|Acid Test or
|Current assets, less stocks (inventories),
divided by current liabilities. A measure of a company’s
||Specific accounting methods adopted
by a company in the preparation of its financial statements.
Under company law these have to be disclosed as part of the
notes to the financial statements.
|Detailed and authoritative statements
issued by professional bodies setting out best accounting practice
for a wide range of transactions. In the UK these are Statements
of Standard Accounting Practice (SSAPs) and more recently, Financial
Reporting Standards (FRSs).
|Amounts a firm owes to its suppliers.
U.S. term for creditors.
||Amounts owed to the firm by its customers.
U.S. term for debtors.
|Accounts Receivable Turnover
||Credit sales divided by average accounts
||Recognition of revenues or expenses
when earned or incurred, without regard to the actual time of
the cash transaction. For example, a charge for the cost of
power in the month of December would be accounted for in that
month even though the quarterly bill might not be received and
paid for until February. In this situation an accrued expense
is shown on the balance sheet.
The accruals concept is also called the matching concept.
||The name given to the depreciation,
or reduction in value of, non-tangible assets.
||A report for shareholders and other
interested parties prepared once a year. Includes a balance
sheet, an income statement, a statement of cash flows, a reconciliation
of changes in owners equity accounts, a summary of significant
accounting principles, other explanatory notes, the auditor’s
report, and comments from management about the year’s
||A level stream of equal payments
that last for a fixed time.
||Taking advantage of temporary differences
in market prices. This is done by buying in the cheap market
and then selling in the highest-priced market
||Resources which a firm owns and which
confer economic benefits in the future.
||This ratio measuring the efficiency
with which the assets are being used to produce sales. Total
Sales divided by Total Assets.
||A company in which another company
owns between 20 and 50% of the equity shares, and has a significant
influence over its commercial decisions.
|Authorised Share Capital
||The maximum amount of share capital
which a company is authorised by its Memorandum of Association
to issue at any point in time.
||An accounting statement that displays
a snapshot of the assets, liabilities and equity of a firm at
a point in time.
||An indicator of the riskiness of
a share’s returns, as compared to the riskiness of general
market returns. A beta of 1.0 indicates the same risk as the
||A long-term debt security issued
by a borrower, either a public or private institution.
||A published ranking of a bond developed
by financial organisations to express its relative creditworthiness
on a defined scale.
||The amount at which an asset is stated
in the balance sheet as opposed to market value. Also means
assets minus liabilities.
||A method used to evaluate the point
where sales equal operating costs. It serves as a guideline
to determine the profitability of a firm. Breakeven is calculated
by dividing the fixed costs of the business by the sales price
per unit less the variable cost per unit (see also Contribution).
|Called-up Share Capital
||The issued share capital that the
shareholders have been called upon to pay.
||A method of evaluating, comparing,
and selecting projects to achieve the best long-term financial
||Broadly the resources used by a business
to generate profit. It is commonly defined as ordinary share
capital, preference shares, reserves and minority interests
plus long-term liabilities.
||Long-term expenditures on fixed assets
which are included on the balance sheet (as opposed to revenue
||To record an expenditure as an asset
on the balance sheet rather than to treat the expenditure as
an expense in the period of its occurrence on the profit and
||The financing mix of a firm. The
more debt in relation to equity, the more financial leverage
or gearing the firm is said to have.
||A forecast of cash receipts and disbursements
expected by a firm in the coming year. A short-term planning
|Cash Conversion Cycle
||The number of days between the purchase
of raw materials and the collection of sales proceeds for finished
goods. Commonly defined as the Collection Period plus Stock
Days less the Payment Period.
||The positive (inflow) or negative
(outflow) movements of cash caused by an activity over a specified
period of time.
|Cash Flow Statement
||A financial statement showing the
sources of cash for a business and the ways in which the cash
has been used during the accounting period.
||The number of times a firm’s
cash is collected in a year.
||The number of days required to collect
accounts receivable or trade debtors. Usually calculated as
Receivables (or Trade Debtors) x by 365 divided by Sales.
|Consolidated Financial Statements
||Statements issued by legally separate
companies (parent company and its subsidiaries) that show the
financial position as they would appear if the companies were
one economic entity.
||A liability, the crystallisation
of which, is dependent on some future event occurring or not
occurring. Examples include outcome of litigation costs, guarantees
or commitments under operating leases.
||The amount by which sales revenue
exceeds total variable costs.
||Classifying, summarizing, recording,
reporting, and allocating current or predicted costs.
|Cost of Capital
||The rate a firm must pay to investors
in order to induce them to purchase the firm’s shares
|Cost of Goods Sold
||Equals beginning inventory (stock)
plus cost of goods purchased or manufactured minus ending inventory
||The rate of interest received by
a bondholder on an annual, semi-annual, or quarterly basis.
||Amounts owed to a business by those
who have supplied it with goods.
||Asset that is in the form of cash
or that is expected to be converted into cash in the next 12
||Short-term expenditures that are
completely charged to income in the year in which they occur.
||Obligations that are expected to
require cash payment within one year or the operating period.
