation of the ri'ht to "uy or sell property B assets at a certain
price and B or %ithin a 'iven time in the future.
OPTIONALITY TEST is part of the 3A(# security insurer provisional exemption
rules7 A. 2ptionality $est7 for corporate and municipal issues, principal and interest must
"e paid in ! dollars, contract terms state that principal is repaya"le in full and the
principal repayment schedule is fixed. .urther the principal is set at closin', fixed in !
dollars and coupon payments cannot "e less than &ero in any period. B. 2ptionality $est7
for Asset8Bac)edB5esidential Mort'a'e8Bac)ed securities, the principal and interest must
"e paid in ! dollars, and the coupon payment cannot "e less than &ero in any payment
period. (n addition, %ith the exception for credit enhancements, the timin' and amount of
cash flo%s to pay the o"li'ation must depend on the timin' and amount of cash flo% from
the assets underlyin' the "ond. (f the "ond is prepaid immediately, the insurer must
receive at least >MO of the purchase price.
ORDER ENTRY# normally, is a computeri&ed relational data"ase that, at a minimum,
'enerates, schedules and maintains estimates, sales orders and "ac)lo's. (nvoices may
also "e created automatically if lin)ed to Accounts 5eceiva"le. More advanced order
entry systems are usually fully inte'rated %ith the accountin' system.
ORDER INTAKE is all orders %hich %ere le'ally concluded durin' the respective
accountin' period under revie% and have also come into effect.
ORDER OF LIQUIDITY is %hen items on a "alance sheet are listed in order of
li,uidity. After cash, the other current assets are listed in order of li,uidity or nearness to
cash (i.e. Accounts 5eceiva"le first, then (nventory])
ORDER OF PERMANENCE is %here fixed assets are entered in the "alance sheet in
descendin' order of permanence (i.e. land first, then "uildin's, then e,uipment ...).
ORDINARY ASSET is a non8capital asset used for "usiness purposes. !ee #AP($A6
A!!E$.
ORDINARY COURSE OF BUSINESS is the actions or results that %ould lo'ically "e
expected in the re'ular or planned operatin' activities of a "usiness as opposed to extra8
ordinary transactions or activities, e.'. trade lia"ilities, capital asset procurement or
revenue and its sources.
ORDINARY INCOME is the income derived from the re'ular operatin' activities of a
"usiness or individual, "ut exclusive of capital 'ains. 3et income from a "usiness, alon'
%ith personal %a'es, interest, and dividends are examples of ordinary income.
ORGANIZATIONAL COSTS see 25GA3(LA$(23 #2!$.
ORGANIZATION COST is amounts spent to "e'in a "usiness entity, e.'., "usiness
filin' fees, franchise ac,uisition, and le'al fees. (n the nited !tates, costs associated
%ith a corporation issuin' or sellin' shares or other securities are capitali&ed and not tax
deducti"le. 2ther or'ani&ation expenses may "e capitali&ed and amorti&ed over a period
of sixty (F:) months or more* there"y providin' possi"le tax relief throu'h or'ani&ation
cost deductions. !ee also !$A5$P #2!$!.
ORIGINAL EQUIPMENT MANUFACTURER is a company that "uilds components
or systems that are used in systems or products sold "y another company usin' the
purchasin' company+s "rand. !ometimes referred to as ?private la"el.?
ORIGINAL ISSUE DISCOUNT is %hen a lon'8term de"t instrument is issued at a
price that is lo%er than its stated redemption value* the difference is called 2ri'inal (ssue
1iscount (2(1).
OSHA (OCCUPATIONAL SAFETY AND HEALTH ACT) is a federal la% in the
nited !tates that re,uires employers to provide employees %ith a %or)place that is
relatively free of ha&ardous conditions.
OTC see 2/E5 $CE #23$E5.
OTHER INCOME is income from activities that are not underta)en in the ordinary
course of an entity+s "usiness.
OUTOFP;CKET are expenses re,uirin' an outlay of cash in a 'iven time period, e.'.,
payroll, advertisin' and other operatin' expenses, "ut not depreciation.
OUTOFTHEMONEY OPTION is an option that has no intrinsic value* for example,
an option %hose stri)e price, in the case of a put, is lo%er than the stoc)s current price, or
in the case of a call, is hi'her. An investor %ho "uys an out8of8the8money option is
speculatin' that the option %ill rise in value and "ecome in8the8money. !ee (38$CE8
M23E0 2P$(23.
OUTSOURCE is to o"tain 'oods or services from an outside supplier* i.e., to contract
%or) outside of your "ud'et and control. (An example %ould "e companies outsourcin' a
percenta'e of their direct la"or in order to maintain a flexi"le %or)force.).
OUTSTANDING is the amount o%ed as a de"t, example7 outstandin' "ills.
OUTSTANDING SHARES is the num"er of shares that are currently o%ned "y all
investors. (t also includes restricted shares (shares o%ned "y officers and insiders of the
company) as %ell as shares held "y the pu"lic. !hares that the company has repurchased
or retired are not considered outstandin' stoc).
OUTTURN is %hat is produced in a 'iven time period.
OVERAGE is that amount, as in money or 'oods, that is actually on hand and exceeds
the desired or listed amount in records or "oo)s. Also )no%n as !5P6!.
OVERAPPLIED FACTORY OVERHEAD is the amount of factory overhead applied
in excess of the actual factory overhead incurred for a production period.
OVERBILLING is invoicin' in excess of a'reed upon pricin' or exa''eratin' the
amount of services or 'oods provided (sometimes ille'ally).
OVERDRAFT is, a. a draft in excess of the credit "alance %ithin an account* or ". a
facility (usually at a "an) or other financial institution) ena"lin' an account holder to
"orro% up to an a'reed amount and often for an a'reed time.
OVERHAUL is to re"uild, ma)e repairs or ad-ustments to.
OVERHEAD is the costs associated %ith providin' and maintainin' a manufacturin' or
%or)in' environment. .or example7 rentin' the "uildin', heatin' and li'htin' the %or)
area, supervision costs and maintenance of the facilities. (ncludes indirect la"or and
indirect material.
OVERHEAD ABSORPTION is the term used for descri"in' the transfer of value from
a fixed asset such as a "uildin' or machine to the final product. (n this %ay the indirect
costs of the entity can "e assi'ned to the products or services supplied.
OVERHEAD BUDGET sho%s the expected cost of all production costs other than
direct materials and direct la"or. Bud'eted varia"le overhead costs are "ased on a
"ud'eted varia"le overhead rate multiplied "y "ud'eted activity. Bud'eted fixed
overhead costs remain unchan'ed as the activity level chan'es %ithin the relevant ran'e.
!ee 2PE5A$(3G B1GE$.
OVERHEAD RATE is calculated "y totalin' all your expenses for one year, excludin'
la"or and materials, and then divide this num"er "y your total cost of la"or and materials.
OVERLEVERAGED is a "alance sheet condition %here the entity is incapa"le of
servicin' its de"t load (interest payments) %ith availa"le capital sources. !imply put, the
entity is carryin' too much de"t.
OVER THE COUNTER (OTC) is a .!. mar)et for securities that are not listed on an
exchan'e. !ecurity orders are transacted via telephone and a computer net%or) that
connect dealers. As opposed to the 30!E, %hich is an auction mar)et, the 2$# is a
ne'otiated mar)et. 2$# dealers may either act either as principals or as a'ents for
customers. $he 2$# mar)et is re'ulated "y the 3A!1.
OVERTRADING# in securities, is7 a. excessive "uyin' and sellin' "y a "ro)er in a
discretionary account, or, ". practice of a mem"er of an under%ritin' 'roup inducin' a
"ro)era'e client to "uy a portion of a ne% issue "y purchasin' other securities from the
client at a premium. (n finance, it is %hen a firm expands sales "eyond a level that can "e
financed %ith normal %or)in' capital.
OVERSTATED is %hen somethin' is represented as 'reater than is true or reasona"le.
OWNERS DRAW see P52P5(E$25! 15AK.
OWNERS EQUITY see !CA5EC261E5+! EU($0.
OWNER'S EQUITY RATIO see 5E$53 23 !$2#<C261E5! EU($0.
OWN WORK CAPITALIZED represents the value of %or) performed for o%n
purposes and capitali&ed as part of fixed assets.
PACKING CREDIT is any loan or advance 'ranted or any other credit provided "y a
"an) to an exporter for financin' the purchase, processin', manufacturin' or pac)in' of
'oods prior to shipment, on the "asis of letter of credit opened in his favor or in favor of
some other person, "y an overseas "uyer or a confirmed and irrevoca"le order for the
export of 'oods from the producin' country or any other evidence of an order for export
from that country havin' "een placed on the exporter or some other person, unless
lod'ment of export orders or letter of credit %ith the "an) has "een %aived.
PACKING LIST is a statement of the contents of a container, usually put into the
container so that the ,uantity of merchandise may "e counted "y the person %ho opens
the container. Also )no%n as a pac)in' slip.
PACKING SLIP see PA#<(3G 6(!$.
PAIDINCAPITAL is capital received from investors for stoc), e,ual to capital stoc)
plus paid8in capital, 32$ that capital received from earnin's or donations. Also called
contri"uted capital.
PAID IN SURPLUS see PA(1 (3 #AP($A6.
PAIDUP CAPITAL is the total amount paid "y shareholders for their shares of capital
stoc).
P&A, dependent upon usa'e, can "e7 Parts & Accessories, Pay & Allo%ances, Personnel
& Administration, or Price & Availa"ility.
PAPER is7 a. amount received, "y a seller of real estate, in the form of a mort'a'e or
note rather than cash* ". a short8term de"t security* c. customer "uy and sell orders
comin' to a tradin' pit* d. money mar)et instruments, commercial paper.
PAPER GAIN (LOSS) is an unreali&ed capital 'ain (loss) in an investment or portfolio.
PARENT COMPANY is a company of %hich others are su"sidiaries.
PARENT ENTITY see PA5E3$ #2MPA30.
P&L see P52.($ A31 62!! !$A$EME3$.
PARETO PRINCIPLE/LAW see M:8H: 56E.
PARI PASSU is to do or apply somethin' at an e,ual pace or rate. (n finance, it is used
in reference to t%o class of securities or o"li'ations that have e,ual entitlement to
payment.
PARTNERSHIP is an unincorporated "usiness that has more than one o%ner. (t is
different from a sole proprietorship in that a sole proprietorship can have only one o%ner.
PAR VALUE is a. the maturity value or face value, i.e., the amount that an issuer a'rees
to pay at the maturity date* ". the official exchan'e rate "et%een t%o countries+
currencies* or, c. the value of a security that is set "y the company issuin' it* unrelated to
mar)et value.
PAS could mean7 Personal Accountin' !ystem, Personnel Accountin' !ystem, or
Personnel Accountin' !ym"ol.
PASSIVE ACTIVITY is defined in the ! $ax #ode as one or more trades, "usiness or
rental activity, that the taxpayer does not materially participate in mana'in' or runnin'.
All income and losses from passive activities are 'rouped to'ether on an income tax
return and, 'enerally, loss deductions are limited or suspended until the passive activity
that 'enerated them is disposed of in its entirety.
PATENT is a le'al form of protection that provides a person or le'al entity %ith
exclusive ri'hts to exclude others from ma)in', usin', or sellin' a concept or invention
for the duration of the patent. $here are three types of patents availa"le7 desi'n, plant, and
utility.
PAYABLE is an amount a%aitin' payment to "e made, e.'. interest paya"le or taxes
paya"le.
PAYABLES TURNOVER is calculated7 Paya"les $urnover E Purchases B Paya"les.
PAYABLE TO SHAREHOLDERS normally refers to distri"ution of dividends to
shareholders and B or repayment of notes held "y shareholders.
PAYBACK PERIOD, in capital "ud'etin', is the len'th of time needed to recoup the
cost of #AP($A6 (3/E!$ME3$. $he pay"ac) period is the ratio of the initial
investment (cash outlay, re'ardless of the source of the cash) to the annual cash inflo%s
for the recovery period. $he ma-or shortcomin' for the pay"ac) period method is that it
does not ta)e into account cash flo%s after the pay"ac) period and is therefore not a
measure of the profita"ility of an investment pro-ect. .or this reason, analysts 'enerally
prefer the 1(!#23$E1 #A!C .62K methods of capital "ud'etin'* primarily, the
(3$E53A6 5A$E 2. 5E$53 and the 3E$ P5E!E3$ /A6E methods.
PAY CYCLE is a set of rules that defines the criteria "y %hich scheduled payments are
selected for payment creation, e.'., payroll may "e on a %ee)ly, "i8%ee)ly, or monthly
pay cycle.
PAYMENT is the satisfaction of a de"t or claim* primarily money paid to fulfill an
o"li'ation.
PAYMENT ON ACCOUNT see 23 A##23$.
PAYOUT RATIO is dividends paid divided "y company earnin's over some period of
time, expressed as a percenta'e.
PAYROLL BURDEN, in the .!., includes the cost of your payroll administration,
.(#A, .$A, !$A, %or)ersD compensation, etc., "ased on each =9::.:: of payroll. .or
example7 =9::.:: of payroll earned Q A@.NF payroll "urden E =9A@.NF total payroll.
PBC LIST (PROVIDED BY CLIENT LIST) is a re,uest "y external auditors of items
that %ill "e re,uired from the client "y the auditor prior to the commencement of
field%or). !uch PB# lists are preliminary and %ill li)ely "e expanded once the audit
commences.
PC is an acronym for Professional #orporation ("usiness le'al entity).
PDI can mean Personal 1isposa"le (ncome or Past 1ue (nterest.
PEACHTREE is commercial accountin' soft%are developed and o%ned "y !a'e
!oft%are.
PEAK is the period of maximal use or demand or activity* for example, at pea) commute
hours, street traffic can "e un"elieva"le. !ee 2..8PEA<.
PEGBOARD SYSTEM see 23E8K5($E !0!$EM.
PEG RATIO compares earnin's 'ro%th and the Price Earnin's 5atio. $he PEG 5atio
(formula) is the current Price Earnin's 5atio divided "y the expected lon'8term 'ro%th
rate (per the earnin's per share).
PENDING usually refers to either7 9. 3ot yet decided* or, H. Bein' in continuance.
PENSION FUND is a fund reserved to pay %or)ers+ pensions %hen they retire from
service. Also )no%n as !PE5A33A$(23 .31.
PENSION MAXIMIZATION is a controversial strate'y, often espoused "y life
insurance a'ents, of usin' insurance to au'ment a company "enefit plan. nder this
arran'ement, a retiree ta)es pension payments for his or her o%n life only and "uys life
insurance to provide for a survivin' spouse. Also )no%n as pension max.
PEP see PE5!23A6 EU($0 P6A3.
P/E RATIO (PRICE/EARNINGS RATIO) is a stoc) analysis statistic in %hich the
current price of a stoc) (today+s last sale price) is divided "y the reported actual (or
sometimes pro-ected, %hich %ould "e forecast) earnin's per share of the issuin' firm* it
is also called the ?multiple?.
PER CAPITA INCOME is the mean income computed for every man, %oman, and
child in a particular 'roup. (t is derived "y dividin' the total income of a particular 'roup
"y the total population in that 'roup.
PERCENTAGE DESIGN, in construction, is the percenta'e expended for desi'n and
construction mana'ement services in proportion to total construction.
PERCENTAGE LEASE is a type of lease %here the landlord char'es a "ase rent plus
an additional percenta'e of any profits reali&ed "y the "usiness tenant.
PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING is instituted if
your revenues exceed =9:,:::,::: (A8year avera'e) or your contracts %ill not "e
completed %ithin a t%o8year period, you are 'enerally re,uired to use the percenta'e of
completion accountin' for contracts. $here are many advanta'es to usin' to percenta'e
of completion method includin'7
(t is the "est measurement of income.
Percenta'e of completion normally needs to "e computed for financial statement
purposes eliminatin' confusin' timin' differences from tax to financial
statements.
$here is no increase in alternative minimum taxa"le income.
6osses can "e reco'ni&ed on contracts "efore the -o" is complete.
(t is useful in levelin' taxa"le income, permittin' use of lo%er tax "rac)ets each
year.
Khen usin' the percenta'e of completion method, it is important to carefully
compute the percent complete, for it may have a 'reat impact on your taxa"le
income.
Estimated costs to complete the contract, a component of calculatin' the percent
to complete, determine %hat your taxa"le income %ill "e. Also, carefully
revie%in' the over8head allocation may result in lo%er tax.
PER DIEM is a. one every day (e.'., save 9: man8hours per diem)* or, ". payment of
daily expenses andBor fees of an employee or an a'ent.
PERFORMANCE BUDGET is a "ud'et format that relates the input of resources and
the output of services for each or'ani&ational unit individually. !ometimes used
synonymously %ith pro'ram "ud'et.
PERFORMANCE INDICATORS are those empirical data points that indicate ho%
%ell, or poorly, an entity is performin' a'ainst preset 'oals and o"-ectives. 3ormally, in
"usiness or strate'ic plannin', a company %ill set tar'ets over a specified period that the
"usiness "elieves are attaina"le and trac) performance over time to those tar'ets or
o"-ectives.
PERFORMING ASSET is an asset that provides a dependa"le annual financial return*
for example, production machinery or, in transportation, an airliner.
PERIOD COST is an expense that is not inventoria"le* it is char'ed a'ainst sales
revenues in the period in %hich the revenue is earned (e.'., !G&A is a period cost). Also
called period expense.
PERIODICITY CONCEPT is the concept that each accountin' period has an economic
activity associated %ith it, and that the activity can "e measured, accounted for, and
reported upon.
PERMANENCE is the ,uality or state of "ein' permanent* primarily -ud'ed "y
dura"ility and useful life. !ee 251E5 2. PE5MA3E3#E.
PERPETUAL INVENTORY is an inventory accountin' system %here"y "oo)
inventory is )ept in continuous a'reement %ith stoc) on hand. A daily record is
maintained of the dollar amount and physical ,uantity. $here are periodic physical
inventories ta)en to reconcile at short intervals.
PERPETUAL SUCCESSION is one of the le'al distinctions "et%een a "usiness and a
company. A company has perpetual succession meanin' that a chan'e in the mem"ership
does not affect the existence of the company %hereas a "usiness does not en-oy this
perpetual succession. .or example, in the case of a partnership, %hich is one form of
"usiness re'istration, a chan'e in the mem"ership affects the partnership.
PERPETUITY, in finance, is an annuity paya"le forever.
PERSISTENT EARNINGS is the level of earnin's, from accountin' to accountin'
period, that are continually recurrin'.
PERSONAL EQUITY is that portion of e,uity o%nership that is held to ones o%n
"enefit or invested as an inte'ral part of the assets of a le'al entity.
PERSONAL EQUITY PLAN (PEP) %as an investment plan in the .<. that used to
allo% people over the a'e of 9M to invest in shares of .<. companies. $he plan
encoura'ed investment "y individuals. 1iscontinued in 9>>>, it %as replaced "y
(ndividual !avin's Accounts ((!A). (t %as done throu'h an approved plan, ,ualifyin'
unit trust, or investment trust. (nvestors received "oth income and capital 'ains free of
tax.
PERSONAL LOAN is a short8term loan that is extended "ased on the personal inte'rity
of the "orro%er.
PERSONAL PROPERTY means property of any )ind except real property. (t may "e
tan'i"le (havin' physical existence) or intan'i"le (havin' no physical existence, such as
patents, inventions, and copyri'hts).
PERVASIVENESS OF ESTIMATES means that the estimates have to "e complete, of
hi'h ,uality and in depth, i.e., they have to ade,uately cover the %hole accountin' entity.
PETTY CASH, normally, is an account and location %here tan'i"le cash is stored for
usa'e in purchasin' or the reim"ursin' of inexpensive out8of8poc)et expenditures.
PHANTOM PROFIT is hypothetical profit, i.e., no cash flo% is 'enerated. Appreciation
on any asset, e.'. stoc), is considered phantom profit unless or until the asset is sold,
there"y 'eneratin' cash flo%.
PHYSICAL INVENTORY is the countin' of all merchandise or e,uipment on hand.
PHYSICAL STOCKTAKE see PC0!(#A6 (3/E3$250.
PIERCING THE CORPORATE VEIL is a le'al concept throu'h %hich a
corporation+s shareholders, %ho 'enerally are shielded from lia"ility for the corporation+s
activities, can "e held responsi"le for certain actions.
PIGGYBACK, dependent upon usa'e, can mean7 9. 2n the "ac) or shoulder or astraddle
on the hip* H. $%o lenders participatin' in the same loan (pi''y"ac) loan)* A.
nauthori&ed access to a data processin' system via an authori&ed user+s le'itimate
connection (pi''y"ac) entry)* ;. Caul "y railroad car* N. !E# re'istration of existin'
holdin's of shares in a corporation com"ined %ith an offerin' of ne% pu"lic shares
(pi''y"ac) re'istration)* F. 5i'hts that entitle an investor to re'ister and sell his or her
stoc) %henever the company conducts a pu"lic offerin' (pi''y"ac) ri'hts).
PINK PEARL is a type of a pencil8lead eraser that auditin' companies use.
PIPE (Private (nvestment in Pu"lic E,uity) refers to any private placement of securities
of an already8pu"lic company that is made to selected accredited investors (usually to
selected institutional accredited investors) %herein investors enter into a purchase
a'reement committin' them to purchase securities and, usually, re,uirin' the issuer to
file a resale re'istration statement coverin' the resale from time to time of the securities
the investors purchased in the private placement. P(PE transactions may involve the sale
of common stoc), converti"le preferred stoc), converti"le de"entures, %arrants, or other
e,uity or e,uity8li)e securities of an already8pu"lic company. $here are a num"er of
common P(PE transactions, includin'7
the sale of common stoc) at a fixed price*
the sale of common stoc) at a fixed price, to'ether %ith fixed price %arrants*
the sale of common stoc) at a fixed price, to'ether %ith resetta"le or varia"le
priced %arrants*
the sale of common stoc) at a varia"le price*
the sale of converti"le preferred stoc) or converti"le de"t* and
a venture8style private placement for an already8pu"lic company.
PISCAN DOCUMENT, a precursor of dou"le entry "oo))eepin', dates from the early
9Hth century. 5ecords indicate that primitive "oo))eepin' %ith se,uential transactions
usin' 5oman numerals %as presented in para'raph form. !ome of the record fra'ments
are from an un)no%n .lorentine "an)in' firm dated from 9H99. (t %as not yet dou"le
entry "oo))eepin', "ut advancin' in that direction. 2ther fra'ments include the #astra
Gualfred and the Bor'hesia #ompany from 9HN>8F@* Gentile de+ !assetti and !ons, 9H@;8
9A9:* and Bene Bencivenni, 9H@@8>F. $he most complete records are from 5inieri .ini &
Brothers, 9H>F89A:N, and Giovanni .arolfi & #o., 9H>>89A::.
PITI is an acronym for Principal, (nterest, $axes and (nsurance %hen dealin' %ith
property mort'a'es.
PLACEMENT is "an) depositin' Eurodollars %ith (sellin' Eurodollars to) another "an)
is said to "e ma)in' a placement.
PLANT ASSET is a non8current physical asset applica"le to manufacturin' activities.
PLEDGE is a. the transfer or assi'nment of assets as collateral to secure payment of a
de"t o"li'ation as %hen securities are pled'ed to a lender for a loan secured "y the o%ner
of the securities. Khen securities a pled'ed, the lender fre,uently re,uires the physical
transfer of the collateral to preclude possi"ility of usin' the same asset for additional
pled'in'* ". the deposit or placin' of personal property as security for a de"t or other
o"li'ation %ith a person called a pled'ee. $he pled'ee has the implied po%er to sell the
property if the de"t is not paid. (f the de"t is paid, the ri'ht to possession returns to the
pled'or* or, c. a %ritten or oral a'reement to contri"ute cash or other assets.
PLEDGE BOND see P6E1GE1 5E/E3E!.
