Glossary of accounting

GLOSSARY of common terms in

ACCOUNTING & FINANCEfor non-specialist students

prepared by barry pierce BA MSc ACMA

July 2012

This glossary is designed to help those studying a basic, introductory module in accounting or finance, but whose degree programme is outside the specialism. Awareness of what business accountants do, and can be asked to do, interpreting their reports and analyses are important skills for any manager or professional because of the ubiquitous role of money. Besides, developing financial awareness & common sense helps personal development because many of the pressures on organisations and the self-employed are financially motivated.However, accountants indulge in jargon and their financial statements are full of it. This leads to confusion amongst those outside the profession, especially where different terms mean the same or subtly different things. This glossary should help you navigate in this idiomatic fog. It presently contains some 350 words or phrases that I have retrospectively surveyed from lectures to BSc engineering, MSc management & MBA students. As such, it reflects my audience and my perspective and is neither objective nor comprehensive. It is hoped that future contributions can develop this glossary into a more balanced and readable reference.I would like to thank Lynda Burkinshaw BA FCA CTA PGCE for reviewing this glossary but mistakes in definition and explanation are entirely my responsibility.

barry pierce

Guide to useTerms are arranged alphabetically and where synonyms exist, the acronym ‘aka’ (‘also known as’) is given in the notes. American textbooks are in common use here so where the term is largely indigenous, (US) is shown. Where the definition is taken, in large part or complete form, from an independent source, that source is indicated by an acronym in the ‘REF’ column are as follows:

2

TERM EXPLANATION REF

NOTES

ODA: Anon. (2005) Oxford Dictionary of Accounting (3rd ed). Oxford University PressCIMA: Anon. (1996) Management Accounting – Official

Terminology. Chartered Institute of Management Accountants

fd: www.thefreedictionary.comab: www.allbusiness.com/glossaries/accountingham: Liebster & Horner ( 1989) The Hamlyn Dictionary of Business Terms. Hamlyn

In digital versions, hyperlinks are indicated from a definition or note to a term explained elsewhere in the glossary

a/c abbreviation for ‘account’ or ‘accounts’

absorption costing costing system that distinguishes between direct & indirect costs and assigns the latter to cost objects based on an intervening factor linked to the volume of production

aka: full costing (US)

accountability managerial responsibility for the appropriate conduct of the economic affairs of a business & the obligation to report thereon to its owners

contemporary interpretation widens conduct beyond the economic realm and widens responsibility to stakeholders & society at large

accountancy the profession of accounting (UK)

accountant a person who practices accountancy

regulated activities require membership of a professional body

accounting the process of identifying, measuring, recording, &

ODA

3


NOTES

communicating economic transactions

accounting entity the unit for which accounting records are maintained, separate from those who own it

ODA

eg a companyaka: business entity

accounting equation formulae that represent the ‘balanced’ nature of accounting entries & statements

ODA

assets = liabilities + capital(amongst others)

accounting period time period for which financial statements are prepared, usually annual where publicly disclosed, but the frequency of accounts prepared for internal use can be monthly or less

accounting standards the principles & methods formulated by an authoritative body for the treatment of specified transactions

eg the IASB

accounts structured records of a legal entity which represents events in monetary terms

aka: ‘books’

accounts payable amounts owed by a company to suppliers which, in aggregated form, appear in the balance sheet under current liabilities

ODA

aka: trade creditors; purchase ledger

accounts receivable amounts owed to a company by its customers which, in aggregated form, appear in the balance sheet under current assets

aka: trade debtors; sales ledger

accrual a fundamental concept that revenue is recognised in the accounting period in which it is earned & related costs are matched to determine profit. An ‘accrual’ recognises an expense in the correct accounting period where a supplier’s invoice is yet to be received, but it can also refer to the advanced receipt of revenue. It is represented

accruals are one of several mechanisms which differentiate cashflow from profit

4


NOTES

in the balance sheet as a current liability

acid test a stringent test of liquidity ab monetary assets ÷ current liabilities

acquisition the transfer of control of a company by the purchase or exchange of its shares