Also known as creditors: amounts due within one year.
||Current assets divided by current
liabilities. This is a measure of the liquidity of the firm.
||Usually a written agreement whereby
a company grants a charge on its assets as security for funds
advanced to it.
|Debt Equity Ratio
||The ratio of a firm’s debt
to its equity or shareholders’ funds. The higher this
ratio, the greater the financial leverage or gearing of the
||Amounts owing to a business, normally
from the sale of goods. Also referred to as accounts receivable.
||The ratio between an entity’s
debtors and its sales on a credit basis. Usually expressed in
terms of the average number of days credit sales that debtors
||Money received in advance of goods
delivered to the customer. The sale cannot be recognised until
delivery occurs and so a liability to deliver the goods is recognised
in the accounts
||The allocation of part of an asset’s
cost to a particular accounting period. Normally done on a straight
line basis. Accumulated depreciation is the total cumulative
amount of depreciation provided to date for assets still held
by the company.
||Amount of profit distributed or proposed
to be distributed to the shareholders. Directors decide periodically
to declare dividends, and they set the amount to be paid.
||The annual dividend payment divided
by the market price of a share of the stock.
|Earnings per Share
||Earnings before interest and taxes
(depreciation and amortisation). EBITDA is an attempt to take
out some of the profit and loss statement items that distort
comparisons across companies (e.g. interest costs). It also
attempts to show an earnings measure that is closer to the company’s
cash flow from operations. This is because both depreciation
and amortisation are included as expenses in the calculation
of EBIT on the P & L but are actually non-cash charges.
However EBITDA is not the same as operational cash flow. For
asset intensive companies these charges can be sizeable. The
key critical failing of EBITDA is that it ignores changes in
net working assets and can overstate cash flow in periods of
working capital growth. It can therefore create the appearance
of stronger interest coverage and lower financial leverage.
For further discussion of EBITDA refer to www.investopedia.com
||The time span over which the benefits
of an asset are expected to be received.
||Earnings per share. Profit after
tax divided by the number of shares in issue.
||See Shareholders’ Funds
||Arise from events that do not occur
regularly but are within the ordinary activities of the business.
||The magnifying (or diminishing) effect
on return on equity from the use of debt in the capital structure.
See also Gearing.
||A lease that effectively transfers
the risks and rewards of ownership of the leased asset from
lessor to lessee. The lease usually lasts for nearly all the
asset’s economic life.
||Assets owned for long-term use and
held on continuing basis. Tangible fixed assets have an underlying
physical substance. See also intangible assets.
||Costs which do not vary with the
level of production.
||The relationship between the amount
of debt finance and the equity finance of a business. A company
with high gearing is one which has a high proportion of debt
||A fundamental accounting concept
which presumes that the business will continue to operate for
the foreseeable future.
||The intangible assets of a firm,
calculated as the excess purchase price paid over book value.
|Gross Margin or Profit
||Net sales minus cost of goods sold.
|Income Statement (Profit
and Loss Statement)
||An accounting statement or a firm’s
sales, operating costs, and financial charges. It reports the
periodic revenues and matching costs and expenses for a specified
period and derives the income for the period.
||The inability to repay debt.
||The term applied to a group of fixed
assets that generally do not have physical existence, including
patents, copyrights, and goodwill.
|Interest Coverage Ratio
||Earnings before interest and taxes
divided by interest expense. Used to measure a firm’s
ability to pay interest.
||A long-term arrangement in which
no one venturer can control strategy.
||Compares the amount of funds invested
by creditors to the amount of funds invested by owners.
||Amounts owed to organisations and
||A measure of how easily assets can
be converted into cash.
||Borrowing over a long period of time,
usually through bank loans or the sale of bonds. On a balance
sheet, any debt due for more than one year is classified as
||Another name for the accruals concept.
||Arises when one company acquires
another but acquires less than 100% of the shares.
|Net Profit Margins
||Net profits after taxes divided by
|Net Working Assets
||Usually refers to trade debtors plus
stock less trade creditors. Net working assets divided by sales
gives a guide as to the additional working capital funding required
from a given increase in sales i.e. a ratio of 15% indicates
a company has to invest 15 pence in working capital for every
incremental £1 of sales.
||The value of assets less liabilities
||The book value of a company’s
||Assets acquired under operating leases
are not shown on the balance sheet (compare with Finance Lease).
||The degree to which a company’s
costs of operation are fixed as opposed to variable. High operating
leverage means a high proportion of fixed costs to total expenses.
|Operating Profits (Trading
||Profits earned from operations, excluding
taxes and interest from consideration.
||The rate of return on the best alternative
investment that is not selected.
||Shares carrying one vote each and
with an equal right to a proportionate share of the dividends.