PLEDGED ACCOUNTS RECEIVABLE is short8term "orro%in' from financial
institutions %here the loan is secured "y accounts receiva"le. $he lender may physically
ta)e the accounts receiva"le "ut typically has recourse to the "orro%er* also called
discountin' of accounts receiva"le.
PLEDGED ASSET is an asset that is transferred to a lender as security for de"t. $he
lender of the de"t ta)es possession of the pled'ed asset, "ut does not have o%nership
unless default occurs.
PLEDGED REVENUES is funds 'enerated from revenues and o"li'ated to de"t service
or to meet other o"li'ations specified "y the "ond contract.
PLS see Profit and 6oss !harin'.
PLUG is a varia"le that handles financial slac) in the financial plan.
PLUG NUMBER see #2!$ 2. G221! !261.
PNL is Profit and 6oss (statementBanalysis* "usinessBaccountin'). !ee also P52.($
A31 62!! !$A$EME3$.
POINTS are additional fee paid to a lender. Points are 'enerally stated as a percent of the
total amount "orro%ed and are in essence prepaid interest. Points paid can "e deducted
over the life of the loan.
POLITICAL COSTS HYPOTHESIS predicts that firms %ith lo% a'ency and political
costs and effective shareholders+ monitorin' %ill distri"ute cash dividend and those %ith
moderate a'ency and political costs may use stoc) dividends in lieu of cash dividends to
separate themselves from firms havin' hi'h a'ency and political costs. $his indicates that
cash dividend firms %ill face "etter lon'8term stoc) mar)et valuation of their shares than
stoc) dividend firms.
POOL is7 9. a 'roup of people or'ani&ed for a specific purpose or any communal
com"ination of funds* H. in capital "ud'etin', the concept that investment pro-ects are
financed out of a pool of "onds, preferred stoc), and common stoc), and a %ei'hted8
avera'e cost* A. in insurance, a 'roup of insurers %ho share premiums* and ;. in
investments, the com"ination of funds for the "enefit of a common pro-ect, or a 'roup of
investors %ho use their com"ined influence to manipulate prices.
POOLINGOFINTERESTS, in the !, is the method of accountin' used in a "usiness
com"ination in %hich the ac,uirin' company has issued votin' common stoc) in
exchan'e for votin' common stoc) of the ac,uired company. $he features of the method
are that the ac,uired company+s net assets are "rou'ht for%ard at "oo) value, retained
earnin's and paid8in capital are "rou'ht for%ard, the net income is reco'ni&ed for the full
financial year re'ardless of the date of ac,uisition, and the expenses of poolin' are
immediately char'ed a'ainst earnin's. (n order to use the method there are a num"er of
criteria to "e met concernin' the prior independence of the companies and the nature and
timin' of the ac,uisition. !ee P226(3G 2. (3$E5E!$ ME$C21.
POOLING OF INTEREST METHOD is an accountin' method for reportin'
ac,uisitions accomplished throu'h the use of e,uity. $he com"ined assets of the mer'ed
entity are consolidated usin' "oo) value, as opposed to the P5#CA!E ME$C21,
%hich uses mar)et value. $he mer'in' entities^ financial results are com"ined as thou'h
the t%o entities have al%ays "een a sin'le entity. !ee P226(3G82.8(3$E5E!$!.
POP is an acronym for, amon' others, Point 2f Presence or Post 2ffice Protocol
((nternet e8mail protocol).
PORTFOLIO is a term for descri"in' all the investments that an entity o%ns. A
diversified portfolio contains a variety of investments.
POSITIVE ACCOUNTING THEORY is %here theorists tend to explain %hy some
accountin' practices are more popular than others (e.'., "ecause they increase
mana'ement compensation). $hey tend to support their conclusions %ith inductive theory
and empirical evidence as opposed to deductive methods. Generally avoid advocacy of
one accountin' rule as "ein' "etter or %orse than its alternatives. Positivists are inspired
"y anecdotal evidence, "ut anecdotal evidence is never permitted %ithout more ri'orous
and controlled scientific investi'ation.
POST it the transfer of accountin' entries from a -ournal of ori'inal entry into a led'er
"oo), in chronolo'ical order accordin' to %hen they %ere 'enerated.
POST DATE is placin' on a document or a chec) a date that follo%s the date of the
initiation or execution of the document. .or example, a post dated chec) cannot "e
cashed until the date %ritten on the chec).
POSTING, in "oo))eepin', is to list on the company+s records, such as to list the detail
of sales and purchases on the accounts receiva"le or paya"le records.
POSTULATE, in lo'ic, is a proposition that is accepted as true in order to provide a
"asis for lo'ical reasonin'.
PPE can mean either Property, Plant, and E,uipment, or Pay Period Endin'.
PPI see P521#E5 P5(#E (31E4.
PR is an acronym for, amon' others, +pu"lic relations+, +payroll+ and +purchase re,uest+.
PRACTICAL CAPACITY is %here the cost of production is "ased on the +practical
capacity+ of production facilities. $herefore, the proportion of overheads allocated to a
unit of production is not to "e increased as conse,uence of idle capacity of the plant.
PREDICTOR RATIOS7 Most ratios are descriptive in nature* that is, they descri"e the
firm as it is no%. As you mi'ht expect, Predictor 5atios provide su''estions a"out li)ely
future conditions for the firm. /enture6ine provides t%o industry standard Predictor
5atios7
9. Altman L8!core 8 a valid predictor or "an)ruptcy, and,
H. !ustaina"le Gro%th 5ate 8 sho%s the de'ree to %hich a concern can 'ro% usin'
their retained earnin's to fund 'ro%th.
PREEMPTIVE RIGHT is the ri'ht of a current stoc)holder to maintain the percenta'e
o%nership interest in the company "y "uyin' ne% shares on a pro rata "asis "efore they
are issued to the pu"lic.
PREFERENCE SHARE see P5E.E55E1 !$2#<.
PREFERENCE SHARE CAPITAL is capital raised "y an entity throu'h the sale of
preferred shares.
PREFERRED CREDITOR is a creditor %hose account ta)es le'al preference for
payment over the claims of others.
PREFERRED STOCK, usually, non8votin' capital stoc) that pays dividends at a
specified rate and has preference over common stoc) in the payment of dividends and the
li,uidation of assets.
PREMIUM ON CAPITAL STOCK is excess received over the par value of stoc)
issued. $he premium account is sho%n under the paid8in capital section of stoc)holder+s
e,uity "ecause it resulted from the issuance of stoc). (t is not an income statement
account since the company earns profit "y sellin' 'oods and services to outsiders, not "y
issuin' shares of stoc) to o%ners.
PREOPERATING COSTS are costs that are deferred until the related assets are ready
for revenue service at %hich time the costs are char'ed to operations.
PREPAID EXPENSES are amounts that are paid in advance to a vender or creditor for
'oods and services. $ypically, insurance premiums are paid in advance of the covera'e
contained in the policy. Prepaid Expenses is a #urrent Asset for your "usiness. $his is
"ecause you have paid for somethin' and someone o%es you the service or the 'oods for
%hich you prepaid.
PREPAYMENT is the payment of all or part of a de"t prior to its due date.
PRESENT VALUE is the discounted value of a payment or stream of payments to "e
received in the future, ta)in' into consideration a specific interest or discount rate.
Present /alue represents a series of future cash flo%s expressed in today+s dollars. A
'iven amount of money is almost al%ays more valua"le sooner than later, so present
values are 'enerally smaller than correspondin' future values.
PRICE is the property of havin' material %orth. Price is usually indicated "y the amount
of money somethin' %ould "rin' if or %hen sold.
PRICE CEILING is a 'overnment8imposed limit on ho% hi'h a price can "e char'ed on
a product.
PRICE EARNINGS MULTIPLE7 $he price8earnin's ratio (PBE) is simply the price of
a company+s share of common stoc) in the pu"lic mar)et divided "y its earnin's per
share. Multiply this multiple "y the net income and you %ill have a value for the
"usiness. (f the "usiness has no income, there is no valuation. (f the common stoc) in not
pu"licly traded, valuation of the stoc) is purely su"-ective. $his may not "e the "est
method, "ut can provide a "enchmar) valuation.
PRICE EARNING RATIO see P5(#E EA53(3G! M6$(P6E.
PRICE ELASTICITY is the de'ree to %hich customers respond to price chan'es
(calculation7 O chan'e in ,uantity divided by O chan'e in price). A value 'reater than 9
E customers exhi"it a 'ood sensitivity to price. A value less than 9 E customers are
insensitive to price. Price Elasticity is if a small chan'e in price is accompanied "y a
lar'e chan'e in ,uantity demanded, the product is said to "e 13+',*) (or responsive to
price chan'es). A product is *-13+',*) if a lar'e chan'e in price is accompanied "y a small
amount of chan'e in demand.
PRICE FIXING is an ille'al practice %here competin' companies a'ree, informally or
formally, to -ointly restrict or control prices %ithin a specified ran'e.
PRICE MIX is the value of the product determined "y the producers. Price mix includes
the decisions as to7 Price level to "e adopted* discount to "e offered* and, terms of credit
to "e allo%ed to customers.
PRICE TO BOOK is a financial ratio that is derived "y dividin' a stoc)Ds capitali&ation
"y its "oo) value. Also called Mar)et8to8Boo).
PRICE TO EARNINGS RATIO (P/E) is a performance "enchmar) that can "e used as
a comparison a'ainst other companies or %ithin the stoc)+s o%n historical performance.
.or instance, if a stoc) has historically run at a PBE of AN and the current PBE is 9H, you
may %ant to explore the reasons for the drastic chan'e. (f you "elieve that the ratio is too
lo%, you may %ant to "uy the stoc). 0ou %ill 'enerally find a PBE ratio "ased on either
the prior reportin' year+s earnin's, or the earnin's of the prior four ,uarters added
to'ether (6$M or 6atest $%elve Months)
PRICE TO REVENUE is a financial ratio derived "y dividin' current stoc) price "y
revenue per share (ad-usted for stoc) splits).
PRIMARY DEALER is a desi'nation 'iven "y the .ederal 5eserve !ystem to
commercial "an)s or "ro)erBdealers %ho meet specific criteria, includin' capital
re,uirements and participation in $reasury auctions. A primary dealer is entitled and
o"li'ated to purchase and sell 'overnment securities %ith the .ederal 5eserve directly.
$hey serve as the conduits for .ederal 5eserve open mar)et activities. $here are
approximately A:8;: such dealers.
PRIMARY MARKET is the first sale of a ne%ly issued security. $hose securities are
purchased in the primary mar)et. All su"se,uent tradin' of those securities is done in the
secondary mar)et.
PRIME BROKERS are providers of "ac)8office administration and stoc) lendin' for
hed'e funds.
PRIME COST is e,ual to the sum of 1(5E#$ MA$E5(A6 plus 1(5E#$ 6AB25.
PRIME RATE is the interest rate that "an)s char'e to their preferred customers.
#han'es in the prime rate influence chan'es in other rates* mort'a'e interest rates for
example.
PRINCIPAL is7 a. a person %ho has controllin' authority (e.'. the #E2 or o%ner of a
company) or is in a leadin' position (part o%ners of a le'al entity)* or, ". a matter or thin'
of primary importance, e.'. is the amount of a loan, excludin' interest, or the amount you
invest, excludin' income.
PRIOR PERIOD refers to accountin' periods that have occurred in the past. !ee also
A##23$(3G PE5(21.
PRIVATE CORPORATION is a corporation that o%nership is held "y the private
sector, i.e. individuals or companies.
PRIVATE EQUITY is e,uity securities of unlisted (non8pu"licly traded) companies.
Private e,uities are 'enerally illi,uid and thou'ht of as a lon'8term investment. Private
e,uity investments are not su"-ect to the same hi'h level of 'overnment re'ulation as
stoc) offerin's to the 'eneral pu"lic. Private e,uity is also far less li,uid than pu"licly
traded stoc).
PRIVATE PLACEMENT is investments in companies that are privately o%ned* i.e,
they are companies that are not traded on a pu"lic stoc) exchan'e (e.'., 30!E,
3A!1AU, and AME4).
PRIVATE PLACEMENT (1EB$) is the sale of a "ond or other security directly to a
limited num"er of investors* used in the context of 'eneral e,uities. .or example, sale of
stoc)s, "onds, or other investments directly to an institutional investor li)e an insurance
company, avoidin' the need for the re'istration %ith the re'ulator if the securities are
purchased for investment as opposed to resale.
PROCEEDS, 'enerally in "usiness, is the total amount "rou'ht in, e.'. the proceeds of a
sale. (n insurance, it is the net amount received (as for a chec) or from an insurance
settlement) after deduction of any discount or char'es.
PROCESS COSTING is a method of cost accountin' applied to production carried out
"y a series of chemical or operational sta'es or processes. (ts characteristics are that costs
are accumulated for the %hole production process and that avera'e unit costs of
production are computed at each sta'e.
PROCUREMENT, from a "usiness perspective, is the purchasin' of services or
materials.
PRODUCER PRICE INDEX (PPI) measures the avera'e chan'e over time in the
sellin' prices received "y domestic producers for their output. $he prices included in the
PP( are from the first commercial transaction for many products and some services.
PRODUCT is7 a. the end result of the manufacturin' process, ". commodities offered for
sale, or c. an artifact that has "een created "y someone or some process.
PRODUCT COST is cost of inventory on hand, also called (nventoria"le #ost. $hey are
assets until the products are sold. 2nce they are sold, they "ecome expense, i.e. #ost of
Good !old (#2G!). All manufacturin' costs are product costs, e.'., direct material,
direct la"or, and factory overhead.
PRODUCT INVOICE is an invoice associated %ith a tan'i"le or physical item as
opposed to a service or professional invoice. !ee P52.E!!(23A6 (3/2(#E and
!E5/(#E (3/2(#E.
PRODUCTION BUDGET is used to propose ho% much you %ill manufacture (or "uy
in from suppliers) so that you can compensate for the demand (identified on your sales
"ud'et). (f your maximum capacity for producin' stoc) %as 9:: units for the month (due
to availa"le resources), it may not "e necessary to produce this maximum (due to a lo%er
demand) each month "ecause it adds to expense and ties up finance. (f you expect a hi'h
demand durin' a certain month(s), it may "e that your manufacturin' capacity cannot
compensate. (n %hich case, you may "ud'et to manufacture excess in the months %here
you do not manufacture the maximum so that you can "uild up your supplies for the
expected months %ith hi'h demand. Alternatively, it may "e a call to "uyBhire more
machineryBstaff in that particular month to allo% an increased capacity for production.
!ee 2PE5A$(3G B1GE$.
PRODUCTIVE ACTIVITY usually is defined as includin' activities that have
economic value in the mar)etplace. A more contemporary definition of productive
activity includes any activity that produces a valued 'ood or service, even if it is not
actually paid for.
PRODUCTIVITY is a measured relationship of the ,uantity and ,uality of units
produced and the la"or re,uired per unit of time.
PRODUCTIVITY RATIO is the ratio of outputs to inputs. $he closer the ratio is to 9.:,
the hi'her the productivity* the closer the ratio is to :.:, the lo%er the productivity.
Productivity is important "ecause it relates to an or'ani&ation+s a"ility to compete, and to
the overall %ealth and standard of livin' of a nation. Productivity is affected "y %or)
methods, capital, ,uality, technolo'y, and mana'ement.
PRODUCT MIX involves plannin' and developin' the ri'ht type of product that %ill
satisfy fully the needs of customers. A product has several dimensions. $hese dimensions
are collectively called +product mix+. Product mix for example may consist of si&e and
%ei'ht of the product, volume of output, product ,uality, product desi'n, product ran'e,
"rand name, pac)a'e, product testin', %arranties and after sales services and the li)e.
PROFESSIONAL FEE is that fee char'ed for services from university trained
professionals* primarily doctors, la%yers and accountants. $he term is often expanded to
include other university trained professions, e.'. pharmacists char'in' to maintain a
medicinal profile of a client or customer.
PROFESSIONAL INVOICE is an invoice associated %ith professional services
rendered, i.e. medical, le'al or accountin' services. !ee !E5/(#E (3/2(#E and
P521#$ (3/2(#E.
PROFESSIONAL SERVICES are those services offered "y university trained
professionals, e.'. doctors, la%yers, and accountants for, normally, a professional fee.
PROFESSIONAL SUBSCRIBER means all other persons %ho do not meet the
definition of 3on8Professional !u"scri"er. !EE 3238P52.E!!(23A6 !B!#5(BE5.
PROFIT is the excess of revenues over outlays in a 'iven period of time (includin'
depreciation and other non8cash expenses).
PROFITABILITY is company+s a"ility to 'enerate revenues in excess of the costs
incurred in producin' those revenues.
PROFITABILITY RATIOS are measures of performance sho%in' ho% much the firm
is earnin' compared to its sales, assets or e,uity.
PROFIT AFTER TAX (PAT) is the net profit earned "y the company after deductin'
all expenses li)e interest, depreciation and tax. PA$ can "e fully retained "y a company
to "e used in the "usiness. 1ividends, if declared, are paid to the share holders from this
residue.
PROFIT & LOSS ACCOUNT sho%s the net profit %hich is left after all relevant
"usiness expenses have "een deducted.
PROFIT AND LOSS SHARING (PLS) is the method utili&ed in (slamic "an)in' to
comply %ith the prohi"ition of interest. $he (slamic solution, commonly referred to as
Profit & 6oss !harin' (P6!), su''ests an e,uita"le sharin' of ris)s and profits "et%een
the parties involved in a financial transaction. (n the "an)in' "usiness, there are three
parties 8 the entrepreneur or the actual user of capital, the "an) %hich serves as a partial
user of capital funds and as a financial intermediary, and the depositors in the "an) %ho
are the suppliers of savin's or capital funds. $here are t%o different partnerships of the
type mentioned in (slam7 the partnership "et%een the depositors and the "an), and the
partnership "et%een the entrepreneur (or the "orro%er) and the "an). nder this proposal,
financial institutions %ill not receive a fixed rate of interest on their outstandin' loans,
rather, they share in profits or in losses of the "usiness o%ner to %hom they have
provided the funds. !imilarly, those individuals %ho deposit their funds in a "an) %ill
share in the profitBloss of the financial institution.
PROFIT AND LOSS STATEMENT (P&L) is also )no%n as an income statement. (t
sho%s your "usiness revenue and expenses for a specific period of time. $he difference
"et%een the total revenue and the total expense is your "usiness net income. A )ey
element of this statement, and one that distin'uishes it from a "alance sheet, is that the
amounts sho%n on the statement represent transactions over a period of time %hile the
items represented on the "alance sheet sho% information as of a specific date (or point in
time).
PROFIT BEFORE TAXES is operatin' profit minus all other expenses (net).
PROFIT CENTER is a section of an or'ani&ation that is responsi"le for producin'
profit, e.'., a division of a corporation that is not a stand8alone entity "ut is re,uired to
produce profits %ithin the corporation.
PROFIT MARGIN ON SALES is7 a. Gross Profit Mar'in on !ales E Gross ProfitB!ales
_ 9::* or, ". 3et Profit Mar'in on !ales E 3et Profit After $axB!ales _ 9::. !ee also
G52!! P52.($ MA5G(3 23 !A6E!.
PROFIT MULTIPLE" Profit and sales multiples are the most %idely used valuation
"enchmar)s used in valuin' a "usiness. $he information needed are pretax profits and a
mar)et multiplier, %hich may "e 9, H, A, or ; and usually a ceilin' of N. $he mar)et
multiplier can "e found in various financial pu"lications, as %ell as analy&in' the sale of
compara"le "usinesses. $his method is easy to understand and use. $he profit multiple is
often used as the valuation ceilin' "enchmar).
PROFORMA is to provide in advance to a prescri"ed form or to descri"e items \pro
#orma financial statement or pro #orma invoice`.
PROFORMA INVOICE is a price ,uote. (t is %ritten as an invoice, and, in effect,
says7 +$his is the purchase price and terms %e are offerin'.+
PROGRAM BUDGET is a "ud'et %herein inputs of resources and outputs of services
are identified "y pro'rams %ithout re'ard to the num"er of or'ani&ational units involved
in performin' various aspects of the pro'ram.
PROGRESSIVE TAX is an income tax system to %here the more income that is made
the hi'her the tax percenta'e that must "e paid.
PROGRESS BILLINGS are interim "illin's for construction %or) or 'overnment
contract %or). $he entry is to de"it pro'ress "illin's receiva"le and credit pro'ress
"illin's on construction in pro'ress. Pro'ress "illin's is a contra account to
#23!$5#$(238(38P52G5E!!.
PRO!ECTION is an approximation of future events. sually a pro-ection is made "y
extrapolatin' )no%n information into the future period, considerin' events that could
affect the outcome. !ee .25E#A!$, B1GE$.
PROMISES FOR THE FUTURE is not a standard term, "ut is sometimes used in
contracts to delineate %hat ordersBcommitments may exist in the future. 1ependent upon
the contractual lan'ua'e, it may or may not "e "indin'.
PROMISSORY NOTE, usually -ust called a +note+, is a 3EG2$(AB6E (3!$5ME3$
%herein the ma)er a'rees to pay a specific sum at a definite time.
PROPORTIANATE UNIT CONCEPT is %here a value or distri"ution is a'reein' in
amount, ma'nitude, or de'ree, e.'. a shareholder holdin' 9O outstandin' shares of an
entity is entitled to receive 9O of that entities declared dividend, i.e. it is in proportion.
PROPRIETARY is an account, item, or information "elon'in' to a company or
individual. !ee P52P5(E$A50 A!!E$.
PROPRIETARY ASSET# usually, is any asset that is considered in the realm of
intellectual property that should not "e disclosed, e.'., all information havin' to do %ith
clientsBcustomers, includin' "ut not limited to names, addresses, telephone num"ers and
other contact information, as %ell as any other personal or "usiness related information,
as it may exist from time to time is a valua"le, and uni,ue proprietary asset to a company.
Proprietary assets %ould also include trade secrets and undisclosed inventions.
PROPRIETARY THEORY is %here no fundamental distinction is dra%n "et%een a
le'al entity and its o%ners, i.e. the entity does not exist separately from the o%ners for
accountin' purposes. $he primary focus is to report information useful to the o%ners, and
therefore the financial statements are prepared from their perspective. !ee E3$($0
$CE250.
PROPRIETORS DRAW is %hen a "usiness proprietor dra%s money for personal needs,
"ut is taxed on "usiness results (at individualsD mar'inal rate) re'ardless of dra%in's.
PROPRIETORS FUNDS is o%ner+s capital plus net profit minus o%ners dra%in's.
PROPRIERTORSHIP see !26E P52P5(E5$25!C(P.
PRO RATA is the "asis for allocatin' an amount proportionally to the items involved.
An amount may "e proportionally distri"uted to assets, expenses, funds, etc.
PROSPECTIVE PAYMENT SYSTEM (PPS), in healthcare, is a Medicare
administered payment plan %here providers are paid a predetermined sum for carin' for a
'iven num"er of consumers. $he "uilt in incentive is for providers to control costs,
theoretically leadin' to more cost effective care.
PROSPECTIVE REIMBURSEMENT, in healthcare, is a reim"ursement method
%here the third party payer set the amount of money for a particular service to "e
delivered to clients in a'reement %ith the or'ani&ation "efore the service is delivered.
PROSPECTUS is the disclosure document for an offerin' re'istered %ith the !E#. $he
final prospectus is issued on the effective date, i.e., %hen the offerin' is released "y the
!E#.
PROVISION, 'enerally, is to prepare in advance for an event that is pro-ected to place in
the future. (n accountin', it is an amount char'ed a'ainst profits for a specific lia"ility
(for example7 "ad de"ts, depreciation or taxes). A lia"ility may "e )no%n, "ut the amount
is often uncertain. $his uncertainty may lead to an ad-ustment in a later income statement
once the final amount of the lia"ility is ascertained.
PROX see P524(M2.
PROXIMO (usually a""reviated to +P524+) means of or in the follo%in' month.
PRUDENCE is havin' foresi'ht and caution alon' %ith discretion, and to not act
rec)lessly.