aka: takeover; merger

activity-based costing costing system that identifies the various activities performed in a firm and uses multiple cost drivers (volume and non-volume based factors) to assign overhead costs (ie indirect costs) to productsABC recognizes the causal relationship of cost drivers with activities

ab abbrev: ABCwidely adopted over the last twenty years, displacing the absorption costing method because many costs are no longer affected by the volume of production

agency theory represents the relation associated with the separation of ownership of an entity from control by its managementRoss (1973)

the provision of accounts by the agent (management) to the principal (shareholder) is regarded as a monitoring cost

AIM the ‘introductory’ market for equities in London with less onerous listing & regulatory requirements

acronym for Alternative Investment Market

allocation the attribution of a whole item of cost (or revenue) to a single unit, centre or time period

CIMA

but see ‘apportionment’

amortisation the process of spreading the original cost or re-valued amount of an intangible asset over its estimated economic life by reducing its ‘carrying value’ in the balance sheet by the amount ‘expensed’ against profit

commonly applied to brands & other intellectual property

analyst a market intermediary who appraises the performance of shares, securities, & other financial products

5


NOTES

annuity a constant yearly cashflow usually associated with an accumulated fund (eg a pension) and thus involves a principal sum & compounded interest

apportionment the splitting of a whole item of cost or revenue between multiple units, centres or time periods on some arbitrary basis

but see ‘allocation’

asset turnover a measure of utilisation of a company’s non-current or total assets, expressed as a multiple

sales ÷ assets

assets economic resources that are expected to convey future benefits

eg receivables, inventories, equipment, patents, etc

attestation a legal verification of truth & correctness

audit examination of a procedure, process or policy, independent of those involved, with a view to ensuring compliance with regulation, effectiveness, or improvement

audited accounts a published set of accounts that have been independently examined by an auditor and who expresses an opinion as to its compliance with accounting standards and the fairness of its representation of economic events

the annual reports of larger organisations will contain an audit statement to provide assurance to the reader on the reliability of its financial statements

auditor an accountant who possesses the certificated training to undertake an audit

in the UK such a person must also be a member of a designated professional body (eg Institute of Chartered Accountants; Association of

6


NOTES

Chartered Certified Accountants)

balance the net debit or credit which remains on an account at the end of an accounting period

represents asset, liability, equity, revenue or expense

balance sheet a statement of the financial position of an entity at a given date disclosing the assets, liabilities and accumulated funds

CIMA

in a company the accumulated funds will represent shareholders’ interests and are termed ‘equity’

balanced scorecard a multi-dimensional performance model that integrates both financial & non-financial metrics with the aims & strategy of an organisation

Kaplan & Norton (1992)

it contains four perspectives: shareholder; customer; internal business process; innovation & growth

beta a measure of the systematic risk of a share or other traded asset

a coefficient above 1.0 means that its price has been more volatile than the market index

bill colloquial name for an invoice

ODA

bond a traded form of borrowing, issued by governments or corporates that usually offers a specified (‘coupon’) rate of interest and a redemption date in the medium/long-term upon which the principal sum is repaid to the bearer

the principal sum on a UK bond is £100 (US: $1,000)bonds are issued in ‘bearer’ form and can be freely traded between investors

bondholder the bearer of the bond entitled to receive interest and/or its ‘face’ value upon maturity

book value value of an asset (or liability) shown in the balance sheet

various bases of valuation are used, as governed by accounting standards & company policies

borrowings generic term for funds

7


NOTES

received which carry an obligation to be repaid in future

break-even point the level of sales or sales volume at which neither a profit or loss is made

abbrev: BEP = fixed cost ÷ contribution per unit

budget a plan usually expressed in financial terms

budget phasing the attribution of an annual budget over shorter periods for the purpose of control

usually monthly or 4-weekly

budget centre normally an organisational unit whose manager has responsibility over a budget

classified as a cost centre, profit centre or investment centre

budgetary control the process of comparing actual results with budget, for the purpose of feedback on past performance or forward modification of plans

usually by budget centre so as to make a designated manager responsible for action

budgetary slack intentional underestimation of revenues and/or overestimation of expenses;

ab

budgeting an approach to the short-term management of organisational performance through the formalised use of financial plans & disseminated targets

business risk generic categorisation of risks associated with the strategy & operations of a commercial enterprise

in finance, the term is often used to differentiate non-financial risk from financial risk which is induced through gearing

buyout the acquisition of a substantial shareholding of a business by its own management