The most common class of share.
|P & L
||A financial statement giving details
of a company’s revenues and expenses.
||The nominal or face value of shares
or bonds. For shares, it is a relatively unimportant value except
for bookkeeping purposes.
||Another term for creditors
||The number of days within which a
firm pays off its accounts payables or trade creditors. Usually
calculated as Accounts Payable (or Trade Creditors) x 365 divided
by Cost of Sales.
||An annuity forever; periodic payments
or receipts on a continuous basis.
||Shares which have prior claims over
those of ordinary shares as regards either dividends or repayment
of capital. Typically the amount of dividend is fixed.
||A prepaid expense – an amount
shown in the accounts as an asset representing goods paid for
but not yet fully received.
|Price Earnings (P/E) Ratio
||The price of a firm’s share
divided by its EPS.
|Profit and Loss Account
||The financial statement that summarises
the turnover (sales) and expenses of a business. See also Retained
||A liability representing amounts
set aside for costs likely to arise in the future.
||Current assets minus inventory (stock)
divided by total current liabilities. Used to measure short-term
solvency of a firm.
|R & D
||Research and Development.
||Another term for debtors
||These are either revenue reserves
or capital reserves. Revenue reserves are accumulated retained
profits which are available for distribution as dividends. Capital
reserves include share premiums and revaluation reserves and
are not available for distribution as dividends.
||The excess of profit after tax over
dividends paid out to shareholders. It can be in respect of
a particular accounting period or the accumulated total over
a company’s whole life to date (shown in the shareholders’
funds as the profit and loss account).
|Return on Assets (ROA)
||EBIT divided by total assets. This
ratio helps a firm determine how effectively it generates profits
from its assets.
|Return on Net Assets (RONA)
||The relationship of annual earnings
before interest, after taxes to total assets less current liabilities.
It is used as a measure of the productivity of a company’s
invested capital regardless of the amount of financial leverage
||Another term for debtors
||Money spent on items such as wages
and rent which will be consumed within the year.
||The degree of uncertainty associated
with the outcome of an investment. It is a measure of the volatility
of returns obtained from a project, and takes into consideration
the probability of loss in any investment venture.
|Risk-Free Rate of Riskless
||A discount rate equal to the return
on a riskless asset. It is usually equal to the return on debt
issued by the government.
||An additional required rate of return
that must be paid to investors who own risky assets. The riskier
the asset, the higher the premium.
||The estimated selling price of an
asset once it has been fully depreciated.
||The nominal value of shares issued
||Shares issued at an amount exceeding
their nominal (par) value.
||The amount that belongs to the shareholders.
It consists of share capital, retained profits and other reserves.
||Anticipated cost of producing a unit
of output; a predetermined cost to be assigned to products produced.
Standard costs are used as the benchmark for gauging good and
||This refers to inventory held for
resale and usually includes raw materials, work in progress
and finished goods.
||Measures the period for which stocks
are being held. Usually calculated as Stock x 365 divided by
Cost of Sales .
||Ratio measuring relationship between
a company’s inventory and cost of sales.
||Depreciating an asset by equal amounts
each year over the life of the asset.
||Debt whose holders have a claim on
the firm’s assets, only after senior debt holder’s
claims have been satisfied.
||A company (B) which is controlled
by another company (A). “Control” means that A owns
more than 50% of the subsidiary’s equity share capital.
Formal name is subsidiary undertaking.
||A cost that has already occurred
and cannot be removed. Because sunk costs are in the past, such
costs should be ignored when deciding whether to accept or reject
|Times Interest Earned Ratio
||EBIT divided by annual interest expense.
It is a measure of how well the firm meets its interest payments.
|Time Value of Money
||An expression of the ability of money
to earn interest. A dollar today has greater value than a dollar
|Total Asset-Turnover Ratio
||Total operating revenues divided
by average total assets. Used to measure how effectively a firm
is managing its assets.
||Another term for sales. Includes
both cash sales and credit sales but not the sale of fixed assets.
||Costs that change as activity levels
change. In accounting this term often means the sum of direct
costs and variable overhead.
||Difference between actual and standard
costs or between budgeted and actual expenditures or, sometimes,
||Work in progress.
||Accounting entries that allocate
portions of past outlays into appropriate operating periods,
such as depreciation and amortization.
||Current assets less current liabilities
(net current assets). Sometimes the term just refers to three
key items of working capital and is defined more narrowly as
stock plus trade debtors less trade creditors.