PRUDENCE CONCEPT, other%ise )no%n as conservatism, says that %henever there
are alternative procedures or values, the accountant %ill choose the one that results in a
lo%er profit, a lo%er asset value and a hi'her lia"ility value.
PTI is Pretax (ncome.
PUBLIC ACCOUNTING means the performance of or offerin' to perform any
en'a'ement that %ill result in the issuance of an attest report that is in accordance %ith
professional standards. ?Practice of pu"lic accountin'? also means the performance of or
offerin' to perform services other than those descri"ed a"ove, such as consultin'
services, personal financial plannin' services, or the preparation of tax returns or the
furnishin' of advice on tax matters "y a sole proprietorship, partnership, limited lia"ility
company, professional association, corporation, or other "usiness or'ani&ation, that
advertises to the pu"lic as a ?certified pu"lic accountant? or ?pu"lic accountant.?
PUBLIC CORPORATION is a corporation formed "y federal, state or local
'overnments for specific pu"lic purposes.
PUBLIC OFFERING is the sale of a ne% securities issue to the pu"lic "y %ay of an
under%riter, a transaction that must "e re'istered %ith the !ecurities and Exchan'e
#ommission.
PUBLIC OWNERSHIP is either7 a. Government o%nership and operation of a
productive facility for the purposes of providin' some 'oods or services to citi&ens* or, ".
(n investments, portion of a corporations stoc) that is pu"licly traded and o%ned in the
open mar)et.
PURCHASE ACCOUNT is an account in %hich all inventory purchases are recorded*
used %ith the periodic inventory method.
PURCHASE AGREEMENT is a contract statin' the terms of a purchase.
PURCHASE DISCOUNT is a reduction in the purchase price, allo%ed if payment is
made %ithin a specified period.
PURCHASE METHOD is accountin' for an ac,uisition usin' mar)et value for the
consolidation of the t%o entities^ net assets on the "alance sheet. Generally,
depreciationBamorti&ation %ill increase for this method (due to the creation of 'ood%ill)
compared to the P226(3G 2. (3$E5E!$ ME$C21 resultin' in lo%er net income.
PURCHASE MONEY AGREEMENT is an a'reement under %hich a person pled'es
the property or item "ou'ht as security.
PURCHASE MONEY INTEREST is that interest associated %ith the purchase money
mort'a'e.
PURCHASE MONEY MORTGAGE (PMM) is seller financin' as a part of the
purchase price.
PURCHASE ORDER is a %ritten authori&ation for a vendor to supply 'oods or services
at a specified price over a specified time period. Acceptance of the purchase order
constitutes a purchase contract and is le'ally "indin' on all parties.
PURCHASE REQUISITION is a %ritten re,uest for 'oods to "e purchased. (t is
usually prepared "y a department head or mana'er and sent to a firm+s purchasin'
department.
PURCHASE RETURNS is a contra purchase account that records all credits from
returned inventory purchases.
PURCHASES BUDGET is a "ud'et of the expected usa'e of materials in production
and the purchase of the direct materials re,uired. !ee 2PE5A$(3G B1GE$.
PURCHASING POWER is the value of a particular monetary unit in terms of the
amount of 'oods or services that can "e purchased %ith it, i,e, the a"ility to purchase,
'enerally measured "y income.
PURE COST is any direct readily verifia"le cost assi'na"le to the su"-ect or item, e.'.,
the direct cost of producin' a product.
PURE RESEARCH is motivated exclusively "y the search for )no%led'e for its o%n
sa)e.
PUSHDOWN ACCOUNTING, in ac,uisitions, is an exception to the 'eneral rule that
the ac,uireeDs carryin' values are unaffected "y the purchase may arise %hen
su"stantially all of the ac,uireeDs shares are purchased "y the ac,uirer. (n that case, the
ac,uirer may direct the ac,uiree to revalue its assets in accordance %ith the fair values
attri"uted to those assets "y the ac,uirer. $his practice is )no%n as push8do%n
accountin', "ecause the fair values are Spushed do%nT to the ac,uireeDs "oo)s. $he net
effect is the same as if the ac,uirer had formed a ne% su"sidiary, %hich then purchased
all of the assets and lia"ilities of the ac,uiree. $here are t%o advanta'es to push8do%n
accountin'7 a. $he first is that the financial position and results of operations of the
ac,uiree %ill "e reported on the same economic "asis in "oth the consolidated statements
and its o%n separate entity statements. Kithout push8do%n accountin', for example, it
%ould "e possi"le for the su"sidiary to report a profit on its o%n and yet contri"ute an
operatin' loss to the parentDs consolidated results, if the consolidation ad-ustments are
sufficient to tip the "alance "et%een profit and loss* and, ". $he second advanta'e is that
the process of consolidation %ill "e 'reatly simplified for the parent. !ince the carryin'
values %ill "e the same as the ac,uisition fair values, there %ill "e no need for many of
the consolidation ad-ustments that other%ise %ill "e re,uired every time consolidated
statements are prepared.
PUSHPULL STRATEGY is the effective simultaneous use of a com"ination of t%o
mar)etin' strate'ies7 PUSH E 9. (physical distri"ution definition) A manufacturin'
strate'y aimed at other channel mem"ers rather than the end consumer. $he manufacturer
attempts to entice other channel mem"ers to carry its product throu'h trade allo%ances,
inventory stoc)in' procedures, pricin' policies, etc. H. (sales promotion definition) $he
communications and promotional activities "y the mar)eter to persuade %holesale and
retail channel mem"ers to stoc) and promote specific products. PULL E 9. (physical
distri"ution definition) A manufacturin' strate'y aimed at the end consumer of a product.
$he product is pulled throu'h the channel "y consumer demand initiated "y promotional
efforts, inventory stoc)in' procedures, etc. H. (sales promotion definition) $he
communications and promotional activities "y the mar)eter to persuade consumers to
re,uest specific products or "rands from retail channel mem"ers.
PUT is (9) A stipulated privile'e of "uyin' or sellin' a stated property, security, or
commodity at a 'iven price (stri)e price) %ithin a specified time (for an American8style
option, at any time prior to or on the expiration date). A securities option is a ne'otia"le
contract in %hich the seller (%riter), for a certain sum of money called the option
premium, 'ives the "uyer the ri'ht to demand %ithin a specified time the purchase (call)
or sale (put) "y the option seller of a specified num"er of "onds, currency units, index
units, or shares of stoc) at a fixed price or rate called the stri)e price. Many options are
settled for cash e,ual to the difference "et%een the a''re'ate spot price and the a''re'ate
stri)e price rather than "y delivery of the underlyin'. (n the .!. and many other
countries, stoc) options are usually %ritten for units of 9:: shares. 2ther units of
underlyin' covera'e are standard in other option mar)ets. 2ptions are ordinarily issued
for periods of less than one year, "ut lon'er8term options are increasin'ly common. (H)
Any financial contract that chan'es in value li)e an option (asymmetrically), even if the
terms of the contract do not state the price relationship in terms of a ri'ht or privile'e or
in other lan'ua'e usually associated %ith options.
PUT OPTION is the ri'ht "ut not the o"li'ation to sell an underlyin' at a particular price
(stri)e price) on or "efore the expiration date of the contract. Alternatively, a short
for%ard position %ith an upside insurance policy.
PUT WARRANT is a security that, in contrast to a conventional %arrant, 'ives the
holder the ri'ht to sell the underlyin' or to receive a cash payment that increases as the
value of the underlyin' declines. Put %arrants, li)e their call %arrant counterparts,
'enerally have an initial term of more than one year.
QDRO see UA6(.(E1 12ME!$(# 5E6A$(23! 251E5 (U152).
QUALIFIED DIVIDENDS are the ordinary dividends received in tax years "e'innin'
after H::H that are su"-ect to the same NO or 9NO maximum tax rate that applies to net
capital 'ain. $hey are sho%n in "ox 9" of .orm 9:>> R1(/. Uualified dividends are
su"-ect to the ne% 9NO maximum capital 'ains rate if the applica"le re'ular tax rate is
HNO or hi'her. (f the applica"le re'ular tax rate is lo%er than HNO, ,ualified dividends
are su"-ect to the ne% NO maximum capital 'ains rate. $o ,ualify for the NO or 9NO
maximum rate, all of the follo%in' re,uirements must "e met7 a. $he dividends must
have "een paid "y a .!. corporation or a ,ualified forei'n corporation* ". $he dividends
are not of the type listed later under 1ividends that are not ,ualified dividends* and, c.
$he proper holdin' period is met. $he follo%in' dividends are not ,ualified dividends.
$hey are not ,ualified dividends even if they are sho%n in "ox 9" of .orm 9:>>R1(/7 a.
#apital 'ain distri"utions* ". 1ividends paid on deposits %ith mutual savin's "an)s,
cooperative "an)s, credit unions, .!. "uildin' and loan associations, .!. savin's and
loan associations, federal savin's and loan associations, and similar financial institutions.
$hese amounts are reporta"le as interest income* c. 1ividends from a corporation that is a
tax8exempt or'ani&ation or farmerDs cooperative durin' the corporationDs tax year in
%hich the dividends %ere paid or durin' the corporationDs previous tax year* d. 1ividends
paid "y a corporation on employer securities that are held on the date of record "y an
employee stoc) o%nership plan (E!2P) maintained "y that corporation* e. 1ividends on
any share of stoc) to the extent that the shareholder is o"li'ated (%hether under a short
sale or other%ise) to ma)e related payments for positions in su"stantially similar or
related property* and, f. Payments in lieu of dividends, "ut only if the shareholder )no%s
or has reason to )no% that the payments are not ,ualified dividends.
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO) is %hen a state court
allocates an interest in a ,ualified retirement plan to a former spouse throu'h a ,ualified
domestic relations order. Payments made to a former spouse as the result of a U152 %ill
not result in the taxpayer "ein' assessed a penalty for early %ithdra%al from the plan* the
former spouse %ill "e taxed on the "enefits %hen received, or the "enefits can "e rolled
over tax free into an (5! or another ,ualified retirement plan.
QUALIFIED OPINION is the auditorDs opinion accompanyin' a financial statement
that calls attention to limitations in the audit or exceptions the auditor has ta)en %ith the
audit of the statements.
QUALITATIVE INFORMATION is information that is descriptive in nature, relatin'
to, or involvin' ,uality or )ind.
QUALITY OF EARNINGS is the increased earnin's due to increased sales and cost
controls, as compared to artificial profits created "y inflation of inventory or other asset
prices.
QUANTATIVE INFORMATION is information relatin' to, or expressi"le in, terms of
,uantity.
QUARTERLY REPORT see (3$E5(M !$A$EME3$.
QUICK ASSETS is current assets minus inventories.
QUICK RATIO (or Acid $est 5atio) is a more ri'orous test than the #urrent 5atio of
short8run solvency, the current a"ility of a firm to pay its current de"ts as they come due.
$his ratio considers only cash, mar)eta"le securities (cash e,uivalents) and accounts
receiva"le "ecause they are considered to "e the most li,uid forms of current assets. A
Uuic) 5atio less than 9.: implies ?dependency? on inventory and other current assets to
li,uidate short8term de"t.
QUOTE TO CASH covers the "usiness process for creatin' a ,uote for a prospect or
customer, order mana'ement, invoicin' and cash receipt. $he functionality is hi'hly
inte'rated %ith !upply #hain Mana'ement and #ustomer Mana'ement. (n traditional
systems, it is funded in modules li)e order entry and accounts receiva"le.
RABBI TRUST is a non,ualified deferred compensation plan %here"y an employer and
employee a'ree to defer payment for the employee+s services until a specified future date.
$he ra""i trust features an irrevoca"le 'rantor trust that is set up "y the employer to hold
the contri"utions set aside for the employee. Khile this provides the employee some
de'ree of safety that the money %ill "e availa"le %hen desired, the terms of the trust must
"e such that exposes the trust assets to the claims of the employer+s creditors.
R&D see 5E!EA5#C & 1E/E62PME3$.
RANDOM SELECTION is a pro"a"ility8"ased selection protocol in %hich each unit
has a )no%n pro"a"ility of "ein' selected. $he chances of selection need not "e e,ual for
each unit, as lon' as the chances are )no%n for each unit.
RATE BASE is the value of a re'ulated pu"lic utility and its operations as defined "y its
re'ulators and on %hich the company is allo%ed to earn a particular rate of return.
RATE OF RETURN is the 'ain or loss for a security in a particular period, consistin' of
income plus capital 'ains relative to investment, usually ,uoted as a percenta'e. $he real
rate of return is the annual return reali&ed on that investment, ad-usted for chan'es in the
price due to inflation.
RATIO is the relative si&e, expressed as the num"er of times one ,uantity is contained in
another (for example, the ratio of assets to lia"ilities of a company havin' total assets of
=H::,::: and lia"ilities of =9N:,::: %ould "e =H::,::: divided "y =9N:,::: E 9.AA).
RATIO ANALYSIS involves conversion of financial num"ers for a firm into ratios.
5atio analysis allo%s comparison of one firm to another. !ince ratios loo) at relationships
inside the firm, a firm of one si&e can "e directly compared to a second firm (or a
collection of firms) %hich may "e lar'er or smaller or even in a different "usiness.
.inancial 5atio Analysis is a method of comparison not dependent on the si&e of either
firm. .inancial 5atios provide a "roader "asis for comparison than do ra% num"ers. (n
the /enture6ine data"ase the comparison is conducted a'ainst the industry (!(# #ode) in
%hich each particular listin' is associated.
RCLD see 5EP521#$(23 #2!$ 6E!! 1EP5E#(A$(23.
REACH, in advertisin', is the total num"er of people %ithin a tar'et mar)et that %ill "e
reached throu'h an advertisin' campai'n.
REAL, dependent upon usa'e, means either 9. in economics, refers to measures such as
cost, price and income, %hich are corrected for inflation over time in order to permit a
comparison of actual purchasin' po%er* or, H. actual cost, as opposed to nominal.
REAL ESTATE see 5EA6 P52PE5$0.
REALIZATION PRINCIPLE is that revenue should "e reco'ni&ed at the time 'oods is
sold and services are rendered.
REALIZED GAIN/LOSS, in securities, is a capital 'ain or loss on securities held in a
portfolio that has "ecome actual "y the sale or other type of surrender of one or many
securities. !ee also #AP($A6 GA(3.
REALIZED INCOME see 5EA6(LE1 3E$ (3#2ME.
REALIZED NET INCOME, in relation to a particular investment, is the amount "y
%hich the total cash 'ains from an investment exceeds the total losses from the
investment. $he 5eali&ed 3et (ncome from any investment cannot "e less than &ero.
REAL PROPERTY is land and B or any permanent structures attached to it* to include
salea"le natural resources, e.'., vacant land, "uildin's, farms, oil, 'as, tim"er, etc.
REASONABLE CERTAINTY is the de'ree of certainty that %ould "e found to "e in
existence "y a reasona"le person.
REASONABLENESS TEST is %here the expected value is determined "y reference to
data partly or %holly independent of the accountin' information system, and for that
reason, evidence o"tained throu'h the application of such a test may "e more relia"le
than evidence 'athered usin' other analytical procedures.
REASONABLE PERSON is a phrase to denote a hypothetical person %ho exercises
,ualities of attention, )no%led'e, intelli'ence, and -ud'ment that society re,uires of its
mem"ers for the protection of their interest and the interest of others.
REBATE is a. payment to a customer upon completion of a purchase as an inducement
or sales promotion tactic* ". unearned interest refunded to "orro%er if the loan is paid off
prior to maturity* c. amount paid "ac) or credit allo%ed "ecause of an over8collection or
the return of an o"-ect sold (i.e., a refund).
RECAPITALIZATION7 (t is dependent upon ho% you use the term. $he term
recapitali&ation in itself is, dependent upon the scenario, simply an ad-ustment of the
relationships "et%een the de"t and e,uity that funds a firms assets. Co%ever, it can
"ecome ,uite complex dependent upon under %hat conditions or reasons the firm is "ein'
recapitali&ed. $his is specially true if recapitali&ation is "ein' pursued to %ard off a
hostile ta)eover.
RECAST EARNINGS is a recalculation of earnin's "ased on the assumption that
certain expenses could "e eliminated throu'h ne% forms of cost savin's. 5ecast earnin's
are often used in the analysis of a ta)eover or mer'er.
RECEIPT is a %ritten ac)no%led'ment that a specified article, sum of money, or
shipment of merchandise has "een received.
RECEIPTS this term, unless other%ise ,ualified, in accountin' means cash received.
RECEIVABLE is an amount a%aitin' receipt of payment.
RECEIVER is a court appointed person %ho ta)es possession of, "ut not title to, the
assets and affairs of a "usiness or estate that is in a form of "an)ruptcy called
5E#E(/E5!C(P. $he receiver collects rents and other income and 'enerally mana'es
the affairs of the entity until a disposition is made "y the court.
RECEIVERSHIP is e,uita"le remedy %here"y a court orders property placed under the
control of a 5E#E(/E5 so that it may "e preserved for the "enefit of affected parties. A
failin' company may "e placed in receivership in an action "rou'ht "y its creditors. $he
"usiness is often continued "ut is su"-ect to the receiver+s control. !ee also
BA3<5P$#0.
RECIPROCAL INVESTMENT is primarily a protection measure "et%een states
('overnments) that ensures that investment "et%een t%o or more states is "alanced.
RECONCILIATION is the ad-ustin' of the difference "et%een t%o items (e.'.,
"alances, amounts, statements, or accounts) so that the fi'ures are in a'reement. 2ften
the reasons for the differences must "e explained. 2ne example %ould "e reconcilin' a
chec)in' account ("rin'in' the chec)in' led'er and "an) "alance statement into
a'reement).
RECOURSE, in finance, is the ri'ht to demand payment from the ma)er or endorser of a
ne'otia"le instrument (as a chec)). !ee 5E#25!E 32$E.
RECOURSE NOTE is a note %here the default may result in loss of collateral and also
personal suit and -ud'ment. Most notes are recourse notes.
RECOVERY, in finance, a. a"sorption of cost throu'h the allocation of depreciation* ".
residual cost or salva'e value of a fixed asset after all allo%a"le depreciation* or, c.
collection of an accounts receiva"le that had "een previously "een %ritten off as a "ad
de"t.
RECURRING ENTRY is a scheduled accountin' entry that occurs consistently as to
date and amount, e.'. a monthly lease payment.
REDEMPTION is the repayment of the principal amount of a de"t or security at or
"efore maturity (as %hen a corporation repurchases its o%n stoc)).
RED HERRING is a preliminary re'istration statement descri"in' the issue (the (P2)
and prospects of the company that must "e filed %ith the !E# or provincial securities
commission. $here is no price or issue si&e stated in the red herrin'. 5ed Cerrin'+s are
sometimes updated several times "efore it is called the final prospectus. (t is )no%n as a
red herrin' "ecause it contains a statement typed in red that the company is not
attemptin' to sell their shares "efore the re'istration is approved "y the !E#.
REDWELLS are %hen le'al records are set up in file folders and file poc)ets called
?red8%ells.? #lients usually have several matters. 5ed8%ells are usually four8inch filin'
media in %hich file folders are inserted. A le'al file may have several standard
components called ?su"8files.? $hese su"8files are normally inserted into red8%ells.
REFERENDUM is %hen a le'islative act is referred for final approval to a popular vote
"y the electorate, e.'., a "ond referendum.
REFLATION is, upon recoverin' from a depression or a recession, the period durin'
%hich prices are returned to the level they had attained durin' a period of prosperity "y
lo%erin' the purchasin' po%er of money is )no%n as reflation.
REFUNDING is redeemin' a "ond %ith proceeds received from issuin' lo%er8cost de"t
o"li'ations %ith ran)in' e,ual to or superior to the de"t to "e redeemed.
REFURBISH is to renovate or clean up.
REG A see 5EG6A$(23 A.
REG D see 5EG6A$(23 1.
REGISTER, in accountin', is a formal or official recordin' of items %ithin a "oo) or
re'ister, e.'., .ixed Asset 5e'ister or (nvoice 5e'ister.
REGISTERED BONDS are "onds for %hich the names and addresses of the
"ondholders are )ept on file "y the issuin' company.
REGISTERED INVESTMENT ADVISOR (RIA) is an investment advisor re'istered
%ith the !E#. 3o certification is re,uired.
REGISTRATION RIGHTS is the ri'ht to re,uire that a company re'ister restricted
shares. 1emand 5e'istered 5i'hts ena"le the shareholder to re,uest re'istration at any
time, %hile Pi''y Bac) 5e'istration 5i'hts ena"le the shareholder to re,uest that the
company re'ister his or her shares %hen the company files a re'istration statement (for a
pu"lic offerin' %ith the !E#).
REGRESSIVE TAX is a tax system to %here the more income that is reali&ed the lo%er
the tax rate "ecomes.
REG S see 5EG6A$(23 !.
REGULATION A, in the !A, is a re'ulation under the !ecurities Act of 9>AA
providin' for a simplified form of filin' %ith the !E#, used for certain pu"lic offerin's of
not more than =N,:::,::: and exemptin' such offerin's from full re'istration.
REGULATION D, in the !A, is a re'ulation under the !ecurities Act of 9>AA %hich
exempts limited offers and sales of securities from re'istration if the offerin' satisfies
certain re,uirements as to the num"er and nature of investors and the value of the
offerin'. Advertisin' and resale are restricted. (n 'eneral, 5ule N:; of 5e' 1 is used for
offerin's of =9 million or less* 5ule N:N of 5e' 1 is used for offerin's of =N million or
less, %ith no more than AN purchasers %ho are not Accredited (nvestors* and 5ule N:F of
5e' 1 is used for offerin's over =N million, %ith no more than AN purchasers %ho are not
Accredited (nvestors, "ut %ho must "e either sophisticated or represented "y a Purchaser
5epresentative.
REGULATION S, in the !A, is a re'ulation under the !ecurities Act of 9>AA %hich
exempts from re'istration certain offers and sales of securities made outside of the nited
!tates "y !A or forei'n issuers.
REIMBURSEMENT is to pay "ac) to someone, e.'. to pay an employee for travel
expenses that %as paid "y the employee out of that employees o%n personal funds.
REIT is 5eal Estate (nvestment $rust.
RELATED PARTY TRANSACTION is an interaction "et%een t%o parties, one of
%hom can exercise control or si'nificant influence over the operatin' policies of the
other. A special relationship may exist, e.'. a corporation and a ma-or shareholder.
RELATIVE CHANGE is a value that is properly related in si&e or de'ree or other
measura"le characteristics, e.'. cost of 'oods en-oyed a relative chan'e of >O as
compared to prior period performance.
RELEVANCE CONCEPT refers to the capacity of accountin' information to ma)e a
difference to the external decision ma)ers %ho use financial reports.
RELEVANT COST, in mana'erial accountin' decision8ma)in' situations, is any
ne'ative8implications phenomenon %hich is conse,uent upon the production process,
%hether it is denominated in money terms or not.
RELEVANT RANGE is the ran'e of activity over %hich chan'es in cost are of interest
to mana'ement
RELIABILITY CONCEPT is a ,uality of information that assures decision ma)ers that
the information represented in the financial records and financial statements captures the
actual conditions and events of the reported entity.
REMITTING BANK is a "an) that sends a draft to the overseas "an) for collection.
REMUNERATION is the act of payin' for 'oods or services or to recompense for
losses (Example7 5eceivin' remuneration for %or), i.e., a paychec)).
RENEWAL NOTE is a note that rene%s a previous note due date.
RENT EXPIRED is "ased upon prepaid rent and the amount of time that has elapsed
that is covered under the prepaid term of the rental.
REPLACEMENT COST is the total cost at current prices of an asset that is not
necessarily an exact duplicate of the su"-ect asset "ut serves the same purpose or function
as the ori'inal.
REPLACEMENT RESERVE FUND, in real estate, is a fund set aside for replacement
of common property in a condominium, P1, or cooperative pro-ect* particularly that
%hich has a short life expectancy, such as carpetin' and furniture.