ODA

call option a right but not an obligation to buy an asset at a pre-specified (exercise) price over a pre-specified future period of time or date

an important risk mitigation (or ‘hedging’) devicealso see ‘put option’

capital a generic term which requires an

8


NOTES

represents the funds injected into and generated by a business

associated adjective, adverb or noun to have particular meaning

capital employed the funded asset base, represented in a balance sheet, from which operating profits are generated

total assets – current liabilities or non-current liabilities + equity

capital expenditure the cost of acquiring or improving non-current assets which is not charged against current profits but recognised as an asset and then written down (as depreciation) over its economic life

abbrev: capex

capital gain the proceeds on disposal of an asset (eg land; ordinary share) less its original cost

capital gain, together with dividend received, are the two components of shareholder return

capital market a market into which long-term securities (ie shares & bonds) are issued and in which they are traded

key source of funds for listed companies

capital retirement a reduction in the funding base of a company by repaying borrowings, redeeming securities, or repurchasing shares

capitalise expenditure that is added to non-current assets in the balance sheet rather than charged against current profits

eg: installation costs on machinery; interest costs on funding the construction of a building

cash bank notes, coins & current account balances

cash balance the net amount of cash possessed or overdrawn

appears in the current asset or liability section of the balance sheet and as the final

9


NOTES

figure in the cashflow statement

cash equivalent highly liquid investments that are capable of being converted into cash without notice

ODA

cash injection a rise in the external funding of a business to facilitate growth or maintain liquidity

cashflow the movement of cash into & out of a business

ODA

receipts & payments respectively

cashflow statement a financial statement (eg in an annual report) which shows the inflows & outflows of cash & cash equivalents over the past accounting period

analysis is by operating, investing, & financing cashflows in published statements

CFO commonly used title for the board director responsible for finance & the accounts

abbrev: Chief Finance Officer

chairman’s statement a mandatory statement in an annual report of a company, the content of which is not regulated

important source of strategic context because, whilst it is likely to convey a favourable picture, the statement summates key events and is often forward-looking

charge a legal interest in the assets of a company often required by lenders & other creditors so as to provide security on a borrowingalso see ‘collateral’ & ‘security’

may be ‘fixed’ where the assets are nominated or ‘floating’ where they are generic (eg in a bank overdraft secured on accounts receivable)

collateral assets that can be offered as security to a lender of funds

commercial paper short-term, unsecured borrowing issued by renowned companies on a money market

offers no interest, but is issued below its par value

comparability an accounting principle that published financial data should be prepared on the

where standards change, past results are re-stated to

10


NOTES

same basis (ie accounting standards) as other companies in order that independent analysis can be consistently based

maintain comparability

compliance activities to ensure accounting records, systems, & reports concur with regulation

fundamental role of an audit

comply or explain a principle embedded in the UK corporate governance code that quoted companies should disclose in their published report that they have complied with provisions of the code or explain any non-compliance, the merit of which can then be judged by the reader

compound interest where the interest on a sum lent or borrowed is re-invested and so accentuated the amount of interest in future periods

eg £10 at 10% interest per annum will be £1 in the first year but £1.10 in the second £(10+1)x10%

contingency theory that there is no universally applicable best practice in the design of organisational controls such as a management accounting system

Lawrence & Lorch 1967

CIMA

contingent an asset or liability that arises from past events but whose existence will be confirmed only by the occurrence of an uncertain future event

ODA

adjective or adverb

contribution incremental profit generated from sales

an important term in marginal costing that represents sales minus variable costs of sale, where fixed costs are not attributed to the cost object (eg to the product)

11


NOTES

control budget the budget that is used for organisational control and to which budget centre managers are held accountable

convertible a bond that can be changed into ordinary shares at a future time at the discretion of the holder or held until maturity and repaid as if a loan

noun

corporate governance guidance or regulation applied to boards of directors on the conduct of their direction and control of company operations

governance regimes have important implications for the internal control of risk and the integrity of public reporting of accounting information

COSO framework the over-arching risk management framework recommended by US law and UK code of corporate governance

‘COSO’ stands for the ‘committee of sponsoring organisations’ of the US Treadway Commission (1987)

cost the amount of expenditure, actual or notional, incurred on, or attributable to, a specified thing or organisational activity

CIMA

cost accounting the process & techniques adopted to collect, analyse, & present internal monetary & quantitative data

cost accounts are usually integrated with financial accounts but extend the ‘database’ considerably beyond regulatory needs

cost centre a production or service location, function, activity or equipment for which costs are accumulated (eg maintenance department)

CIMA

cost classification the process of grouping expenditure according to common characteristics (eg energy)

ODA

cost driver the factor, normally the level especially

12


NOTES

of resource, that causes cost to be incurred on organisational activities (eg number of purchase orders)

associated with activity-based costing where it is also the basis upon which cost of activities are attributed to cost objects

cost object the ‘destination’ to which or purpose for which costs are attributed

eg product for pricing; department for budgetary control; customer for profitability analysis

cost pool a cost centre, where it is an activity (eg procurement)

only used in activity based costing

cost of capital the return required by investors on the provision of their funds. This may be a cash cost (as in the interest on a loan) or an opportunity cost (as in equity)

this is not the cost of arranging or issuing finance. It is an annualised cost of ‘renting’ the finance

costing the process of determining the costs of products, services or activities

CIMA

use of this term normally requires qualification by an adjective

cost-plus pricing an approaching to setting the selling price of a product or service which involves applying a ‘mark-up’ to its attributed cost

coupon the interest rate specified on a bond certificate

this is the rate paid and shown in the accounts. It is not the rate of return (or yield) to the bondholder

covenant a promise that is legally enforceable

creative accounting misleadingly optimistic, though not illegal, forms of accounting. Accounting statements published on this basis are said to be ‘window-dressed’

technically compliant with laws and accounting standards and, normally, acquiesced to by the auditor

13


NOTES

credit an agreed delay in the settlement of an invoice or other liability incurred.an entry on the right-hand side of an account

see ‘double entry’

credit crunch a populist phrase for the loss of liquidity in the money markets & throughout the banking system as a result of bank collapse in 2008/9 in the US, UK and, to a lesser extent, Europe

led to a withdrawal or tightened constraint on corporate lending

credit rating an independent assessment of the ability of a company (or other entity) to repay a borrowing or line of credit

undertaken by an agency such as Standard & Poors. Commonly the highest (most favourable) rating is ‘AAA’ falling to a single ‘C’ for high risk clients or projects

creditors those to whom an organisation owes money

ODA

includes lenders, trade supplier, & government authorities for taxaka: payables

current less than one year adjective applied to assets & liabilities in the balance sheet

current ratio an indicator of working capital management. A high ratio may indicate inefficiency; a low ratio illiquidity

current assets : current liabilities

customer profitability analysis

attribution of the revenue streams & service costs to specific customers or customer groups

contemporary re-orientation in the cost object which reflects the rising importance of networks & brands

debenture a loan agreement, normally at a fixed rate of interest and redeemable in the medium & long term. It often carries a legal claim or charge over

the holder of the debenture – ie the investor – can assign its rights or sell the ‘loan’ on a capital