REPLACEMENT VALUE CONCEPT, in insurance, is loss covera'e for assets at the
cost re,uired to purchase li)e assets at mar)et value. $he replacement value concept
eliminates the often trou"lesome factor of used or depreciated value %hen claims for
losses are ad-usted.
REPLACEMENT VALUE is a valuation similar to an ad-usted "oo) value analysis.
5eplacement value is different than li,uidation value in that is uses the value of the
replacement value of assets, %hich is usually hi'her than "oo) value. 6ia"ilities are
deducted from the replacement value of the assets to determine the replacement value of
the "usiness.
REPO is a contract under %hich the seller of securities, such as $reasury Bills, a'rees to
"uy them "ac) at a specified time and price. Also called repurchase a'reement or
"uy"ac).
REPORTABLE CONDITION is a matter comin' to the auditorDs attention relatin' to
!(G3(.(#A3$ 1E.(#(E3#(E! in the desi'n or operation of the entity+s internal control
that could A1/E5!60 A..E#$ an entityDs a"ility to fulfill future o"li'ations %ith
customers andBor the satisfaction of lia"ilities.
REPORTABLE SEGMENT is a "usiness se'ment or 'eo'raphical se'ment for %hich
(A! 9; re,uires se'ment information to "e reported.
REPORTED EARNINGS PER SHARE is the earnin's per share after profit o%ed to
preference shareholders or minority interests is su"tracted, i.e. it is the profit that actually
"elon's to the ordinary shareholders.
REPORTING ENTITY is the le'al entity for %hich financial reports are prepared and
made availa"le.
REPORTING PERIOD see A##23$(3G PE5(21.
REPRESENTATION EXPENSES are those expenditures %hose character and primary
purpose is for representational or entertainment related activities, includin' receptions or
"an,uets.
REPRODUCTION COST LESS DEPRECIATION (RCLD) is a techni,ue for
valuin' electric distri"ution assets.
REQUIRED RATE OF RETURN see C516E 5A$E.
REQUISITION is a %ritten re,uest to "uy somethin'. sually, once approved, the
re,uisition is then transformed into a purchase order.
RESEARCH & DEVELOPMENT (R&D) is research as a planned activity aimed at
discovery of ne% )no%led'e %ith the hope of developin' ne% or improved products and
services. 1evelopment is the translation of the research findin's into a plan or desi'n of
ne% or improved products and services.
RESERVE is an accountin' entry that properly reflects contin'ent lia"ilities.
RESERVE ACCOUNTS, 'enerally, are those accounts %here retained earnin's are set
aside to satisfy dividends, improvements, contin'encies, retirement of preferred stoc),
etc.
RESERVE CAPITAL is that part of the nominal (current value) of a "usiness that has
not yet "een called up. (t is thus a reserve, %hich can "e dra%n on in case of need.
RESIDUAL, 'enerally, is somethin' left after other parts have "een ta)en a%ay.
RESIDUAL CLAIM is a claim to a share of earnin's after de"t o"li'ations have "een
satisfied.
RESIDUAL EQUITY THEORY is the theory that common stoc)holders are considered
to "e the real o%ners of the "usiness, i.e., Assets 8 6ia"ilities 8 Preferred !toc) E
#ommon !toc).
RESIDUAL INCOME is income from efforts %hich continue to 'enerate revenue over
time %ithout re,uirin' any additional effort (e.'., a stream of future royalty payments
from a "oo)).
RESIDUAL OWNERSHIP see 5E!(1A6 EU($0 $CE250.
RESIDUAL VALUE is7 a) 5eali&a"le value of a fixed asset after deductin' costs
associated %ith its sale* ") !crap value or the value to a -un) dealer* or c) $he amount
remainin' after all depreciation has "een deducted from the ori'inal cost of a deprecia"le
asset.
RESOURCE ABSORPTION, in "usiness, is the depletion of the finite resources
availa"le to a company, i.e., la"or, machinery, materials, etc.
RESPONSIBILITY ACCOUNTING is the collection, summari&ation, and reportin' of
financial information a"out various decision centers throu'hout an or'ani&ation* can also
"e called profita"ility accountin' or activity accountin'. (t trac)s costs, revenues, or
profits to the individual mana'ers %ho are responsi"le for ma)in' the decisions a"out
costs, revenues, or profits and ta)in' action a"out them.
RESPONSIBILITY CENTER is a su"unit in an or'ani&ation %hose mana'er is held
accounta"le for specified financial results of its activities.
RESTATEMENT OF FINANCIALS are sometimes re,uired "y the (5! %hen the (5!,
throu'h audit, determines that (5! rules %ere not follo%ed* either la%fully or
fraudulently. !uch restatements usually have a ne'ative effect on the financial results of
the audited entity for the periods in ,uestion.
RESTRICTED is somethin' that is cur"ed or re'ulated, e.'. restricted assets.
RESTRICTED ASSETS are assets B resources %hich are restricted "y le'al or
contractual re,uirements for use under specific circumstances or purposes.
RESTRICTED DONATIONS see 5E!$5(#$E1 A!!E$!.
RESTRUCTURING is the termination of employees and the reor'ani&ation of those
remainin'* can include reductions in plant and e,uipment. 5estructurin' is usually
implemented to reali&e cost savin's.
RESULTS FROM OPERATION is a synonym for the financial statement of a
corporation7 P&6, "alance sheet, statement of cash flo%s, and sometimes a statement of
o%ners e,uity. !ee .(3A3#(A6 !$A$EME3$.
RETAIL is the sellin' of 'oods directly to consumers* usually in small ,uantities and not
for resale.
RETAINAGE, in a construction contract, is the money earned "y a contractor "ut not
paid to the contractor until the completion of construction or another predetermined date.
$he retaina'e is held "ac) as assurance for the ,uality of the contractors %or).
RETAINED EARNINGS are profits of the "usiness that have not "een paid out to the
o%ners as of the "alance sheet date. $he earnin's have "een ?retained? for use in the
"usiness (5etained Earnin's is an account in the e,uity section of the "alance sheet). (t is
comprised of the "alance, either de"it or credit, of appropriated or unappropriated
earnin's of an entity that are retained in the "usiness. 32$E7 Appropriated earnin's are
not availa"le for dividends, "ut may "e used to reduce a deficit or may "e transferred to
stated capital. 2ther appropriations of profits re,uire a vote of the shareholders.
RETAINED EARNINGS STATEMENT see !$A$EME3$ 2. 5E$A(3E1
EA53(3G!.
RETAINED PROFIT see 5E$A(3E1 EA53(3G!.
RETROSPECTIVE REIMBURSEMENT, in healthcare, is %here reim"ursement came
after medical care %as delivered.
RETURN ON ASSETS (ROA) sho%s the after tax earnin's of assets. 5eturn on assets
is an indicator of ho% profita"le a company is. se this ratio annually to compare a
"usiness+ performance to the industry norms7 $he hi'her the ratio the 'reater the return on
assets. Co%ever this has to "e "alanced a'ainst such factors as ris), sustaina"ility and
reinvestment in the "usiness throu'h development costs.
RETURN OF CAPITAL is the distri"ution of cash that resulted from tax savin's on
depreciation, sale of a capital asset or securities, or any other sources unrelated to
retained earnin's.
RETURN ON CAPITAL EMPLOYED (ROCE) is a measure of ho% effectively the
company is usin' its capital. $he formula to measures the return on all the assets the
company is usin'7 Profit "efore interest and tax (PB($) B (total assets 8 current lia"ilities)
RETURN ON EQUITY (ROE) measures the overall efficiency of the firm in mana'in'
its total investments in assets and in 'eneratin' a return to stoc)holders. (t is the primary
measure of ho% %ell mana'ement is runnin' the company. 52E allo%s you to ,uic)ly
'au'e %hether a company is a value creator or a cash consumer. By relatin' the earnin's
'enerated to the shareholders+ e,uity, you can see ho% much cash is created from the
existin' assets. #learly, all thin's "ein' e,ual, the hi'her a company+s 52E, the "etter the
company.
RETURN ON INVESTED CAPITAL (ROIC) is a measure of ho% effectively a
company uses the money (o%ned or "orro%ed) invested in its company operations. (t is
calculated "y7 net income after taxes B (total assets less excess cash minus non8interest8
"earin' lia"ilities).
RETURN ON INVESTMENT (ROI) is a profita"ility measure that evaluates the
performance of a "usiness. 52( can "e calculated in various %ays. $he most common
method is 3et (ncome as a percenta'e of 3et Boo) /alue (total assets minus intan'i"le
assets and lia"ilities).
RETURN ON NET WORTH see 5E$53 23 !$2#<C261E5! EU($0.
RETURN ON RATE BASE is the ratio of net operatin' income earned "y a utility,
calculated as a percenta'e of its rate "ase.
RETURN ON SALES is a measure of a company+s profita"ility, e,ual to a fiscal year+s
pre8tax income divided "y total sales.
RETURN ON STOCKHOLDERS EQUITY is a measure of ho% profita"ly the
company is utili&in' shareholders+ funds. (t is calculated7 profit after tax a total
stoc)holder+s e,uity. Also called 5E$53 23 3E$ K25$C.
RETURNS INWARDS are 'oods sold on credit to a customer and returned for some
reason to "e refunded for (!ales returns).
RETURNS OUTWARDS are 'oods "ou'ht on credit from a supplier and returned for
some reason to "e refunded for (Purchases returns).
REVALUATION, in 'eneral, is the reconsideration of the value or %orth of a property.
(n currency, it is the increase in the exchan'e rate of a currency as a result of official
action.
REVALUATION RESERVE see A!!E$ 5E/A6A$(23 5E!E5/E.
REVALUATION SURPLUS, under the revaluation model, increases in carryin'
amount a"ove a cost8"ased measure are reco'ni&ed as revaluation surplus.
REVENUE is the inflo%s of assets from sellin' 'oods and providin' services to
customers* includin' the reduction of lia"ilities from sellin' 'oods and providin' services
to customers.
REVENUE AD!USTMENT is a -ournal entry to either increase or decrease revenue
"ased upon ne% data* there"y either increasin' or decreasin' cash.
REVENUE BONDS are a type of municipal "ond %here principal and interest are
secured "y revenues such as char'es or rents paid "y users of the facility "uilt %ith the
proceeds of the "ond issue. Pro-ects financed "y revenue "onds include hi'h%ays,
airports, and not8for8profit health care and other facilities.
REVENUE CONTRACT is a "indin' a'reement "et%een a 'overnmental "ody and
another party that defines the terms under %hich revenue %ill "e received. A contract can
"e distin'uished from a customer purchase order "y the fact that a contract %ill contain
the si'natures of "oth parties, %hile a purchase order %ill contain only the si'nature of
the customer.
REVENUE EXPENDITURE is the cost of resources consumed or used up in the
process of 'eneratin' revenue, 'enerally referred to as expenses.
REVENUE !USTIFIED is %here the revenue reali&ed from a product or service %ill
pay for the cost and expenses of that product or service, i.e. the product or service %ill
pay for itself.
REVENUE RECOGNITION is the process of recordin' revenue, under one of the
various accepta"le methods, in the accountin' period. (n each period of revenue
reco'nition, all related expenses should "e matched to revenue. $he most common
method of reco'ni&in' revenue is at the time of sale or provisionin' of service.
REVENUE RESERVE is a fund that is not a #AP($A6 5E!E5/E, i.e. the funds are
distri"uta"le.
REVERSE COSTBENEFIT METHOD is "ased on the short8cut rate of return
formula and amounts to as)in' the ,uestion7 'iven the cost of the investment, %hat level
of annual "enefits %ould produce a 'iven rate of return (M percent, for instance) on the
investmentZ
REVERSE TAKEOVER can occur in different forms7 9. a smaller corporate entity
ta)es over a lar'er one.* H. a private company purchases a pu"lic one* or, A. a method of
listin' a private company %hile "ypassin' most securities re'ulations, %here"y %hich a
shell pu"lic company "uys out a functionin' private company %hose mana'ement then
controls the pu"lic company.
REVERSING ENTRY is a very special type of ad-ustin' entry. Generally, it is a de"it
or credit "oo))eepin' entry made to reverse a prior "oo))eepin' entry. $hey can "e
extremely useful and should "e used %here necessary. A reversin' entry comes in t%o
parts7 the ori'inal ad-ustin' entry, and the reverse, or opposite entry. $he second entry is
%ritten "y simply reversin' the position of all de"its and credits. ltimately, the end
result on the "oo)s is &ero, "ut the ad-ustin' entry serves to correctly allocate an expense,
so the financial statements are correct.
.or example7 4 #ompany has a payroll department, and cuts chec)s every t%o %ee)s
after ta"ulatin' hours, and calculatin' net pay. A lar'e num"er of allocations have to "e
made to various %ithholdin' accounts. $he accountants don+t %ant to interfere %ith the
operations of the payroll department. And the employees also %ant the department to run
efficiently so they can 'et their pay chec)s on time.
At the end of the year the accountants need to appropriately allocate payroll expenses,
plus taxes due and paya"le. 5ather than interfere %ith the payroll department the
calculation is made on paper (or computer), and entered as an ad-ustin' entry. (t is
mar)ed to "e reversed. After the closin' entries are made, the first entries of the ne% year
are the reversin' entries. $hey undo the effects of the ad-ustin' entry.
(f the ad-ustin' entry is not reversed, the "oo)s %ill not "e correct. Both the accountants
and payroll department %ill "e ma)in' entries related to payroll. $he reversin' entry
effectively allo%s the accountants to ma)e ad-ustin' entries %ithout causin' the "oo)s to
"e incorrect* the payroll department continues to ma)e routine entries, and doesn+t need
to ma)e any special entries or allocations.
REVERSION ASSET see A!!E$ 5E/E5!(23.
REVIEW is an accountin' service providin' some assurance to the Board of 1irectors
and interested parties as to the relia"ility of financial data %ithout the #PA conductin' an
examination in accordance %ith 'enerally accepted accountin' standards. $he A(#PA
auditin' standards "oard formulates revie% standards for pu"lic companies %hile the
A(#PA Accountin' and 5evie% !ervices #ommittee provides revie% standards for non8
pu"lic "usinesses.
REVOCABLE LETTER OF CREDIT is a letter of credit %hich can "e cancelled or
altered "y the dra%ee ("uyer) after it has "een issued "y the dra%ee+s "an).
REVOLVING COLLATERAL are accounts receiva"le or inventory %hich chan'e
from day to day.
REVOLVING LINE OF CREDIT in commercial "an)in' is a contractual a'reement
"et%een a "an) and, usually, a company %here the "an) a'rees to provide loans up to a
specified maximum over a specified period, usually a year or more. (n consumer "an)in',
it is a loan account re,uirin' monthly payments less than the full amount of the loan, and
the "alance is carried for%ard %ith a finance char'e on that "alance.
REVOLVING FINANCING is financin' secured "y collateral.
REVOLVING FUND is money that is rene%ed as it is used.
REVOLVING LOAN is a loan that is automatically rene%ed upon maturity.
REWORK is to chan'e an item in order to improve it or ma)e it more suita"le for a
particular purpose, e.'. to re%or) a defective product into one that exhi"its the ,uality
re,uired for acceptance.
RFP is 5e,uest for Proposal.
RISK is the measura"le possi"ility of losin' or not 'ainin' value. 5is) is different from
uncertainty. ncertainty is not measura"le.
RISK AD!USTED RETURN is %hen %e su"tract from the rate of return on an asset a
rate of return from another asset that has similar ris). $his 'ives an a"normal rate of
return that sho%s ho% the asset performed over and a"ove a "enchmar) asset %ith the
same ris). Ke can also use the "eta a'ainst the "enchmar) to calculate an alpha %hich is
also ris) ad-usted performance.
ROA see 5E$53 23 A!!E$!.
ROBUST is %hen a "usiness is considered fully developed and healthy.
ROCC is an acronym for 5eturn 2n #ommitted #apital.
ROE see 5E$53 23 EU($0.
ROG, in "usiness, is an acronym meanin' S5eceipt 2f GoodsT.
ROI (R1,/6- (- I-81',<1-,) can "e calculated in various %ays. $he most common
method is 3et (ncome as a percenta'e of 3et Boo) /alue (total assets minus intan'i"le
assets and lia"ilities).
ROIC see 5E$53 23 (3/E!$E1 #AP($A6.
ROLL FORWARD, in accountin', it is the systematic esta"lishment of a ne%
accountin' period+s "alances "y usin' (rollin' for%ard) prior accountin' period data.
$here are t%o approaches7 9. 5oll for%ard "oth asset and lia"ilities on a consistent "asis
from a consistent earlier date (possi"ly the last annual revie%)* or, ta)e the most up to
date asset and lia"ility fi'ures as the startin' point (%hich may "e at different dates) to
produce roll for%ard estimates of assets and lia"ilities* in securities, it is %hen an investor
replaces an old options position %ith a ne% one havin' a later expiration date (and same
stri)e price).
ROLL FORWARD BUDGET see #23$(32! B1GE$.
ROLLING STOCK is the e,uipment availa"le for use as transportation, as automotive
vehicles, locomotives, or railroad cars, o%ned "y a particular company or carrier. 1oes
not include aircraft or %ater "orne craft.
ROLLOVER is7 a. in .!. real estate tax la%, a delayed tax that allo%s you to apply the
profit you ma)e sellin' your old house to pay for the ne% one %ithout payin' capital
'ains taxes on the profit. (n order to rollover the profits, the ne% house must "e more
expensive than the old and the t%o sales must occur %ithin t%o years of each other* ". in
investments, it is the transferrin' of funds from one investment to another such as rollin'
over the proceeds from a "ond %hich has matured into another "ond, or the rollin' over
of the proceeds of a share sale into a tax8efficient investment vehicle li)e a /enture
#apital $rust* or, c. in "an)in', it is the term used %hen a "orro%er o"tains authority
from a "an) to delay a principal payment on a loan.
ROYALTY is the share of the product, or of the proceeds reali&ed from the product,
reserved "y an o%ner for permittin' another entity to exploit and use that entityDs
property, i.e. it is the rental paid to the ori'inal o%ner of property "ased upon a
percenta'e of sales, profit or production. 5oyalty can involve literary %or)s, inventions,
and other intellectual property, as %ell as minin' leases and conveyances.
RULE OF THUMB is a rou'h and useful principle or method, "ased on experience
rather than precisely accurate measures.
RUNNING RATE is a sustained constant rate, often the only important sin'le rate
except for &ero o"served under a 'iven schedule (as in some ratio performances)* also
)no%n as stream rate.
RUNNING TOTAL is the sum of any 'iven set of num"ers that is
incrementedBdecremented as additional num"ers "ecome availa"le over time. .or
example, a retail store ma)es sales throu'hout a time period, the runnin' total is the sum
of their sales, includin' returnsBcredits, at any 'iven point of time durin' that time period7
day, %ee), month, ,uarter, year.
RUN RATE, in finance, is ho% the financial performance of a company %ould loo) if
you %ere to extrapolate current results out over a certain period of time. (n accountin', it
is the avera'e annual dilution from stoc) option 'rants at a company over the most recent
three year period reported in the annual report.
SAFE HARBOR RULE is a concept in statutes and re'ulations %here"y a person %ho
meets listed re,uirements %ill "e preserved from adverse le'al action. .re,uently, safe
har"ors are used %here a le'al re,uirement is some%hat am"i'uous and carries a ris) of
punishment for an unintended violation.
SALARY is scheduled %a'es and "enefits an employee receives from an employer.
SALES AND COLLECTIONS BUDGET represents one of the first steps in the
"ud'etin' process, as items such as inventory levels and operatin' expenses are driven
off of the !ales and #ollections Bud'et. Effective sales "ud'etin' is a )ey factor in
"uildin' a useful and representative financial model for a "usiness. 5e'ardless of the
nature of your "usiness (for example, %hether it is product or service8"ased).
SALES BUDGET is the expected sales in units and dollars. !ee 2PE5A$(3G
B1GE$.
SALES CONTRACT see !A6E! 251E5.
SALES DISCOUNT is a reduction in the sellin' price usually as an inducement to
consummate a sale. !ales 1iscount is on the income statement as a deduction from Gross
!ales to 'et 3et !ales.
SALES INVOICE is a document that records the sale of 'oods or services from a
vendor to a customer.
SALES / RECEIVABLES (R1)1*8+231' T/6-(816) is a ratio that measures the num"er
of times trade 5eceiva"les turn over durin' the year. Generally, the hi'her the turnover of
receiva"les, the shorter the time "et%een sale and cash collection. (t indicates ho% fast
the company is 'ettin' paid for 'oods and services. 5eceiva"les turnover is "est
compared to the industry in order to determine if the company should improve their
collection rate. $he faster the receiva"les turnover, the "etter cash flo% %ill loo). !lo% or
"elo% par turnover can "e an indication of systemic pro"lems %ithin the company. (t is
"est to compare receiva"les turnover %ith that of industry avera'es.
SALES MULTIPLE is the most %idely used valuation "enchmar) used in the valuation
of a "usiness. $he information needed are annual sales and an industry multiplier, %hich
is usually a ran'e of .HN to 9 or hi'her. $he industry multiplier can "e found in various
financial pu"lications, as %ell as analy&in' sales of compara"le "usinesses. $his method
is easy to understand and use. $he sales multiple is often used as the valuation
"enchmar).
SALES ORDER, also )no%n as !A6E! #23$5A#$, is a contract "y %hich "uyer and
seller a'ree to the terms and conditions of a sale.
SALES PROCEEDS are the sum of the service units (products, services) sold "y a
corporation %ithin a particular period. $he sales proceeds are calculated from the
,uantities sold (pcs, )', hrs) multiplied "y the sales price per unit %ithin a particular
period.
SALES TAX is a tax levied "y a 'overnment entity, usually state or city, on the retail
price of an item and certain taxa"le services, collected "y the retailer.
SALVAGE VALUE is7 a) 5eali&a"le value of a fixed asset after deductin' costs
associated %ith its sale* ") !crap value or the value to a -un) dealer* or c) $he amount
remainin' after all depreciation has "een deducted from the ori'inal cost of a deprecia"le
asset.
SAME STORE SALES is used %hen analy&in' the retail industry. (t compares sales in
stores %hich have "een open for a year or more.
S&P ?;; see !$A31A51 A31 P225+! (!&P) N::.
SAP is an inte'rated enterprise resource plannin' (E5P) system that seamlessly
inte'rates most activities of a company.
SAVINGS ACCOUNTS are client accounts maintained "y "an)s, savin's & loan
associations, credit unions, and mutual savin's "an)s that pay interest "ut can not "e used
directly as money. $hese accounts let customers set aside a portion of their li,uid assets
that could "e used to ma)e purchases. But to ma)e those purchases, savin's account
"alances must "e transferred to ?transactions deposits? (or ?chec)a"le deposits?) or
currency. Co%ever, this transference is easy enou'h that savin's accounts are often
termed near money. !avin's accounts, as such constitute a si&ea"le portion of the MH
monetary a''re'ate. Kith savin's accounts you can ma)e %ithdra%als, "ut you do not
have the flexi"ility of usin' chec)s to do so. As %ith an MM1As (money mar)et deposit
account), the num"er of %ithdra%als or transfers you can ma)e on the account each
month is usually limited.
SAVINGS DEPOSITS see !A/(3G! A##23$!.
SBIC is !mall Business (nvestment #ompany.
SCHEDULE is an ordered list of times at %hich thin's are planned to occur, e.'., cash
receipts schedule and amorti&ation schedule.
SCIENTER THEORY is "ased on the %ord +scienter+, %hich is 6atin for ?havin'
)no%led'e.? (n criminal la%, the theory refers to )no%led'e "y a defendant that hisBher
acts %ere ille'al or hisBher statements %ere lies and thus fraudulent. (n securities, it is to
)no%in'ly transact a fraudulent securities deal.
S CORPORATION see !B#CAP$E5 !.
SCRAP is material that is discarded as %orthless or sold to "e reused as parts* -un)* a
small unusa"le amount of somethin' that is left over after the rest has "een used or
consumed.
SCRAP VALUE see !A6/AGE /A6E.
SDCF is !ales & 1istri"ution #ash .lo%.
SEC is the !ecurities and Exchan'e #ommission.
SECA is !elf8Employment #ontri"utions Act of 9>N;.
SECURED is an o"li'ation "ac)ed "y a pled'e of collateral. 2pposite of unsecured.
SECURED LIABILITY is a lia"ility that has a de'ree of protection to%ards satisfaction
if unpaid "ecause the de"tor has pled'ed personalBcompany assets to%ards satisfaction of
that lia"ility* e.'., a property mort'a'e is a secured lia"ility "ecause the mort'a'e holder
has a 'uarantee throu'h a lien on the property.
SECURITIES FRAUD, in most cases, is nothin' more than stealin'. .ederal and state
securities la%s contain more technical definitions. But %hen investors are enticed into
purchasin' security instruments "ased on untrue data, statements or promises, it is
securities fraud.
SECURITIZATION is the process of creatin' a pass8throu'h, such as the mort'a'e
pass8throu'h security, "y %hich the pooled assets "ecome standard securities "ac)ed "y
those assets. Also, refers to the replacement of non8mar)eta"le loans andBor cash flo%s
provided "y financial intermediaries %ith ne'otia"le securities issued in the pu"lic capital
mar)ets.
SECURITY dependent upon usa'e is7 a. a 'uarantee that an o"li'ation %ill "e met* ".
defense a'ainst financial failure* financial independence* c. property that your creditor
can claim in case you default on your o"li'ation* or, d. a formal declaration that
documents a fact of relevance to finance and investment* the holder of %hich has a ri'ht
to receive interest or dividends, e.'. stoc)s and "onds.
SEGMENT REVENUE is revenue, includin' interse'ment revenue, %hich is directly
attri"uta"le or reasona"ly alloca"le to a se'ment. (ncludes interest and dividend income
and related securities 'ains only if the se'ment is a financial se'ment ("an), insurance
company, etc.).
SEGREGATED FUND is a pooled investment fund, much li)e a mutual fund,
esta"lished "y an insurance company and se're'ated from the 'eneral capital of the
company. (ts chief distinction from a mutual fund is its 'uarantee that, re'ardless of fund
performance, at least a minimum percenta'e of the investor+s payments into the fund %ill
"e returned %hen the fund matures.
SELFCONTRUCT ASSETS is the costs incurred to "uild it yourself.
SELLING & ADMINISTRATIVE EXPENSE BUDGET is a "ud'et of planned
expenditures for non8manufacturin' activities, such as sales commissions and office
salaries. !ee 2PE5A$(3G B1GE$.
SELLTHROUGH, in retail sales, is the num"er of product distri"uted that are actually
sold, e.'. movies sold as compared to rented.
SEMIVARIALBLE COST is one that varies %ith chan'es in volume, "ut, unli)e
varia"le cost, does not vary in direct proportion. $his component contains "oth fixed and
varia"le elements, e.'., a rented vehicle may have a rental fee (fixed), "ut contain a
milea'e adder (varia"le).
SENIOR DEBT/NOTE are loans or de"t securities that have a claim prior to -unior
o"li'ations and e,uity on a corporationDs assets in the event of a li,uidation.
SENSEX is a Bom"ay !toc) Exchan'e (ndex (B!E A:8!hare Benchmar) !ensex (ndex).
SENSITIVE ASSETS are those assets that can "e affected "y uncontrolla"le external
factors. $here are interest rate sensitive assets (assets yieldin' cash8flo%s at some fixed
points in the future) and theft8sensitive assets (inventory for example).
SENSITIVE LIABILITIES normally refers to +interest rate sensitive lia"ilities+ (i.e.,
lia"ilities %here there is a floatin' interest rate).
SENSITIVITY ANALYSIS is the analysis of ho% sensitive outcomes are to chan'es in
the assumptions. $he assumptions that deserve the most attention should depend lar'ely
on the dominant "enefit and cost elements and the areas of 'reatest uncertainty of the
pro'ram or process "ein' analy&ed.
SEPARABLE COSTS are all costs (manufacturin', mar)etin', distri"ution, etc.)
incurred "eyond the splitoff point that are assi'na"le to one or more individual products.
SERIAL BOND is a "ond issue in %hich the "onds mature periodically over a num"er of
years.
SERVICE BUSINESS is a form of "usiness providin' different types of la"or services
in a %ide variety of "usiness sectors, e.'., la%n mo%in', housecleanin' and clothes
cleaners are three types of consumer services offered to the 'eneral pu"lic.
SERVICE CHARGE ACCOUNTING, in property mana'ement, is estate and property
service char'e accountin' system that provides the mechanism for comprehensive service
char'e reconciliation reports for "oth the tenant and the property mana'er. Expenditure
can "e apportioned e,ually over the entire service char'e period or can "e allocated to a
specific date ran'e %ithin the period. .ull "ud'et reportin' and next period "ud'et
calculation routines are usually provided.
SERVICE CONTRACT is a contract offered "y a retailer for maintainin' and repairin'
a product "eyond its manufacturer+s %arranty covera'e.
SERVICE INVOICE is an invoice associated %ith non8professional services, e.'.
-anitorial, consultin' or architectural. !ee P52.E!!(23A6 (3/2(#E and P521#$
(3/2(#E.
SERVICE LEVEL AGREEMENT (SLA) is performance o"-ectives reached "y
consensus "et%een the user and the provider of a service, or "et%een an outsourcer and
an or'ani&ation. A service level a'reement specifies a variety of performance standards
that may or may not include ?service level.?
SETOFF is the dischar'e of a de"t "y settin' a'ainst it a distinct claim in favor of the
de"tor.
SETUP COST see .(4E1 #CA5GE.
SEVERANCE TAX is levied on production of natural resources ta)en from land or
%ater "ottoms %ithin the territorial "oundaries of a state.
SG&A refers to the indirect overhead costs contained %ithin the !ales, General and
Administrative expense B cost cate'ories.
SGD is an acronym for !(G3E1.
SHARE is one unit of o%nership interest in a company, mutual fund, limited partnership,
etc.
SHARE APPLICATION MONEY is that money received "y a company durin' an
(P2. Payments received for a su"scription of stoc) is normally received over the (P2 life.
.or example7 Kid'ets 6imited has "een re'istered %ith an authori&ed capital of
=H,::,::: divided into H,::: shares of =9:: each of %hich, 9,::: shares %ere offered for
pu"lic su"scription at a premium of =N per share, paya"le as7
on application =9:
on allotment =HN (includin' premium)
on first call =;:
on final call =A:
.or a total of =9:NBshare
$he amounts received %ould "e carried as a current lia"ility until such time as the stoc)
is issued, then it %ould "e considered as part of e,uity.
SHARE BUYBACK is %hen a company ma)es an offer to "uy "ac) some of its o%n
shares. $here are several types of "uy8"ac)s. $hree common types are7 9. an e,ual access
scheme 8 %hen the company offers to "uy "ac) the same proportion of each shareholder+s
shares* H. a selective "uy8"ac) 8 %hen the company offers to "uy "ac) shares from only
one or some of its shareholders* or, A. the company may "uy the shares on the exchan'e
%here the shares are traded.
SHARE CAPITAL is that portion of a corporation+s e,uity o"tained from issuin' shares
in return for cash or other considerations.
SHAREHOLDER is an individual or company, (includin' corporations) that le'ally
o%ns one or more shares of a company.
SHAREHOLDER LOANS include any loans "et%een a corporation and any of its
shareholders. 6oans from shareholders are normally carried as lon'8term de"t, "ut the
reality is such loans should "e counted as e,uity (they are not) "ecause they rarely are
paid "ac) to the shareholder.
SHAREHOLDER OF RECORD is any individual or company that o%ns at least one
share of stoc) of a corportion* such shares represented "y a stoc) certificate or record of
shares held "y the o%ner+s "ro)er.
SHAREHOLDERS FUND is e,uity plus accumulated profits.
SHAREHOLDER'S EQUITY is total assets minus total lia"ilities. (t is the same as
EU($0, 3E$ K25$C and stoc)holderDs e,uity.
SHARE PREMIUM is the difference "et%een the hi'her price paid for a share of stoc)
and the stoc)s par value %hen issued.
SHARPE RATIO, named after Killiam P. !harpe, is a measurement of portfolio tradin'
performance. (t is calculated "y su"tractin' ris) free rate from total portfolio return, then
dividin' "y the standard deviation of the portfolio7!harpe ratio E $otal portfolio return R
5is) free rate B Portfolio standard deviation.
SHIP IN PLACE is sales "illed to customers prior to delivery and held "y the seller
(also7 ?"ill and hold? or ?"ill in place? sales).
SHIPPING NOTICE is a formal notification that 'oods ordered are en8route to their
destination.
SHORTTERM usually encompasses a calendar of 9H months or less.
SHORT TERM ASSET is an asset expected to "e converted into cash %ithin the normal
operatin' cycle (usually one year), e.'. accounts receiva"le and inventory.
SHORT TERM LIABILITY is a lia"ility that %ill come due %ithin one year or less.
SHRINKAGE is7 9. the amount "y %hich somethin' shrin)s* H. process or result of
"ecomin' less or smaller (Example7 ?$he material lost H inches per yard in shrin)a'e?)*
or, A. the act of stealin' 'oods that are on display in a store (Example7 ?!hrin)a'e? is the
retail trade+s euphemism for shopliftin').
SIC (STANDARD INDUSTRIAL CLASSIFICATION) is a .!. Government
numerical codin' system used in the .!. to 'roup and classify "asically all products and
services existin' %ithin the .!. economy.
SIGHT DRAFT is a draft %hich is paya"le on demand.
SIGNATURE LOAN is a loan secured "y the "orro%er %ith nothin' more than the
si'nature of that "orro%er.
SIGNIFICANCE is a meanin' that is not expressly stated "ut can "e inferred, e.'. the
si'nificance of an increase in product demand can only "e )no%n after the financial
effects are calculated.
SILENT PARTNERSHIP is the relation of partnership sustained "y a person %ho
furnishes capital only, i.e., the partner is not involved in the day8to8day operations or
decisions of the entity.
SIMPLE INTEREST is interest computed on principal alone, as opposed to compound
interest %hich includes accrued interest in the calculation.
SIMPLE !OURNAL ENTRY is a -ournal entry that involves only one de"it and one
credit in the transaction.
SINGLEENTRY BOOKKEEPING is a simple "oo))eepin' system in %hich all
transactions are recorded in a sin'le record (e.'., a chec)"oo) that indicates expenditures
only). !in'le8entry does not rely upon e,ual de"its and credits.
SIGNOFF is approval or a'reement, e.'. to si'n8off on a purchase contract.
SINKING FUND is a sum set apart periodically from the income of a 'overnment or a
"usiness and allo%ed to accumulate in order ultimately to pay off a de"t. A preferred
investment for a sin)in' fund is the purchase of the 'overnment+s or firm+s "onds that are
to "e paid off. sually the fund is administered "y a trustee.
SIPS is an acronym for !ecure (nternet Payment !ervice (e.'., #y"ercash).
SISTER COMPANY is similar to the %ay in %hich a family is structured, t%o or more
sister companies (si"lin') share the same Parent #ompany or individual o%ner. 6i)e a
!u"sidiary, it is a separately incorporated "usiness.
SKIP PERSON is a transfer of property to a person %ho is in a 'eneration "elo% a child
of the transferor, referred to as a ?s)ip? person, typically a 'randchild or 'reat 'randchild.
SKU is an acronym for !toc) <eepin' nit. (t is usually used to identify an item carried
in inventory or stoc).
SLA see !ervice 6evel A'reement.
SLIPPAGE is the difference "et%een estimated transactions costs and actual transactions
costs. $he difference usually represents revisions to price difference or spread and
commission costs.
SLIT is !erial86ot (tem $rac)in'.
SLR see !$A$$250 6(U(1($0 5A$(2 and see "elo%.
SLR is an acronym %ith several possi"le meanin's, e.'., !toc) 6evel 5eport, !toc)
6evel 5e,uirement, !ystem 6evel 5e,uirement(s), !tatutory 6i,uidity 5atio.
SMA see !PE#(A6 MEM25A31M A##23$.
SMALLCAP is a stoc) %ith a capitali&ation, meanin' a total e,uity value, of less than
=N:: million.
SMOOTHING is a %idely used techni,ue in forecastin' trends, seasonality and level
chan'e, e.'. avera'in' month8to8month fluctuations. Kor)s %ell %ith data that has a lot
of randomness.
SOCIAL CAPITAL is net%or)s, to'ether %ith shared norms, values and understandin's
%hich facilitate cooperation %ithin or amon' those 'roups for mutual "enefit.
SOCIAL COST is the cost to society as a %hole from an event, action, or policy chan'e.
(ncludes ne'ative externalities and does not count costs that are transfers to others, in
contrast to private cost.
SOCIAL ENTITY is the separate existence of an or'ani&ation that is perceived to exist,
"y its mem"ers and the pu"lic at lar'e, as a +'iven+, i.e. somethin' that exists "efore and
outside of them.
SOES (S<+33 O6716 EC1)/,*(- SE',1<) tradin' is an electronic method of day tradin'
the 3A!1 mar)et. At present, !2E! tradin' is at the center of controversy "et%een the
3A!1, !E#, individual traders, and the courts. !2E! is chan'in' the %ay tradin' is
done on the 3A!1, and it may re%rite the rules of the 'ame for tradin'. Bandits is -ust a
term "ein' used for the individuals usin' the !2E! system for day tradin'.
SOFT CLOSE, in accountin', is %hen -ournal entries may "e allo%ed to periods
previously considered closed %ith the confidence that you can create corrected financial
statements and that "alances "rou'ht for%ard are corrected* in securities, is %hen a fund
%ill no lon'er accept ne% investors into the fund, ho%ever existin' shareholders can
continue to contri"ute.
SOFT COSTS are those extraneous costs that are not readily foreseen or "ud'eted for,
e.'. le'al fees, loan fees and interest, etc.
SOLE PROPRIETOR is an individual %ho o%ns a "usiness as opposed to stoc) in a
corporation. A sole proprietor pays no corporate income tax "ut has unlimited lia"ility for
hisBher "usiness de"ts and o"li'ations. !ee !26E P52P5(E5$25!C(P.
SOLE PROPRIERTORSHIP is a "usiness structure in %hich an individual and hisBher
company are considered a sin'le entity for tax and lia"ility purposes. A sole
proprietorship is a company %hich is not re'istered %ith the state as a limited lia"ility
company or corporation. $he o%ner does not pay income tax separately for the company,
"ut heBshe reports "usiness income or losses on hisBher individual income tax return. $he
o%ner is insepara"le from the sole proprietorship, so heBshe is lia"le for any "usiness
de"ts* also called proprietorship. $he distin'uishin' characteristics of a sole
proprietorship include7 only one o%ner for the "usiness (hence, ?sole?) and the "usiness
is unincorporated.
SOLVENCY is a company+s lon'8term a"ility to meet all financial o"li'ations.
SOP is !tatement of Position (%ithin the A(#PA or .A!B) or !tandard 2peratin'
Procedure.
SOUND, %hen used in a financial context, means financially secure and safe.
SOURCE DOCUMENTS are the primary documents used %hen for%ardin' an
ar'ument or ma)in' a presentation of fact. sually used as a direct reference as a source
of empirical data, expert opinion or information. !ee !PP25$(3G 12#ME3$!.
SPE see !PE#(A68P5P2!E E3$($0.
SPECIAL DEPRECIATION are 'overnmental tax incentive measures intended to help
achieve a variety of policy o"-ectives includin' support for certain re'ions or certain
types of firms "y offerin' tax incentives throu'h depreciation "onuses.
SPECIAL !OURNAL contains records of ori'inal entry other than the 'eneral -ournal
that are desi'ned for recordin' specific types of transactions of similar nature, e.'. !ales
Gournal, Purchase Gournal, #ash 5eceipts Gournal, #ash 1is"ursements Gournal, and
Payroll Gournal.
SPECIAL MEMORANDUM ACCOUNT (!MA) is a su"8account of a mar'in account
for excess e,uity. (t can "e %ithdra%n or used to "uy more securities.
SPECIALPURPOSE ENTITY (SPE) is a financin' vehicle that is not a su"stantive
operatin' entity, usually one created for a sin'le specified purpose. An !PE may "e in the
form of a corporation, trust, or partnership. !pecial8purpose entities have "een used for
several decades for asset securiti&ation, ris) sharin', and to ta)e advanta'e of tax statutes.
SPECIAL PURPOSE VEHICLE (SPV) is an or'ani&ation constructed %ith a limited
purpose or life. .re,uently, these !pecial Purpose /ehicles serve as conduits or pass
throu'h or'ani&ations or corporations. (n relation to securitisation, it means the entity
%hich %ould hold the le'al ri'hts over the assets transferred "y the ori'inator.
SPECIFIC IDENTIFICATON INVENTORY VALUATION is a method of valuin'
and trac)in' inventory %here each item can "e identified. !pecific identification is most
often used for lar'e, easily tracea"le items, such as furniture or vehicles. (f trac)in' each
individual inventory item is not practical, the inventory can "e valued usin' other
accepted methods, such as the first8in, first8out method (.(.2) or the last8in, first8out
method (6(.2).
SPECIFIC IDENTIFICATION METHOD is an inventory costin' method under
%hich the actual cost of a particular item is assi'ned to that item* used for determinin'
cost of 'oods sold.
SPECIFIC RESEARCH is a method used %hen 'atherin' primary information for a
mar)et survey %here tar'eted customers B consumers are as)ed very specific and in8depth
,uestions 'eared to%ard resolvin' pro"lems found throu'h prior exploratory research.
SPENDING LEVEL is the true expenditure or cash outlay of any entity in a 'iven
cate'ory or "ud'etary area.
SPINOFF is a type of corporate reor'ani&ation in %hich the ori'inal corporation
transfers some of its assets to a ne%ly formed corporation. (n exchan'e for the spun off
assets, the ori'inal corporation receives all of the ne% corporation+s capital stoc), %hich it
then distri"utes to its shareholders as a property dividend.
SPINOFF RULING is a le'ally "indin' rulin' "y the (nternal 5evenue !ervice as to
any aspect of a spin8off "y a corporation. !ee also !P(32...
SPLIT ACCOUNTING, under (A! A>, provides that if certain conditions are met the
Pem"edded derivativeD in a Phy"rid (com"ined) financial instrumentD (i.e, a financial
instrument %hich includes a non8derivative Phost contractD as %ell as an em"edded
derivative) must "e accounted for separately from the Phost contractD.
SPLITINTEREST AGREEMENT, in not8for8profits, is a contri"ution to the
institution in %hich the institution must share the investment incomeB"enefits %ith the
donor and other "eneficiaries if desi'nated.
SPLITOFF POINT is the sta'e in the production process at %hich -oint products
"ecome identified as distinct products %hich can "e sold or processed further* this is
called the split8off point.
SPLIT PAYMENT allo%s the customer to7 a. pay part of the "ill %ith cash and part %ith
a credit card* or, ". apply portions of payments across several invoices.
SPOILAGE is materials %asted or spoiled in the production process. !ee also
AB325MA6 !P2(6AGE and 325MA6 !P2(6AGE.
SPONTANEOUS ASSETS are assets that arise automatically, in the course of operatin'
a company day8to8day, %hen a company purchases assets and they are delivered.
SPONTANEOUS LIABILITIES are o"li'ations that are reali&ed automatically, in the
course of operatin' a company day8to8day, %hen a company "uys 'oods and services on
credit.
SPOTCASH is the immediate cash payment on a transaction.
SPOT COMMODITY is a commodity traded %ith the expectation that it %ill actually
"e delivered to the "uyer, as contrasted %ith to a .$5E! #23$5A#$ that %ill
usually expire %ithout any physical delivery actually ta)in' place. !pot commodities are
traded in the !P2$ MA5<E$.
SPOT RATE is the price at %hich a currency can "e purchased or sold and then
delivered %ithin t%o "usiness days, e.'., spot dollar.
SPREAD see A!< P5(#E.
SPREADSHEET is (9) A multi8column sheet of paper used for performin' numeric
%or), especially accountin' and "usiness related %ee)ly or monthly summaries. (H) A
computer application pro'ram that supports a user in numeric manipulation, especially in
column B ro% format.
SPV see !pecial Purpose /ehicle.
SRO is !elf85e'ulatory 2r'ani&ation.
SSA is !ocial !ecurity Administration, !elective !ervice Administration or !ocial
!ecurity Act.
STABLE DOLLAR ASSUMPTION is %hen usin' money as a measurin' unit and
preparin' financial statements expressed in dollars, accountants ma)e the assumption that
the dollar is a sta"le unit of measurement.
STABLE MONETARY UNIT CONCEPT allo%s accountants to i'nore the effect of
inflation in the accountin' records.
STABLE UNIT OF MEASURE, in accountin', assumes that money is used as the "asic
measurin' unit for financial reportin'. Money is the common denominator in %hich
accountin' measurements are made and summari&ed. $he dollar, or any other monetary
unit, represents a unit of value* that is, it reflects an a"ility to command 'oods and
services. (mplicit in the use of money as a measurin' unit is the assumption that the
dollar is a sta"le unit of value, -ust as the )ilometer is a sta"le unit of distance and the
hectare is a sta"le unit of area.
STABLE UNIT OF VALUE see !$AB6E 3($ 2. MEA!5E.
STABILIZED INCOME is the pro-ected planned revenue that is su"-ect to chan'e "ut
represents the "est annuali&ed estimate of consistent income.
STAFF ACCOUNTANT, on avera'e, is a professional %ho is a #PA in 'ood standin'
or #PA candidate %ith one to three years of professional experience. $he staff accountant
is supervised in the field "y senior personnel and performs tas)s such as tests of
transactions and preparation of %or) papers.
STAKE is a share or an interest in an enterprise, especially a financial share.
STALE CHECK is a chec) that is six months or older than the date affixed to the chec)
"y the ma)er. (f a customerDs chec) is presented more than six months after the date
appearin' on the chec), the payin' "an) has the option of payin' or dishonorin' the
chec) "ecause the chec) is deemed ?stale?.
STANDARD AND POOR'S (S&P) ?;; is an index of the N:: lar'est, most actively
traded stoc)s on the 3e% 0or) !toc) Exchan'e. (t provides a 'uide to the overall health
of the ! stoc) mar)et.
STANDARD COST is production or operatin' cost that is carefully predetermined. A
standard cost is a tar'et cost that should be attained. $he standard cost is compared %ith
the actual cost in order to measure the performance of a 'iven costin' department or
operation. !ee !$A31A51 #2!$ !0!$EM.
STANDARD COST SYSTEM is an accountin' system desi'ned to properly allocate
costs of direct la"or, indirect la"or, materials, overhead, and sellin'B
'eneralBadministrative accounts on a unit "asis for the purpose of accurately costin'
products and the su"se,uent control of those costs in mana'in' the production,
mar)etin', purchasin', and administrative functions of the "usiness.
STANDARD DEDUCTIONS is used to reduce income "y taxpayers %ho do not itemi&e
allo%a"le deductions on their tax returns. $he amount of the deduction depends on your
filin' status7 if you are FN or older, if you are "lind and %hether you can "e claimed as a
dependent on another taxpayer+s income tax return. !ee ($EM(LE1 1E1#$(23!.
STANDARD RATE AND DATA SERVICE (SRDS), in advertisin', is a company that
produces a directory for each different type of media* normally listin'7 rates, circulation,
contacts, mar)ets serviced, etc.
STARTUP COSTS or 2r'ani&ation #ost, in the .!., is %hen a ne% corporation is
created, the costs associated %ith the formation are not deducti"le. An election must "e
made to amorti&e or'ani&ational costs no later than the due date (includin' extensions) of
the return for tax year in %hich the active trade or "usiness "e'ins. (f an election is not
made to amorti&e these costs, they must "e capitali&ed on the "oo)s and are not su"-ect to
amorti&ation resultin' in permanent capitali&ation. pon ma)in' the timely election, the
corporation may recover these costs throu'h amorti&ation deductions over a F: month
period. 2r'ani&ational expenditures include any expenditure %hich is7[ incident to the
creation of the corporation,[ char'ea"le to capital account, and [ is of a character %hich,
if expended incident to the creation of a corporation havin' a limited life, %ould "e
amorti&a"le over such life.$he follo%in' are examples of or'ani&ation costs7[ le'al
services incident to the or'ani&ation of the corporation, such as draftin' the corporate
charter, "y8la%s, minutes of or'ani&ational meetin's, terms of ori'inal stoc) certificates,
etc.[ necessary accountin' services.[ expenses of temporary directors and of
or'ani&ational meetin's of directors or stoc)holders.[ fees paid to state of incorporation.
STATED CAPITAL is the declared total amount of money or other resources o%ned or
used to ac,uire future income or "enefits.
STATED VALUE is the per share value sometimes assi'ned to no8par stoc) "y the
corporation.
STATEMENT OF ACCOUNTING POLICIES is normally comprised of7 a definition
of the reportin' or'ani&ation, statement of 'eneral accountin' policies, statement of
particular accountin' policies, and a statement of chan'es in accountin' policies.
STATEMENT OF AFFAIRS is a speciali&ed form of financial statement settin' out the
de"tor+s assets and lia"ilities 8 secured, preferred and unsecured. $his document is usually
prepared on short notice and from incomplete records. (t is s%orn to "y an officer of the
company and or "y the "an)rupt %here applica"le. $he trustee often has a different
opinion as to the value of the assets and the extent of lia"ilities included therein. $he
formali&ed statement of affairs is s%orn under oath "y the de"tor "efore a la%yer or
desi'nated le'alBcourt entity.
STATEMENT OF CASH FLOWS measures the flo% of money in and out of a
"usiness. 2ne of four financial statements found in the annual report, it cate'ori&es a
company+s cash receipts and dis"ursements for a 'iven fiscal year "y three ma-or
activities7 operations, investments and financin'.
STATEMENT OF FUND BALANCE is part of the .inancial !tatements of certain
re'ulated entities, e.'. local, county, and state, 'overnments. $he content or confi'uration
of the #onsolidated .inancial !tatements normally includes a #onsolidated !tatement of
.und Balance alon' %ith separate !tatements of .und Balance for all authori&ed funds
%ithin the -urisdiction, e.'. General 2peratin' .und and Airport 2peratin' .und.
STATEMENT OF RETAINED EARNINGS is one of the four "asic financial
statements* the !tatement of 5etained Earnin's is a reconciliation of the 5etained
Earnin's account. (nformation such as dividends or announced income is provided in the
statement. $he !tatement of 5etained Earnin's provides information a"out %hat a
company+s mana'ement is doin' %ith the company+s earnin's.
STATEMENT OF STOCKHOLDERS' EQUITY is a summary of the chan'es in
stoc)holders+ e,uity of a corporation that have occurred durin' a specific period of time.
STATE UNEMPLOYMENT TAX ACT (SUTA), in the .!., is the same as .$A
except from an individual .!. state in compliance to federal 'uidelines. !ee also
.E1E5A6 3EMP620ME3$ $A4 A#$.
STATUTORY ACCOUNT is an involuntary account, %hich is created "y la% rather
than "y "usiness need. An example of a statutory account %ould "e taxes.
STATUTORY AUDITOR is normally part of the internal audit function operatin' in
one or more of the follo%in' areas7 a. 5evie% of the Accountin' !ystems and the related
internal controls. $hus %hile the ade,uacy of the accountin' systems is the responsi"ility
of the Mana'ement, the !tatutory Auditor is usually assi'ned the specific responsi"ility
for revie%in' the accountin' systems and the related internal controls, as also monitorin'
their operations* ". 5evie% of financial and operatin' information includin'
identification, measurement, classification and reportin' such information specifically
en,uirin' into individual items includin' detailed testin' of transactions, procedures and
"alances* and, c. Examination of the economy, efficiency and effectiveness of operations
includin' non8financial controls.
STATUTORY LAW is la% enacted "y the le'islative "ranch of 'overnment, as
distin'uished from case la% or common la%.
STATUTORY LIEN is an involuntary lien, %hich is created "y la% rather than "y
contract. !tatutory liens include tax liens, -ud'ment liens, mechanic+s liens, etc.
STATUTORY LIQUIDITY RATIO (SLR) is a ratio %hich every "an)in' company
shall maintain in the form of cash, 'old or unencum"ered approved securities, an amount
%hich shall not, at the close of "usiness on any day "e less than such percenta'e of the
total of its demand and time lia"ilities as the 5eserve Ban) may specify from time to
time.
STEAMSHIP CONFERENCE is an a'reement "et%een multiple shippin' companies
to provide common frei'ht rates. !ome shippin' lines %ill state that they are Snon8
conferenceT, i.e., they char'e an independent and li)ely lo%er rate.
STEP LEASE is type of lease that outlines or stipulates the expected annual increases in
the tenant+s "ase rent "ased on an approximation of %hat the landlord "elieves %hat the
landlordDs expenses may "e.
STEPPED COSTS is a cost that increases "y a reasona"ly constant sum each time
volume or activity increases "y a predicta"le, constant, multiple. $he smallest step costs
are varia"le costs, %hich increase "y a discrete amount each time output or activity
increases "y one unit. 6ar'er steps %ill consist of %hat are, effectively, fixed costs over a
particular ran'e of output. !ome costs increase, or decrease, in si'nificant steps %hen
output or activity passes certain limits. .or instance, if a "us company re'ularly has more
passen'ers on a route than can "e carried "y a sin'le vehicle it may "e necessary to use
an additional "us. 5unnin' an additional "us %ill dou"le the cost of operatin' on that
route. !imilarly, a manufacturin' firm may have a policy of employin' one supervisor for
every ten production %or)ers. (n %hich case the firm %ill need one supervisor for 9R9:
employees, t%o supervisors for 99RH: employees, and so on. !o, if demand rises to the
point %here H9 production employees are re,uired an extra supervisor
must "e employed. #osts that "ehave in this %ay are called stepped costs.
STEWARDSHIP is responsi"ility for ta)in' 'ood care of resources entrusted to one,
e.'., "oards of directors must sho% 'ood ste%ardship to%ards the company for %hich
they are a "oard mem"er.
STOCK CONTROL ACCOUNT reflects the total amount or value of all stoc) items.
$he "alance of each of the individual stoc) item led'er accounts or records must e,ual
the total of the stoc) item list, %hich represents the amounts or value of the individual
stoc) items o"tained from the individual "alances in the various su"sidiary led'er
accounts for each stoc) item. $his su"sidiary led'er is )no%n as the stoc) item led'er.
STOCKHOLDER see !CA5EC261E5.
STOCKHOLDER'S EQUITY see !CA5EC261E5+! EU($0.
STOCK INDEX a formali&ed screened listin' of traded securities, e.'. the 1o% Gones
(ndustrial Avera'e that trac)s a portfolio of stoc)s.
STOCK POWER is a form that permits a 1onor to provide the authority to chan'e the
name on a stoc) certificate from the 1onorDs name to the name of another party, such as a
charita"le or'ani&ation, %ithout usin' a Stransfer a'entT. $his form, to'ether %ith the
desi'nated stoc) certificate and 6etter of Authori&ation, 'iven to the charita"le
or'ani&ation %ill expedite the transfer of the 1onorDs stoc) certificate "y the charita"le
or'ani&ationDs "ro)era'e to expedite the sale and receipt of proceeds from the 'ift of
securities.
STOCK ROTATION RIGHTS is a contractual stipulation that allo%s for a distri"utor
to return up to a stipulated percenta'e of purchased 'oods to the supplier over a stipulated
period of time. $hese ri'hts are intended to ensure that a distri"utor is not over"urdened
%ith excessive or o"solete inventory from the supplier that 'ranted the stoc) rotation
ri'hts.
STOCK SALE is %here the e,uity price is assumed to include the operatin' assets and
operatin' lia"ilities of the seller+s "usiness and not include the lon' term lia"ilities
assumed. $he lon' term lia"ilities assumed are sho%n as a separate line item and %hen
added to the e,uity price results in the deal price. (n those transactions indicated as an
asset sale the e,uity price is assumed to include the operatin' assets.
STOCK SPLIT is the issuance of a su"stantial amount of additional shares, there"y
reducin' the par value of the stoc) on a proportionate "asis.
STOCKTAKING is the process of countin' and evaluatin' stoc)8in8trade, usually at an
or'ani&ation+s year end in order to value the total stoc) for preparation of the accounts. (n
more sophisticated or'ani&ations, in %hich permanent stoc) records are maintained, stoc)
is counted on a random "asis throu'hout the year to compare ,uantities counted %ith the
,uantities that appear in the, usually, computeri&ed records.
STOCK TURNOVER PERIOD is calculated7 6on' $erm 1isa"ilities 4 9::O B #ost of
!ales.
STOCK TURNS is the num"er of times per year that the stoc) (ra% material, %ip &
finished 'oods) is turned over in relation to the sales revenue of a 'iven product.
#alculation 8 !toc) turns E !ales turnover of products B /alue of ra% material, %ip &
finished 'oods.
STORAGE can "e7 a. a depository for 'oods, e.'. a stoc)room or %arehouse* ". the
process of storin' information in a computer memory or on a ma'netic tape or dis)* or c.
an electronic memory device.
STORES are provisions and supplies in inventory that are re,uired for runnin' an entity.
STRAIGHT BOND is the most common de"t security. All other "ond types are
variations of, or additions to standard strai'ht "ond features. An investor pays a sin'le
capital sum to receive interest payments, called coupons, until a fixed maturity date %hen
the last coupon is accompanied "y redemption of the "ond+s face value. $he coupon is
simply a fixed rate of interest 8 paid annually or semi8annually 8 on the principal sum or
faceBpar value. $he de"t is of fixed maturity 8 the principal redemption date. $he
maximum term is A: years, "ut @89: years is most common.
STRAIGHTLINE DEPRECIATION METHOD allo%s an e,ual amount to "e
char'ed as depreciation for each year of the expected use of the asset. (t is computed "y
dividin' the ad-usted "asis of a property "y the estimated num"er of years of remainin'
useful life.
STRANDED PLANT is a cost that has "een incurred, "ut can not "e reversed. sually
referred to as a sun) cost.
STRATEGIC ASSET, in relation to the assets held "y a le'al entity, means an asset or
'roup of assets that the entity needs to retain if the entity is to maintain the entity+s
capacity to achieve or promote any outcome that the entity determines to "e important to
the current or future %ell8"ein' of the entity.
STRATEGIC GOAL is the milestone the or'ani&ation aims to achieve that evolves
from the strate'ic issues. $hey transform strate'ic issues into specific performance
tar'ets that impact the entire or'ani&ation. $hey can "e ,ualitative or ,uantitative.
1ependent upon usa'e, G2A6! are 'eneral in nature, %hile 2BGE#$(/E! are specific,
measura"le and time8"ased. (n some or'ani&ations, the meanin's for G2A6 and
2BGE#$(/E are reversed. !ee G2A6.
STRATEGIC PERFORMANCE MANAGEMENT provides a detailed "lueprint for
turnin' corporate vision into reality 8 "rea)in' do%n the thin's an entity needs to achieve
as a "usiness into real actions that can "e measured. !ee BA6A3#E1 !#25E#A51.
STRATEGIC PLANNING is the activity of definin' %hat you %ant to accomplish in
your "usiness and then identifyin' the path that %ill allo% you to reach your 'oal in the
most efficient and sensi"le manner.
STRAW MAN is a %ea) or ima'inary opposition (as an ar'ument or adversary) set up
only to "e easily confuted. 2ften done to create an environment for "rainstormin' from a
certain startin' point.
STRIPPED BOND is a "ond that can "e su"divided into a series of &ero8coupon "onds.
STUMPAGE refers to7 a. $im"er in standin' trees* usually sold %ithout the land at a
fixed price per tree or per stump, the stumps "ein' counted %hen the land is cleared.
(32$E7 2nly trees a"ove a certain si&e are allo%ed to "e cut "y lo''ers "uyin' stumpa'e
from the o%ners of land)* or, ". A tax on the amount of tim"er cut, re'ulated "y the price
of lum"er.
SUBSTANTIVE is reality, real rather than apparent, as seen "y an un"iased o"server
and not -ust the official vie% of mana'ement.
SUBCHAPTER S is a le'al corporate entity or'ani&ed under the nited !tates .ederal
$ax #ode that allo%s !u"chapter ! #orporations to distri"ute all income B loss
proportionately to its shareholders, %ho then claim that income B loss on their personal
income taxes* there"y avoidin' the payment of corporate taxes.
SUBLET, in real estate, refers to the leasin' of space %ithin a leased facility "y the
ori'inal lessee.
SUBLEDGER is for the purpose of or'ani&in' revenue and expense transaction for only
one account, e.'., .or an individual salesperson, li)e a 'eneral led'er, the su"led'er has
different default account types, each from a salesperson+s perspective, not a company
perspective. $hus, 1ue is due to the salesperson and Paya"le is paya"le "y the
salesperson.
SUBORDINATED DEBT is de"t over %hich senior de"t ta)es priority. (n the event of
"an)ruptcy, su"ordinated de"t holders receive payment only after senior de"t claims are
paid in full. $here is a pec)in' order determinin' the se,uence in %hich a company %ill
pay off its de"t instruments, su"ordinate (or -unior) issues %ill not "e repaid until
unsu"ordinated (or senior) de"t has "een repaid in full.
SUBPRIME CREDIT CARDS are credit cards offered to consumers %ith credit
pro"lems or no esta"lished credit* as opposed to prime cards for those %ith 'ood credit
ratin's. !u"8prime cards do not offer as many "enefits and possi"ly could "e more costly.
SUBSCRIBER, in securities, is an entity that contri"utes (or promises to contri"ute) a
sum of money to purchase securities. $he term !u"scri"er encompasses all 3on8
Professional and Professional !u"scri"ers. !ee 3238P52.E!!(23A6 !B!#5(BE5
and P52.E!!(23A6 !B!#5(BE5.
SUBSCRIPTION, in securities, is an a'reement to "uy a ne% issue of securities.
SUBSIDIARY is a company %hose votin' stoc) is more that N:O o%ned "y another
company.
SUBSIDIARY BOOKS see !B!(1(A50 6E1GE5.
SUBSIDIARY LEDGER is a 'roup of su"sidiary accounts the sum of the "alances of
%hich is e,ual to the "alance of the related control account in the 'eneral led'er.
SUBSTANCE OVER FORM is an accountin' concept %here the entity is accountin'
for items accordin' to their su"stance and economic reality and not merely their le'al
form. $his concept is one of the )ey determinants of relia"le information. .or most
transactions there %ill "e no difference, so no issue arises. (n some cases ho%ever, the
t%o diver'e and the choice of ho% to present the transactions can 'ive very different
results. $his difference occurs %hen an asset or lia"ility is not reco'ni&ed in the accounts
even thou'h "enefits or o"li'ations may result from the transaction, or oppositely.
SUBVENTION is the provision of assistance or financial support such as an endo%ment
or a su"sidy from a 'overnment or foundation.
SUI is either !tate nemployment (nsurance (tax) or !tate nemployment (ncome.
SUMOFTHEYEARS DIGITS (SYD) is the accelerated depreciation method in
%hich a constant "alance (cost minus salva'e value) is multiplied "y a declinin'
depreciation rate.
SUNDRY ACCOUNT is an account %here miscellaneous items are recorded, e.'.,
!3150 5E#E(/AB6E! represent miscellaneous receiva"les.
SUNDRY CREDITORS refers to companies or individuals to %hich money is o%ed.
SUNDRY DEBTOR is an entity from %ho amounts are due for 'oods sold or services
rendered or in respect of contractual o"li'ations. Also termed7 de"tor, trade de"tor, and
account receiva"le.
SUNDRY SHAREHOLDERS are a 'roup of miscellaneous shareholders.
SUNK COST is the cost expended that cannot "e retrieved on a product or service.
SUPERANNUATION is a. the act of dischar'in' someone "ecause of a'e (especially to
cause someone to retire from service on a pension)* or, ". a monthly payment made to
someone %ho is retired from %or).
SUPERANNUATION FUND see PE3!(23 .31.
SUPPLIER FINANCING is %here the trade assists in meetin' credit needs of a
customer, e.'. a trade credit line may "e ne'otiated to %here a supplier may 'ive >: to
9H: days to pay for the 'oods plus an interest char'e.
SUPPORTING DOCUMENTS assist in ma)in' a case (prove a point or for%ard an
ar'ument) "y providin' additional depth and analysis for much of the case in ,uestion.
!ee !25#E 12#ME3$!.
SUPPRESSED INFLATION means that a situation exists in %hich prices %ould rise 88
if 'overnment re'ulations did not esta"lish artificial limits on prices, %a'es, etc.
SUPRANATIONAL is transcendin' esta"lished national "oundaries or spheres of
interest (Example7 A supranational company).
SURCHARGE is a char'e added on top of another char'e for a specific service, product
or purpose.
SURETY BOND is a contract "y %hich one party a'rees to ma)e payment on any
default or the de"t of another party.
SURPLUS 'enerally means any excess amount, "ut in finance it is the remainder of a
fund appropriated for a particular purpose. (n a corporation, surplus means assets left
after lia"ilities and de"t, includin' capital stoc), have "een su"tracted.
SURVEILLANCE is close %atch )ept over someone or somethin'.
SUSPENSE ACCOUNT, in accountin', is an account that is used on a temporary "asis
for receipts, dis"ursements, or discrepancies until such time as the analysis is complete
and they can "e properly classified.
SUSTAINABLE GROWTH RATE (SGR) sho%s ho% fast a company can 'ro% usin'
internally 'enerated assets %ithout issuin' additional de"t or e,uity. !G5 provides a
useful "enchmar) for -ud'in' a company+s appropriate rate of 'ro%th. A company %ith a
lo% sustaina"le 'ro%th rate "ut lots of opportunities for expansion %ill have to fund that
'ro%th via outside sources, %hich could lo%er profits and perhaps strain the company+s
finances. Gro%th can "e a ma-or dilemma "ecause %ith 'ro%th comes a spontaneously
'enerated need for increased %or)in' capital. /enture6ine calculates a !ustaina"le
Gro%th 5ate from the data entered into the (ncome !tatement and Balance !heet. $he
!ustaina"le Gro%th 5ate is the rate at %hich the firm may 'ro% the !toc)holder+s E,uity
Account (3et Korth) usin' only increases in 5etained Earnin's (3et Profit+s contri"ution
to retained earnin's) to fund the 'ro%th. Gro%th "eyond this amount %ill force the firm
to o"tain additional financin' from external sources to finance 'ro%th.
SUTA see !$A$E 3EMP620ME3$ $A4 A#$.
SWAPS is %hen one currency is temporarily exchan'ed for another, then the currency is
held and exchan'ed later after a fixed period of time. $o calculate the s%ap ta)e the
interest rate differential "et%een the t%o underlyin' currencies, thus it may "e used for
speculative purposes to exploit anticipated movement in the interest rates. !ee
(3$E5E!$ 5A$E !KAP!.
SWAPTIONS are over8the8counter options on s%aps.
SWOT ANALYSIS is one of the most used forms of "usiness analysis. A !K2$
examines and assesses the impacts of internal stren'ths and %ea)nesses, and external
opportunities and threats, on the success of the ?su"-ect? of analysis. An important part of
a !K2$ analysis involves listin' and evaluatin' the firm+s stren'ths, %ea)nesses,
opportunities, and threats. Each of these elements is descri"ed7
9. !tren'ths7 !tren'ths are those factors that ma)e an or'ani&ation more competitive than
its mar)etplace peers. !tren'ths are %hat the company has a distinctive advanta'e at
doin' or %hat resources it has that is strate'ic to the competition. !tren'ths are, in effect,
resources, capa"ilities and core competencies that the or'ani&ation holds that can "e used
effectively to achieve its performance o"-ectives.
H. Kea)nesses7 A %ea)ness is a limitation, fault, or defect %ithin the or'ani&ation that
%ill )eep it from achievin' its o"-ectives* it is %hat an or'ani&ation does poorly or %here
it has inferior capa"ilities or resources as compared to the competition.
A. 2pportunities7 2pportunities include any favora"le current prospective situation in the
or'ani&ation+s environment, such as a trend, mar)et, chan'e or overloo)ed need that
supports the demand for a product or service and permits the or'ani&ation to enhance its
competitive position.
;. $hreats7 A threat includes any unfavora"le situation, trend or impendin' chan'e in an
or'ani&ation+s environment that is currently or potentially dama'in' or threatenin' to its
a"ility to compete. (t may "e a "arrier, constraint, or anythin' that mi'ht inflict pro"lems,
dama'es, harm or in-ury to the or'ani&ation.
A firm+s stren'ths and %ea)nesses (i.e., its internal environment) are made up of factors
over %hich it has 'reater relative control. $hese factors include the firm+s resources*
culture* systems* staffin' practices* and the personal values of the firm+s mana'ers.
Mean%hile, an or'ani&ation+s opportunities and threats (i.e., its external environment) are
made up of those factors over %hich the or'ani&ation has lesser relative control. $hese
factors include, amon' others, overall demand, the de'ree of mar)et saturation,
'overnment policies, economic condition, social, cultural, and ethical developments*
technolo'ical developments* ecolo'ical developments, and the factors ma)in' up Porter+s
.ive .orces (i.e., intensity of rivalry, threat of ne% entrants, threat of su"stitute products,
"ar'ainin' po%er of "uyers, and "ar'ainin' po%er of suppliers.)
SWEEPING ACCOUNTS is %hen an entity &eros out a monetary asset account (ta)es
the money) that does not meet an esta"lished mandatory monetary hurdle at %hich they
%ill ma)e a payment to the holder of that account, e.'., if a salesman does not ma)e a
certain amount of sales re,uired over a time period, his company %ill not pay him
commission on the sales that %ere made durin' that period and s%eep his account
"alance to &ero at the end of the time period.
SWIFT CODE, %ithin the context of international payment transactions, is a code issued
"y the !ociety for Korld%ide (nter"an) .inancial $elecommunication (!K(.$) that
ena"les "an)s %orld%ide to "e identified %ithout the need to specify an address or "an)
num"er. !K(.$ codes are used mainly for automatic payment transactions.
SYNDICATE is a 'roup of investment "an)ers or "an)s that acts -ointly, on a temporary
"asis, to, in the case of investment "an)ers, sell securities or to under%rite a ne% issue of
"onds (syndicated capital), or, for the "an) syndicate to loan money in a "an) credit
(syndicated credit).
SYNERGY is the %or)in' to'ether of t%o or more thin's to produce an effect 'reater
than the sum of their individual effects. .or example, in the context of mer'ers, cost
syner'y is the savin's in operatin' costs expected after t%o companies, %ho compliment
each other+s stren'ths, -oin.
SYNTHETIC LEASE is a transaction that appears, from an accountin' standpoint, as a
lease, "ut as a loan from a tax standpoint* resultin' in an off8"alance sheet account of the
financin' and the tax "enefits that accompany the financed asset.
TACCOUNT is the "asis for -ournal entry in accountin'. $8accounts have three "asic
elements. A title, a left side (de"it side) and a ri'ht side (credit side). $o ma)e an entry in
a t8account, put the currency (dollar, pound, etc.) amount on the appropriate side (de"it or
credit). $here are five "asic types of accounts7 assets, lia"ilities, e,uity, revenue and
expenses. Assets, lia"ilities and e,uity are the "alance sheet accounts.
TAINTED ACCOUNTS RECEIVABLE is receiva"les that are considered to "e le'ally
suspect due to acts of fraud, misuse, or a"use.
TAGALONG is to 'o alon' %ith.
TAGALONG RIGHTS is a contractual o"li'ation used to protect a minority
shareholder (usually in a venture capital deal). Basically, if a ma-ority shareholder sells
their sta)e, then the minority shareholder has the ri'ht to -oin the transaction and sell their
minority sta)e in the company. Also referred to as co8sale ri'hts.
TAKEOVER refers to one company (the ac,uirer) purchasin' another (the tar'et). !uch
events resem"le mer'ers, "ut %ithout the formation of a ne% company.
TALLY SHEET is a form for countin', i.e. a form on %hich ,uantities are recorded,
especially %hen conditions ma)e countin' errors li)ely.
T&E is an acronym for $ravel & Entertainment.
T&M is $ime and Materials.
T&R, amon' others, can mean7 $echnical & 5esearch or $ermination & 5ecoupment.
TANGIBLE normally refers to assets that can "e held or seen and that are capa"le of
"ein' appraised at an actual or approximate value (e.'. inventory, land & "uildin's, etc.).
TANGIBLE BOOK VALUE is different than "oo) value in that it deducts from asset
value intan'i"le assets, %hich are assets that are not hard (e.'., 'ood%ill, patents,
capitali&ed start8up expenses and deferred financin' costs).
TANGO SHEETS is a not often used slan' term referin' to a document that compares
forecasted financial data to actual financial performance for the purposes of ille'ally
ad-ustin' the reported financial data to more closely match the prior forecasted
performance.
TARE WEIGHT is the %ei'ht of pac)in' container and pac)a'in' material %ithout the
%ei'ht of the 'oods contained therein.
TARGET COSTING is a disciplined process for determinin' and reali&in' a total cost
at %hich a proposed product %ith specified functionality must "e produced to 'enerate
the desired profita"ility at its anticipated sellin' price in the future.
TARIFF, usually, a country+s tax on imports. May sometimes refer to the rate of tax* and,
is used interchan'ea"ly %ith the term SdutyT.
TARIFF# AD VAL OREM is a tariff determined as a percenta'e of the value of the
'oods.
TAXABLE refers to 'oods or funds su"-ect to taxation.
TAXABLE BENEFITS are employer provided ?non8cash? taxa"le compensation or
frin'e "enefits, such as employer8provided vehicles, complementary tic)ets, and 'raduate
level educational assistance, are su"-ect to federal income, state income, social security,
and Medicare tax rules. Accordin' to (nternal 5evenue #ode !ection 9.F989, all
compensation paid to, or on "ehalf of, an employee constitutes %a'es su"-ect to income
and employment tax %ithholdin', unless specifically excluded "y (5! code.
TAXABLE INCOME is that income that is reported to the 'overnment for the purposes
of calculatin' income taxes. $axa"le income normally is not ali'ned %ith the financial
income reported %ithin financial statements. !ee .(3A3#(A6 (3#2ME.
TAX EFFECT METHOD is %here, irrespective of %hen is a tax paya"le, its effect
should "e reco'ni&ed in the year in %hich the relevant income has "een recorded.
TAX EQUIVALENT YIELD is the yield that must "e offered "efore factorin' in taxes
so that an investment pays off a certain after8tax yield. $his measure is often necessary to
compare taxa"le and tax8free investments, since tax8free issues tend to have lo%er pre8tax
yields due to the fact that the investment+s proceeds %ill not "e reduced "y taxes. $ax
e,uivalent yield is e,ual to re,uired after8tax yield divided "y (9 minus the tax rate).
TAX LOSS CARRY FORWARD/BACKWARD is a tax "enefit that lets a company or
individual to deduct losses in order to reduce a tax lia"ility.
TAX PAYABLE METHOD is %here the tax expense is e,ual to the provision for taxes
paya"le in a particular period and deferred income tax is not reco'ni&ed.
TAX SHELTER are le'al methods taxpayers can use to reduce tax lia"ilities. An
example is the use of depreciation of assets.
TBILL see $5EA!50 B(66.
TCO see $2$A6 #2!$ 2. 2K3E5!C(P.
TERM BONDS are "onds %hose principal is paya"le at maturity. !ometimes referred to
as "ullet8maturity "onds or "ullet "onds.
TERM DEBT, as in $erm Bonds, is de"t that mature in one lump sum at a specified
future date. $erm de"t is usually carried as one type of lon'8term de"t.
TERM ENDOWMENT are endo%ments %ith time restrictions re,uired "y the donor
such as a restriction that the income from the endo%ment may not "e utili&ed until a
future period or a specific date for condition is met.
TERMINAL VALUE, %hen used in a discounted cash flo% valuation, the cash flo% is
pro-ected for each year into the future for a certain num"er of years, after %hich uni,ue
annual cash flo%s cannot "e forecasted %ith reasona"le accuracy. At that point, rather
than attemptin' to forecast the varyin' cash flo% for each individual year, one uses a
sin'le value representin' the discounted value of all su"se,uent cash flo%s. $his sin'le
value is referred to as the terminal value.Khen a firm+s cash flo%s 'ro% at a ?constant?
rate forever, the present value of those cash flo%s can "e %ritten as7 /alue E Expected
#ash .lo% 3ext Period B (r 8 ')%here, r E 1iscount rate (#ost of E,uity or #ost of
#apital) ' E Expected 'ro%th rate. $his ?constant? 'ro%th rate is called a sta"le 'ro%th
rate and cannot "e hi'her than the 'ro%th rate of the economy in %hich the firm operates.
Khile companies can maintain hi'h 'ro%th rates for extended periods, they %ill all
approach ?sta"le 'ro%th? at some point in time. Khen they do approach sta"le 'ro%th,
the valuation formula a"ove can "e used to estimate the ?terminal value? of all cash flo%s
"eyond.
TERM LOAN is a "an) loan, typically %ith a floatin' interest rate, for a specified
amount that matures in "et%een one and ten years and re,uires a specified repayment
schedule.
TESTIMONY is evidence 'iven "y a competent %itness under oath.
THEORY OF CONSTRAINTS is a mana'ement approach that focuses on identifyin'
and relaxin' the constraints that limit an or'ani&ation+s a"ility to reach a hi'her level of
'oal attainment.
THIRD PARTY is someone other than the principals directly involved in a transaction
or a'reement.
THIRD PARTY RECOVERY normally refers to delin,uent accounts receiva"le
recovered "y a collection a'ency for a fee.
THREE PERCENT (BF) RULE is a rule used in vestin' pension plan "enefits. $he
participant+s accrued "enefit must "e at least e,ual to AO of the participant+s normal
pro-ected retirement "enefit for each year of participation, %ith a maximum of 9::O after
AA 9BA years of participation.
TI icould mean, amon' others, $otal (ncome or $enant (mprovements.
TIC is $otal (nvested #apital.
TIC/EBIT is one of the earnin's multiples ratios used in determinin' company value.
TILL ROLL is a roll of paper on %hich the separate amounts of money paid for 'oods
are recorded in a retail shop+s cash re'ister.
TIME DEPOSIT is a "an) deposit that can "e %ithdra%n only after a set period of time
or %ith prior notice, e.'. a certificate of deposit (#1).
TIME LAG see 6AG $(ME.
TIME PERIOD CONCEPT provides that accountin' ta)e place over specific time
periods )no%n as fiscal periods. $hese fiscal periods are of e,ual len'th, and are used
%hen measurin' the financial pro'ress of a "usiness.
TIMES FIXED CHARGES EARNED see #2/E5AGE 2. .(4E1 #CA5GE!.
TIMES INTEREST EARNED (TIE) measures the extent to %hich operatin' income
can decline "efore the firm is una"le to meet its annual interest costs. $he $(E ratio is
used "y "an)ers to assess a firmDs a"ility to pay their lia"ilities. $(E determines ho%
many times durin' the year the company has earned the annual interest costs associated
%ith servicin' its de"t. 3ormally, a "an)er %ill "e loo)in' for a $(E ratio to "e H.: or
'reater, sho%in' that a "usiness is earnin' the interest char'es t%o or more times each
year. A value of 9.: or less su''ests that the firm is not earnin' sufficient amounts to
cover interest char'es.
TIME TO MARKET (TTM) is the len'th of time it ta)es to develop a ne% product
from an early initial idea for a ne% product to initial mar)et sales. Precise definitions of
the start and end point vary from one company to another, and may vary from one pro-ect
to another %ithin the company.
TIME VALUE OF MONEY is the idea that a dollar today is %orth more than a dollar
in the future, "ecause the dollar received today can earn interest up until the time the
future dollar is received.
TOBIN RATIO see MA5<E$ $2 B22< /A6E.
TO DATE is prior to the current date.
TOP DOWN is a concept of analy&in' a su"-ect, such as costs or revenue, startin' from
the hi'hest level %or)in' to%ards the "ottom.
TOPDOWN BUDGETING is %here "ud'ets are created "y startin' from the hi'hest
level %or)in' to%ards the "ottom usin' parametric relationships. A monetary value is
placed on an individual unit (product, service, materials, and la"or hour). An estimate of
the num"er of units re,uired is then converted to currency "y multiplyin' the ,uantity of
units "y the unit price.
TOPLINE of a company is its 'ross sales, or revenue fi'ure.
TOTAL ASSETS is the total of all assets* "oth current and fixed.
TOTAL ASSET TURNOVER measures mana'ement+s efficiency in mana'in' all of a
firmDs assets 8 specifically the 'eneration of revenues from the firm+s total investments in
assets. $his ratio is extremely important in hi'h asset firms such as manufactures and
telecommunications companies. Generally, the hi'her this ratio as compared to li)e
companies or the industry7
the smaller the investment re,uired to 'enerate sales, thus the more profita"le the
firm.
indicates the firm has less money tied up in fixed assets for each dollar of sales
revenue.
TOTAL COST OF OWNERSHIP (TCO) is a model developed "y Gartner Group to
analy&e the direct and indirect costs of o%nin' and usin' hard%are and soft%are.
Mana'ers of enterprise systems use various versions of $#2 to lo%er costs %hile
increasin' the "enefits of information technolo'y deployments. $he $#2 includes7
ori'inal cost of the computer and soft%are, hard%are and soft%are up'rades,
maintenance, technical support, and trainin'. Most estimates place the $#2 at a"out A to
; times the actual purchase cost of the P#.
TOTAL CURRENT ASSETS is total of cash & e,uivalents, trade receiva"les,
inventory and all other current assets.
TOTAL CURRENT LIABILITIES is the total of notes paya"le8short term, current
maturities86$1, trade paya"les, income taxes paya"le, and all other current lia"ilities.
TOTAL LIABILITIES & NET WORTH is the sum of all lia"ility items and 3et
Korth.
TOTAL QUALITY MANAGEMENT (TQM) is a structured system for satisfyin'
internal and external customers and suppliers "y inte'ratin' the "usiness environment,
continuous improvement, and "rea)throu'hs %ith development, improvement, and
maintenance cycles %hile chan'in' or'ani&ational culture.
TQM see $2$A6 UA6($0 MA3AGEME3$.
TRACEABLE, in accountin', is to discover "y 'oin' "ac)%ard over the transactions
(evidence) step "y step esta"lishin' a ?paper8trail? for a transaction. 3on8tracea"le is
%here the ?paper8trail? of a transaction is "ro)en or non8existent.
TRADE DEBTORS represent amounts of money o%ed "y customers %ho have
purchased 'oodsBservices from the company.
TRADE DISCOUNT is a producer discount 'iven to retail trade mem"ers to assist them
in increasin' sales of the producer+s product.
TRADE DRAFT is a draft addressed to a commercial enterprise.
TRADE EXCHANGE is a "arter system %here people or companies trade 'oods and
services %ithout the use of money. (n the .!., income from "arter transactions is
considered taxa"le.
TRADEMARK is a formally re'istered sym"ol identifyin' the manufacturer or
distri"utor of a product.
TRADE NAME is a distinctive name used to identify a product or company and "uild
reco'nition. Many corporations* e.'. #oca #ola, .ord, (BM, etc.* a''ressively protect
their trade names %ithin the mar)et.
TRADE PAYABLE, also )no%n as an account paya"le, is an amount o%ed to a creditor
for 'oods and services received.
TRADE RECEIVABLES (NET) are all accounts from trade, net of allo%ance for
dou"tful accounts.
TRADE SPENDING is that mar)etin' expense directed to%ards "rand "uildin', e.'.
promotional allo%ances, slottin', and advertisements. $otal expenditure often represents
H:8HNO or more of total sales and is a si'nificant expenditure for any si&e company.
Mana'in' this investment more %isely and reducin' any fraction of a percenta'e of these
dollars is vital.
TRADING CONCERN is an entity that derives its products for sale, there"y revenue,
throu'h purchasin' products for sale from other producers B manufacturers for resale to
their customer "ase.
TRADING PROFIT is that profit earned from the short8term tradin' of securities that
%ere held for less than one year. !uch profit is usually su"-ect to tax at re'ular income
tax rates.
TRAILING, in time periods, is the most recently completed time period. .or example,
trailin' t%elve months %ould "e the t%elve8month period %hich ended on the final day of
the last month.
TRANCHES are related securities that are offered at the same time "ut have different
ris), re%ard, andBor maturity.
TRANSACTION is an event or happenin' that chan'es financial position andBor
earnin's.
TRANSACTION ANALYSIS is coupled %ith data event analysis. $ransaction analysis
loo)s at the data carriers %hich move data and information around the firm. !ome of
these transactions may "e externally 'enerated and some are internally 'enerated. !ee
1A$A E/E3$ A3A60!(!.
TRANSACTION DRIVERS are used to count the fre,uency of an activity, i.e., the
num"er of times an activity is performed.
TRANSACTION EXPOSURE, in forei'n exchan'e, is the possi"ility of incurrin'
exchan'e 'ains or losses on transactions already entered into and denominated in a
forei'n currency. (t is typified "y real exchan'e 'ains or losses and mixes retrospective
and prospective vie%s. (t is short8term in nature.
TRANSFER PRICE is the price char'ed "y an individual entity in a multi8entity
corporation on transactions amon' the entities involved.
TRANSLATION EXPOSURE, in forei'n exchan'e, is to convert the results of forei'n
operations from the local currency to the home currency in the areas of paper exchan'e
'ains or losses* it is retrospective and short8term in nature.
TRANSPARENCY, in economics, (9) Principle adopted in the General A'reement on
$ariffs and $rade that 'overnments must ma)e their rules, re'ulations, and practices open
and accessi"le to the pu"lic and other 'overnments. (H) General A'reement on $rade in
!ervices re,uirement that its mem"er states pu"lish their re'ulations affectin' trade in
services, that they notify the #ouncil for $rade in !ervices of any relevant chan'es, and
that they respond promptly to re,uests for information from other mem"ers.
TRANSPORTATON IN is frei'ht costs paid "y the "uyer therefore added to the costs
of merchandise, i.e. part of inventory cost.
TRANSPORTATION OUT is part of cost of sellin' therefore included as sellin'
expense, i.e. part of !G&A.
TRANSPOSITION ERROR is the unintentional exchan'e of t%o elements of an
ordered list %ith all others stayin' the same. A transposition is therefore a permutation of
t%o elements. .or example, the s%appin' of H and N to ta)e the list 9HA;NF to 9NA;HF is a
transposition. (n this example, if the ne%ly ordered list of 9NA;HF %as unintentional, it
%ould "e commonly called a transposition error. (n accountin', an error in copyin' a
num"er from one place to another is a transposition error.
TREASURY BILL (TBILL) is a 'overnment security that matures in one year or less.
$hey are &ero8coupon "onds that are sold at a discount of the par value to create a
positive yield to maturity. $reasury "ills are considered "y many the most ris) free
investment. $reasury Bills are commonly issued %ith maturity dates of >9 days, F
months, or 9 year.
TREASURY CERTIFICATE is a . !. $reasury security usually issued at par %ith a
specified rate of interest and a maturity of one year or less. (t is issued paya"le to the
"earer and sold in minimum amounts of =l:,:::.
TREASURY CYCLE is the timin' and fre,uency of the various maturities or treasury
instruments* transactions include those related to financin' the operations of the "usiness
(e.'. issuance of capital stoc) or lon'8term de"t).
TREASURY STOCK is stoc) reac,uired "y the issuin' company and availa"le for
retirement or resale. (t is issued "ut not outstandin'. (t cannot "e voted and it pays or
accrues no dividends. (t is not included in any of the ratios measurin' values per common
share.
TREND ANALYSIS is the analysis of chan'es over time throu'h the use of analytical
techni,ues, such as time series analysis, to discern trends.
TRIAL BALANCE is a listin' of the accounts in your 'eneral led'er and their "alances
as of a specified date. A trial "alance is usually prepared at the end of an accountin'
period and is used to see if additional ad-ustments are re,uired to any of the "alances.
!ince the "asic accountin' system relies on dou"le8entry "oo))eepin', a trial "alance
%ill have the same total de"it amount as it has total credit amounts.
TRIPLE BOTTOM LINE (TBL) is a metric for a corporation+s social, environmental,
and economic performance. $B6 is the latest series of "u&& %ords to descri"e "usiness
involvement in sustaina"ility. $B6 is all a"out droppin' the financial "ottom line as a
meanin'ful indicator of %here you stand in the mar)et place and replacin' it %ith a
"ottom line that properly ac)no%led'es the interplay of the social economic and
environmental dimensions of our lives.
TRIPLE NET (NNN) is a lease that includes on top of the "asic rent, a share of the real
property taxes, insurance, and maintenance. ?$riple8net8leases+ are standard in
commercial property leases in shoppin' centers and malls. sually done under a limited
partnership, resultin' in lo%er ris) for investors.
TRIPLE P is a productivity model %herein the interrelationship "et%een productivity,
profita"ility and performance, as %ell as, effectiveness and efficiency are plotted in a
schematic vie% %here the main difference "et%een these five terms can "e captured.
TRUE AND FAIR VIEW is one of the most prominent principles of accountin'. (t
su''ests that an enterprise should provide a true and fair vie% a"out its financial
conditions and operatin' results. $he concept of true and fair vie% does not mean
a"solute truth a"out enterprises. .inancial statements are a product of mana'ement+s
-ud'ments and estimates. $he principle of true and fair vie% re,uires comparative truth
a"out the enterprises+ picture. $rue and fair vie% is rather defined operationally* it is
thou'ht to "e accomplished "y complyin' %ith all other lo%er accountin' principles.
TRUEUP, 'enerally, is to ma)e level, s,uare, "alanced, or concentric. sed in "usiness
as an expression meanin' to ?"rin' into ali'nment? %ith predetermined criteria or
process.
TRUE VALUE is the amount that a "uyer is finally %illin' to pay.
TRUST ACCOUNT is a separate "an) account, se're'ated from a "ro)er+s o%n funds,
in %hich the "ro)er is re,uired "y state la% to deposit all monies collected for clients* in
some states called an E!#52K A##23$.
TRUST DEED is an instrument of conveyance of title to property %herein the transferee
%ill "e holdin' the title to the property on "ehalf of another person.
TRUST FUND is a fiduciary relationship callin' for a trustee to hold the title to assets,
usually monetary, for the "enefit of the "eneficiary.
T/T is a payment or financial transaction desi'nation meanin' ?$ele'raphic $ransfer? of
funds.
TTM see $ime $o Mar)et.
TURNAROUND is the reversal of unfavora"le circumstances of a "usiness %here an
investment opportunity may exist. A firm may %or) %ith such a "usiness to restructure
the mana'ement and finances in order to ta)e the 'reatest advanta'e of more favora"le
circumstances. $here are or'ani&ations li)e the $urnaround Mana'ement Association that
speciali&e in turnin' around failin' companies.
TURNAROUND DOCUMENT is a document that has "een created "y a computer to
"e used for data entry. (t is a called a turnaround document "ecause once it has "een filled
in "y users it is then used for input "ac) into the computer. An example of a turnaround
document is the mar) sheet that is filled in "y your teacher. $he mar) sheet is 'enerated
"y the computer, filled in "y the su"-ect teacher and then used for input "ac) into the
computer so that reports can "e printed.
TURNOVER, in .!. accountin', is the num"er of times an asset is replaced durin' a
financial period* often used in terms of inventory turnover or accounts receiva"le
turnover. (n securities, for either a portfolio or exchan'e, $532/E5 is the num"er of
shares traded for a period as a percenta'e of the total shares. (n Great Britain,
$532/E5 means sales.
TWO PARTY CHECK is a chec) made out from one individual to another, i.e. only
t%o entities are involved in the transaction.
TWO PARTY ENDORSEMENT, normally, is %hen t%o si'natures are re,uired to
ma)e a document or "an) draft le'al or authori&ed.
ULLAGE is the empty space present %hen a shippin' container is not full.
UNABSORBED COSTS occurs %hen the cost structure does not fully reflect all
varia"le andBor fixed costs.
UNALLOCATED COSTS represents corporate costs not associated either directly or
indirectly in providin' a product or service for sale. nallocated costs are not included in
the calculation of #2!$ 2. G221! !261.
UNAPPROPRIATED PROFITS are those profits that have "een %ithdra%n from a
"usiness "y its proprietors or appropriated for any other purpose.
UNAUDITED OPINION is a ,ualified opinion "y a #ertified Pu"lic Accountant %ho
has not audited the relevant financial statements.
UNBUDGETED are items andBor amounts that are currently not included %ithin a
"ud'et.
UNCONTROLLABLE EXPENSE is expense that cannot "e controlled or restrained.
!ome of the costs of doin' "usiness can not "e postponed or spread out over a lon'er
period of time (e.'., taxes, rent and utilities).
UNDERAPPLIED FACTORY OVERHEAD is the amount of residual factory
overhead that remains once all )no%n overhead allocations are assi'ned to the applica"le
products. !ee also 3AB!25BE1 #2!$!.
UNDERBILLING is not recoverin' the full value of the a'reed upon price or not
"illin' for the correct amount of services or 'oods provided (usually unintentional).
UNDERBUDGETED is a line item %ithin a "ud'et to %here the "ud'eted amount is not
sufficient to cover the actual amount.
UNDERLYING is the security, cash commodity, for%ard, futures contract, s%ap, or
other contract or instrument that is the su"-ect of a derivative contract or instrument.
UNDERRECORDED normally refers to an understatement as to %hat a total %ould "e
if all data %as accurately included or considered* e.'. underrecorded costs, revenues,
population, etc.
UNDERSTATED is to represent as less than is the case.
UNDERWRITER is a. a "an)er %ho deals chiefly in under%ritin' ne% securities
(investment "an)er), or ". an a'ent or financial institution that sells insurance.
UNDISTRIBUTED EARNINGS see $etained %arnin!s.
UNEARNED REVENUE / INCOME represents money that you have received in
advance of providin' the 'oods or services to your customer. nearned revenue is a
lia"ility of your "usiness until you provide the 'oods or services you a'reed to provide to
the customer.
UNEXPIRED means not havin' come to an end or "een terminated "y the passa'e of
time.
UNFAVORABLE VARIANCE is the opposite of favora"le variance. !ee
.A/25AB6E /A5(A3#E.
UNICAP see 3(.25M #AP($A6(LA$(23 56E!.
UNIFORM CAPITALIZATION RULES (UNICAP), in the .!., is a method of
valuin' inventory for tax purposes that re,uires capitali&ation of direct costs, e.'. material
and la"or, and an alloca"le portion of indirect costs that "enefit or are incurred "ecause of
production or resale activities. #ertain expenses must "e included in the "asis of the
property or in inventory costs rather than currently deducted. $hese costs are then
recovered throu'h depreciation or amorti&ation or as cost of 'oods sold.
UNITCONTROL SYSTEM is an accountin' system used in inventory mana'ement
that trac)s inventory usin' "in tic)ets and physical inventory chec)s.
UNIT COST see 2BGE#$ #2!$.
UNITLEVEL ACTIVITY, in Activity Based #ostin', is an activity that must "e done
for each unit of production.
UNLIMITED COMPANY is %here there is no limit to the mem"ers lia"ilities.
UNQUALIFIED OPINION is an independent auditor+s opinion that a company+s
financial statements comply %ith accepted accountin' procedures. !ee UA6(.(E1
2P(3(23.
UNREALIZED is an event havin' occurred "ut not yet reflected in a transaction. $his
refers to unreali&ed 'ains and losses, %hich have not happened "ut %ould happen if the
investor sold the security or asset that an entity currently holds. nreali&ed 'ains are not
usually taxa"le. (t is the opposite of reali&ed.
UNREALIZED ACCOUNTS RECEIVABLE, in cash "ased accountin', is monies due
"ut not received* can "e used to offset taxes.
UNREALIZED INCOME (paper profit) is profit %hich has "een made "ut not yet
reali&ed or collected throu'h a transaction, such as a stoc) %hich has risen in value "ut is
still "ein' held. also called unreali&ed 'ain or unreali&ed profit or paper 'ain or "oo)
profit.
UNREALIZED LOSS is a term that commonly refers to the %rite8do%n of an
investment portfolio resultin' from applyin' the lo%er of cost or mar)et value on an
a''re'ate "asis. 2n a short8term portfolio, the unreali&ed loss is sho%n on the income
statement. 2n a lon'8term portfolio, the unreali&ed loss is presented as a separate item in
the stoc)holder+s e,uity section of the "alance sheet.
UNRESOLVED EQUITY is the difference "et%een $otal Assets and $otal 6ia"ilities
on the Balance !heet. $otal Assets is al%ays e,ual to $otal 6ia"ilities plus E,uity.
UNRESTRICTED ASSETS are assets B resources %hich are not restricted for use "y
le'al or contractual re,uirements and may "e used for any purpose.
UNRESTRICTED GRANT is a 'rant made to further the 'eneral purpose or %or) of an
or'ani&ation, rather than for a specific purpose or pro-ect.
UNSECURED is o"li'ation "ac)ed not "y collateral "ut only "y the inte'rity of the
"orro%er. 2pposite of secured.
UPSTREAM / DOWNSTREAM SALES is normally associated %ith inter8company
sales7 pstream is a su"sidiary sellin' into the parent entity* %hile do%nstream is the
parent sellin' into a su"sidiary.
UNUSUAL GAINS AND LOSSES are material 'ains and losses that are either unusual
or occur infre,uently, "ut not "oth, are excluded from the extraordinary item
classification (see E4$5A251(3A50 ($EM!).
USAGE VARIANCE is the difference "et%een the "ud'eted ,uantity of materials and
the actual ,uantity used.
USEFUL LIFE is the expected period of time, in years, durin' %hich a depreciatin'
asset %ill "e productive.
USE TAX is a tax on the storin', usin', consumin', and sometimes distri"utin' tan'i"le
personal property or providin' a taxa"le service, i.e. you %ill "e su"-ect to the use tax in
the state %here that event occurs.
VAD, in "usiness, can mean7 /alue of Annual 1emand, /alue8Added 1ata, /alue8
Added 1ealer, or, /alue8Added 1istri"utor.
VALIDATE is to a. declare or ma)e le'ally valid* ". mar) %ith an indication of official
sanction* or, c. to esta"lish the soundness of* corro"orate.
VALUATION ALLOWANCE/RESERVE is an allo%ance to provide for chan'es in
the value of a company+s assets, such as depreciation or if an asset is deemed impaired.
VALUATION DATE is the day %hen the evaluation has "een made or the date %hen
the evaluation applies.
VALUE is a term that defines the %orth of a thin'. $he term is usually preceded "y the
%ord, or %ords such as +.air? or ?.air Mar)et?, and it is usually defined in the document
%here it is found. 3ot all value for an item is the same, i.e. value is usually perceived.
VALUE ADDED is the difference, at each sta'e of production or the provisionin' of a
service, "et%een the price of a product or service and all materials or activities paid for to
produce the product or provide the service.
VALUE ADDED TAX is a consumption tax %here taxes are levied at each step of a
manufacturin' process %here value is added to that product at that point in the
manufacturin' cycle* as %ell as at the point %here the consumer purchases the end
product.
VALUE ADDED VERTICAL INTEGRATION is controllin' as much of the "uild
stream, "oth upstream and do%nstream, in producin' a product or service as possi"le
%hile ensurin' that every part of the stream provides added value. !ee also /A6E
A11E1 and /E5$(#A6 (3$EG5A$(23.
VALUE CHAIN is the se,uential set of primary and support activities that an enterprise
performs to turn inputs into value8added outputs for its external customers. As developed
"y Michael E. Porter, it is a connected series of or'ani&ations, resources, and )no%led'e
streams involved in the creation and delivery of value to end customers. /alue systems
inte'rate supply chain activities, from determination of customer needs throu'h
productBservice development, productionBoperations and distri"ution, includin' (as
appropriate) first8, second8, and third8tier suppliers. $he o"-ective of value systems is to
position or'ani&ations in the supply chain to achieve the hi'hest levels of customer
satisfaction and value %hile effectively exploitin' the competencies of all or'ani&ations
in the supply chain.
VALUE FOR MONEY is in the perception of the "uyer or receiver of 'oods andBor
services. Proof of 'ood value for money is in "elievin' or concludin' that the
'oodsBservices received %as %orth the price paid. Examples of the types of factors that
may "e considered are suita"ility, ,uality, s)ills, price, %hole of life costs and other
criteria. $he mix of these and other factors and the relevant importance of each %ill vary
on a case "y case "asis.
VALUE IN USE is the value of an asset in the opinion of the o%ner.
VALUE MANAGEMENT is the application of esta"lished techni,ues to help define
and refine "usiness need, delivery strate'y and the "est value concept "y settin' customer
o"-ectives and values and determinin' success criteria for the pro-ect.
VAR is an acronym for /alue8Added 5eseller (usually of technolo'y products)* or, in
finance, /alue at 5is).
VARIABLE COSTS are those costs associated %ith production that chan'es directly
%ith the amount of production, e.'.,the direct material or la"or re,uired to complete the
"uild or manufacturin' of a product.
VARIABLE EXPENSES are those "usiness expenses that usually fluctuate dependent
upon production or sales volume. #ontrast %ith .(4E1 E4PE3!E!.
VARIABLE INTEREST RATE is an interest rate that moves up and do%n "ased on the
chan'es of an underlyin' interest rate index, e.'. a credit card mi'ht have a varia"le rate
that is a certain spread over the prime rate.
VARIANCE, in accountin', is the difference "et%een a pro-ected num"er and the actual
num"er, e.'. 9. a "ud'et variance is spendin' either more or less from the amount that
%as "ud'eted* and H. a cost variance is the difference "et%een actual cost and standard
cost in the cate'ories of direct material, direct la"or, and direct overhead.
VARIANCE ANALYSIS is the analysis of performance "y means of variances. sed to
promote mana'ement action at the earliest possi"le sta'es. After a "ud'et ("ased on
standard costs) has "een set, its usefulness lies in the revie% procedures %hich compare
actual results a'ainst the "ud'et. /ariance analysis is the process of examinin' in detail
each variance "et%een actual and "ud'etedBexpectedBstandard costs to determine the
reasons %hy "ud'eted results %ere not met (material costs too hi'h, sales prices too lo%,
etc.).
VAT see /A6E A11E1 $A4.
VEBA is /oluntary Employees+ Benefits Association.
VENDOR is a le'al entity that promotes or exchan'es 'oods or services for money.
VENDOR MANAGED INVENTORY (VMI) is a process in %hich a supplier 'enerates
orders for its distri"utor "ased on demand information sent "y the distri"utor. /endor
Mana'ed (nventory %as first applied to the 'rocery industry, "et%een companies li)e
Procter & Gam"le (supplier) and Kal8Mart (distri"utor). But increasin'ly, /endor
Mana'ed (nventory is providin' the "enefits of smoother demand, increased sales, lo%er
inventories and reduced costs to other industries.
VENDOR STATEMENT is a statement "y the seller to the "uyer detailin' material
particulars re'ardin' the property in ,uestion (suita"ility for intended use).
VENTURE is an investment that is very ris)y "ut could yield 'reat profits.
VENTURE CAPITAL is capital committed to an unproven venture. $he initial, start8up
money is referred to as ?seed money? and entails the 'reatest ris). (f the pro-ect 'ets off
the 'round it may re,uire additional financin' at additional ?rounds? or the ?me&&anine
level? "efore the company is finally "rou'ht to the mar)et and the venture capitalist can
en-oy handsome re%ards. Experienced investors in venture capital situations typically
plan on turnin' a%ay a minimum of > out of every 9: proposals %hich are "rou'ht to
them, and then they expect as many failures as successes from their selected investments.
VERIFIABILITY is %here the fact is capa"le of "ein' tested (verified or falsified) "y
experiment or o"servation.
VERTICAL FINANCIAL ANALYSIS allo%s comparison of the financial ratios of a
company in time R past, present and future.
VERTICAL INTEGRATION is the extent to %hich a firm o%ns its upstream suppliers
and its do%nstream "uyers. #ontrol upstream is referred to as "ac)%ard inte'ration
(to%ards suppliers of ra% material), %hile control of activities do%nstream (to%ards the
eventual "uyer) is referred to as for%ard inte'ration.
VESTED refers to havin' an a"solute ri'ht or title, %hen previously the holder of the
ri'ht or title only had an expectation. Example7 after H: years of employment 6arry
6oyal+s pension ri'hts are no% vested.
VET# VETTED# VETTING is to ma)e a careful and critical examination of someone or
somethin', e.'. a person prior to employment.
VIABILITY, in economics, is the capa"ility of developin' and survivin' as a relatively
independent social, economic or political unit.
VMI see /E3125 MA3AGE1 (3/E3$250.
VOLUME GAIN is to o"tain advanta'es due to increase in volume, such as value
increase, points in 'ross mar'in or profit.
VOSTRO ACCOUNT is a local currency account maintained %ith a "an) "y another
"an). $he term is normally applied to the counterparty+s account from %hich funds may
"e paid into or %ithdra%n, as a result of a transaction.
VOUCHER is a. a piece of su"stantiatin' evidence* a proof* or, ". a %ritten record of
expenditure, dis"ursement, or completed transaction* or, c. a %ritten authori&ation or
certificate, especially one exchan'ea"le for cash or representin' a credit a'ainst future
expenditures.
WACC see Kei'hted Avera'e #ost of #apital.
WAGE is actual remuneration paid to an employee for services rendered. Minimum
%a'es, in the .!.A., are esta"lished "y the federal .air 6a"or !tandards Act.
WARRANT, in 'overnment accountin', is an order dra%n authori&in' payment to a
desi'nated payee. (n securities, it is a security entitlin' the holder to "uy a proportionate
amount of stoc) at some specified future date at a specified price, usually one hi'her than
current mar)et. $his ?%arrant? is then traded as a security, the price of %hich reflects the
value of the underlyin' stoc). Karrants are issued "y corporations and often used as a
?s%eetener? "undled %ith another class of security to enhance the mar)eta"ility of the
latter. Karrants are li)e call options, "ut %ith much lon'er time spans 88 sometimes years.
(n addition, %arrants are offered "y corporations %hereas exchan'e traded call options
are not issued "y firms.
WARRANTY is a 'uarantee 'iven to a "uyer from a seller that the 'oods or services
purchased %ill perform as promised, or a refund %ill "e 'iven, repair %ill "e done at no
char'e, or an exchan'e made.
WEIGHTED AVERAGE is one in %hich different data in the data set are 'iven
different ?%ei'hts.? /aryin' su"-ective assumptions are derived for determinin' the level
of importance for each data cate'ory. .or example, many teachers %ill use a ?%ei'hted
avera'e? %hen calculatin' a student+s 'rade in a course. A teacher mi'ht determine the
final 'rade for the course "y calculatin' that the test avera'e is F:O of the 'rade, ,ui&
avera'e is A:O of the 'rade, and a sin'le pro-ect is 9:O of the 'rade.
WEIGHTED AVERAGE COST OF CAPITAL (WACC) is an avera'e representin'
the expected return on all of a company+s securities. Each source of capital, such as
stoc)s, "onds, and other de"t, is %ei'hted in the calculation accordin' to its prominence
in the company+s capital structure.
WHITE KNIGHT is an entity that comes to the rescue of a corporation that is "ein'
ta)en over.
WHITE PAPER 9. in a technolo'ical industry, is an informational "rief offerin' an
overvie% of a technolo'y, product, issue, standard, policy, or solution 8 its importance,
use and implementation, and "usiness "enefits. Khite Papers have emer'ed as the
standard %ay of communicatin' more in8depth information to "usiness decision8ma)ers
in terms of pro"lems solved and mar)ets addressed* or, H. a Khite Paper can "e an
official 'overnment report of an investi'ation into a pu"lic event that received a 'reat
deal of pu"licity and notoriety* it indicates the official 'overnment position on a
particular pu"lic issue.
WHOLLY OWNED SUBSIDIARY is an entity %hose parent o%ns virtually 9::O of
its common stoc).
WHOLESALE is the sellin' of 'oods to retail merchants* usually in lar'e ,uantities for
resale to consumers.
WINDFALL PROFIT/GAIN is profit that occurs suddenly as a result of an event not
controlled "y the company or person reali&in' the 'ain from the event. .or example, a
hurricane may "rin' extraordinary revenue to a roofin' contractor as a result of the
natural disaster.
WINDOW DRESSING is the act or an instance of ma)in' somethin' appear
deceptively attractive or favora"le. sually usin' somethin', e.'. inflated sales
pro-ections, to create a deceptively favora"le or attractive impression.
WINDOW OF ENTERPRISE depicts the overall structure of accountin'.
WIDGET is a device that is very useful for a particular -o". 2ften used %ithin a name of
a fictitious company.
WIP is an acronym for Kor) in ProcessBPro'ress. sually refers to inventory that has
value added from la"or or additional processin'. Khen considered for inventory value,
the value of the ra% material plus the value added component is accounted for in
determinin' the value of that inventory at that point in the process.
WITHOLDING, dependent upon application, is7 a. income tax %ithheld from
employees+ %a'es and paid directly to the 'overnment "y the employer* or, ". a tax
deducted from dividends on investments %hich are paid to forei'n investors. $his can "e
claimed "ac) if there is a 1ou"le $axation A'reement in place "et%een the countries.
!ee K($CC261(3G $A4.
WITHHOLDING TAX usually refers to those taxes that are %ithheld from an
employeeDs compensation to account for that individuals tax lia"ility on hisBher
compensation.
WITNESS is an individual %ho testifies at a trial on %hat he has seen, heard, or
other%ise o"served.
WORK CENTER, normally, is an individual production area or su"8process of an
overall manufacturin' process.
WORKER&S COMPENSATION is, usually, a state or privately mana'ed insurance
fund in the nited !tates that reim"urses employees for in-uries suffered on the -o".
WORKING ASSET STATEMENT is a net %orth statement minus any personal assets,
the car, house, "oat, etc. A %or)in' asset statement %ill 'ive a clear picture of an
individual+s invested assets.
WORKING CAPITAL (WC) is current assets minus current lia"ilities* also called net
current assets or current capital. (t measures the mar'in of protection for current
creditors. (t reflects the a"ility to finance current operations.
WORKING CAPITAL RATIO is %or)in' capital expressed as a percenta'e of sales.
WORKING CAPITAL STATEMENT (WCS) is part of the financial statements+
?!tatements of #ash .lo%s or #han'es in .inancial Position.? $he K#! normally
includes sections coverin'7 !ources of Kor)in' #apital, ses of Kor)in' #apital, and
Kor)in' #apital #han'es.
WORKING CAPITAL TURNOVER (WCT) sho%s ho% efficiently Kor)in' #apital
(K#) is employed, i.e., it measures ho% efficiently the "usiness is usin' its availa"le
assets. K#$ measures the amount of 3et 5evenue 'enerated per monetary unit of
Kor)in' #apital. (t varies %idely "y industry* therefore it is "est to compare K#$ to
industry avera'es.
WORKING TRIAL BALANCE is similar to the trial "alance. Additionally, it contains
columns for ad-ustin' entries and the ad-usted "alance. $his report is typically used at
year8end to assist in ma)in' ad-ustin' entries.
WORK IN PROCESS is parts and su"assem"lies in the process of "ecomin' completed
finished 'oods.
WORK IN PROGRESS a piece of %or) that is not yet finished.
WORK SHEET is a document or schedule in %hich an accountant or auditor 'athers
information to su"stantiate an opinion concernin' an account "alance or +test of
transaction.+
WORLD TRADE ORGANIZATION (WTO) is the international trade "ody formed "y
the a'reement of mem"er nations. $he K$2 is an evolution of the GA$$ process
desi'ned to resolve trade disputes and %or) for the lo%erin' of tariff and non8tariff trade
"arriers.
WORTH is an indefinite ,uantity of somethin' havin' a specified value. !ee /A6E.
WRAP ACCOUNT at its most "asic is an alternative form of commission arran'ement
"et%een a securities firm and its client. Krap accounts 'enerally char'e the client an
annual fee "ased on assets in the account in lieu of a per transaction commission
structure. (n other %ords, the firm ?%raps? to'ether all the costs and char'es them off as a
?mana'ement feeT. .irms often add further features to %rap accounts such as investment
mana'ement, custodial services, and enhanced reportin'.
WRITEDOWN is the reduction in the "oo) value of an asset.
WRITEOFF is to decrease the value of an item, e.'., a tax %rite8off decreases tax
lia"ility, a vehicle involved in an accident can "e declared a %rite8off if the cost to repair
is in excess of the value of the vehicle.
WRITEUP is the increase in value of an asset, "ut it is seldom used and is not allo%ed
in GAAP (Generally Accepted Accountin' Principles).
WRITEUP SERVICE is the provisionin' of all reportin' re,uirements of "oo))eepin'
and accountin' services. $he follo%in' is a non8exhaustive list of reportin' services
provided7
9:>>s report preparation for su"contractors.
Ban) account reconciliation.
#hec) codin'.
.ixed asset schedules.
Maintenance of 'eneral led'er.
Payroll deposit calculations.
Payroll tax filin's.
Personal property tax returns.
Preparation of internal financial statements.
XINEFFICIENCY is the failure to minimi&e costs or maximi&e returns. (!ometimes
referred to as 48efficiency, "ut carryin' the same meanin'.)
YANKEE BOND is a dollar "ond issued "y a non8.!. "orro%er in the nited !tates.
YELLING MARKETS refers to mar)ets %here transactions involve the yellin' of
prices and ,uantities durin' the transaction.
YEN is the currency of Gapan. (ts su"divisions are 9:: sen and 9::: rin.
YIELD is the annual return on an investment, expressed as a percenta'e. $he yield to
redemption or maturity (the same thin') com"ines the runnin' yield %ith the ?pull to
redemption?* thus a "ond %hich has a 9:O coupon and exactly one year of remainin' life
%ill sell at =>M.HO %hen interest rates are at 9H.:O, that 9H.:O "ein' composed of
9:.HO runnin' yield and 9.MO pull to redemption (=9::.: 8 >M.HO).
YIELD TO MATURITY (YTM) is the rate of return the investor %ill earn if a "ond is
held to maturity.
YTD is 0ear $o 1ate* meanin' the period "e'innin' of the calendar year, Ganuary 9st of
the current year, or the fiscal year up until today+s date.
YTM see 0(E61 $2 MA$5($0
ZERO BASED BUDGET is %here the expenses or costs of the prior year are not ta)en
into consideration %hen esta"lishin' expense or "ud'etary levels loo)in' for%ard. Each
expense cate'ory starts from &ero. All expenses or cost levels %ithin the "ud'et must "e
-ustified or re8-ustified as "ein' necessary* thus S&ero8"aseT.
ZERO COUPON BONDS are "onds priced at a lar'e discount from face value. $he
"onds mature at full face value so the difference "et%een the ori'inal issue price and the
face value represents interest income. $he issuer of the &ero coupon "ond saves on cash
flo% since the interest isn+t paid out until the end of the "ond holdin' period.
ZERO COUPON CONVERTIBLE DEBENTURE/SECURITY is a &ero coupon
"ond that is converti"le into the common stoc) of the issuin' company after the common
stoc) reaches a certain price.
ZERORATED denotes 'oods on %hich the "uyer pays no value8added tax althou'h the
seller can claim "ac) any tax heBshe has paid.
ZERORATED SALES is %hen a sale is taxa"le at the rate of :O, i.e. no sales tax.
!ome examples could "e7 "asic 'roceries, prescription dru's or certain medical devices.
ZSCORE see A6$MA3+! ?L8!#25E?

@WAY MATCHING is the comparison of relevant voucher to purchase order.
BWAY MATCHING is the comparison of relevant voucher, purchase order, and receiver.
BF RULE see $C5EE PE5#E3$ 56E.
4 C'' OF CREDIT are the four primary considerations that %ill affect a lender+s decision to approve or decline your
loan application. <no%n as the ; #Ds of credit7 9. #apacity 8 %hat is your a"ility to repay the loanZ 1o you have a -o"
or another income sourceZ 1o you have other de"tsZ H. #haracter 8 %ill you repay the loanZ Cave you used credit
"eforeZ 1o you pay your "ills on timeZ A. #ollateral 8 if you fail to repay your loan, is there somethin' of value that
you a'ree to forfeitZ .or example, if you are "uyin' your first car, it could "e used as collateral to insure that you %ill
repay the loan. (f you default, you lose your car. ;. #apital (accumulation) 8 %hat are you %orthZ 1o you have other
assets, such as a savin's account, car, or certificate of deposit that could "e used to repay the de"tZ
44? CALENDAR, in "ud'etin' and accountin', is the "rea)do%n of each month into %ee)s "y countin' the
num"er of times .riday occurs %ithin each month, e.'., Gan E ; %ee)s, .e" E ; %ee)s, Mar E N %ee)s, Apr E ; %ee)s,
May E ; %ee)s, Gun E N %ee)s] etc. to total NH %ee)s in a 9H month period. Every third month, .riday %ill occur N
times. All other months, .riday %ill occur ; times. (n the months %here .riday occurs N times, it is considered a N
%ee) month. Khereas, the ; .riday months %ill "e considered as ; %ee) months.
%K is a document re,uired "y the !E# to announce certain si'nificant chan'es in a pu"lic company, such as a mer'er
or ac,uisition, a name or address chan'e, "an)ruptcy, chan'e of auditors, or any other information %hich a potential
investor ou'ht to )no% a"out.
$;K is the audited annual report that most reportin' companies file %ith the !ecurities and Exchan'e #ommission
(!E#). (t provides a comprehensive overvie% of the re'istrant+s "usiness. $he report must "e filed %ithin >: days after
the end of the company+s fiscal year.
$;Q is a report filed ,uarterly to the !ecurities and Exchan'e #ommission (!E#) "y most reportin' companies. (t
includes unaudited financial statements and provides a continuin' vie% of the company+s financial position durin' the
year. $he report must "e filed for each of the first three fiscal ,uarters of the company+s fiscal year and is due %ithin
;N days of the close of the ,uarter.
$BTH PERIOD in the fiscal year is the period used for fiscal year8end ad-ustin' entries (periods 989H "ein' the
months in the fiscal year).
$? MINUTE RULE is a time)eepin' method used as a semi8official delay prior to endin' or "e'innin' an activity.
.or example7 a. 2nly %aitin' for a tardy colle'e instructor for 9N minutes prior to the class "ein' terminated, or, ".
Puttin' a 9N minute hands8off delay "efore impulsively eatin' a candy %hen dietin'.
%; @; RULE (P+61,( P6*-)*D31/L+G) is a 'eneral rule of thum" in "usiness that says that H:O of the items produce
M:O of the activity, %hile H:O of the product line produces M:O of the sales, H: O of the customers 'enerate M:O of
the complaints, and so on. (n evaluatin' any "usiness situation, loo) for the small 'roup %hich produces the ma-or
portion of the transactions you are concerned %ith. $his rule is not exactly accurate, "ut it reflects a 'eneral truth,
nothin' is evenly distri"uted.
4;$ (K) PLAN is a retirement plan in the nited !tates that allo%s ,ualified employees to contri"ute money from
their paychec)s into a tax8sheltered account.
A4; F(6< is the .!. (5! Employer+s Annual Payroll $ax form.
A4$ F(6< is the .!. (5! Employer+s .ederal Uuarterly Payroll $ax form.