14


NOTES

the borrower’s assets and contains covenants which restrict the borrower’s freedom of action over decisions on capital structure & dividends

market. In this way, the debenture becomes securitised and tradable

debit an entry on the left-hand side of an account

see ‘double entry’

debt an amount owed by one entity to another.a collective term to describe any forms of capital or financing other than equity

debtors those who owe money to an organisationusually these are customers who have been granted credit and are referred to as ’trade debtors’

shown in the current assets section of the balance sheetaka: ‘accounts receivable’

decision relevant data that are pertinent to the taking of a decision. In financial terms, these can be regarded as future, incremental cashflows

accounting data is often irrelevant as it may involve sunk or notional costs or be based on historic value

deferral an asset or liability recognised on a balance sheet that reflects a future income or expense

eg deferred income: liability prepayment: asset

deficit loss pseudonym often used in not-for-profit organisations

deposit money paid in part-settlement of a product to be supplied or service to be received.in banking terms, this is money lodged by a customer

depreciation the attribution of the initial cost of a tangible, non-current asset over future accounting periods to recognise the reduction in its value through use

the basis of attribution is stated as an accounting policy & the amount is charged against profits in the income statement, thus reducing the

15


NOTES

carrying value in the balance sheet over time

derivative a financial instrument originally designed to hedge against the risk of future movements in the price of a specified tradable asset but whose use is often speculative.its prevailing price is, in part, derived from the price of the underlying asset to which it refers

forwards, futures, options & swaps are all examples of derivative products

direct cost a cost that can be specifically attributed to a cost object

directors’ report a section in an annual report that is required by the UK’s Companies Act 2006

compliance-based, it contains little strategic or financial insight

disclosure provision of information in the public interest, the minimum content of which is specified by law, market regulations, & financial reporting standards

discount factor a decimal, derived from the discount rate and future time period, which when multiplied by the future amount, converts it to a present value

eg discount factor for an amount to be received in two years where the rate of return is 10% is 0.826

discount rate the ‘hurdle’ rate of interest applied to appraise a potential investment.the rate will be based upon the cost of capital but is normally adjusted to reflect the specific risk characteristics of the investment or an equivalent investment in the market

commonly used in a discounted cashflow projection to determine if the net present value is positive or negative – value creative or destructive, respectively

discounted payback an technique that assesses the delay in recovering the outlay on an investment

16


NOTES

using the present values of its projected cash generation

discounting the reduction of future amounts to their present value.when used in connection with invoices, this refers to the reduced amount received from a factor in advance of settlement by the customer.when used in connection with treasury bills or commercial paper, this refers to the reduced amount received on issue in relation to the face value of the bill that will be paid upon maturity

the level of discount on ‘T’ Bills determines the implied base rate in the UK economy

disposal the sale or scrapping of an asset

particularly evident in the notes to the accounts on non-current assets and in the investing section of the cashflow statement

diversification broadening in the field of operations of a business or investor

associated with the creation of a portfolio and risk reduction

divestment the sale of an asset, particularly a subsidiary business

dividend a discretionary reward to shareholders from the distributable reserves of a company

normally related to the current earnings of a business

dividend cover a measure of the maintainability of a dividend. A trend of reducing cover multiples could be a prelude to a cut

earnings ÷ dividendsor eps ÷ dps

dividend per share the total amount distributed divided by the number of shares in issuewhere dividends are declared, an interim

abbrev: dpsan important measure of the trend in shareholder reward, where

17


NOTES

payment is made and a final dividend per share proposed for shareholder vote at the annual general meeting of the company

quoted companies will seek to be progressive and avoid the volatility associated with earnings

dividend yield a measure of shareholder return by relating the last year’s dividend distribution to the current share price on the capital market, expressed as a percentage

dividend per share ÷ share price x 100

double entry a method of recording transactions in a set of accounts which reflects the dual aspect of the transaction and involves more than one account

since each debit entry has a corresponding credit, the accounts as a whole should ‘balance’

drawn down occurs where a borrowing facility has been arranged where amounts may be called upon as required and over an agreed period up to the limit specified by the facility

the aggregate drawdown and not the facility represents the liability shown in a balance sheet

earnings profits after tax, that are attributable to the ordinary shareholders

aka: net income (US); the bottom line (slang)

earnings per share important measure of financial performance, whose calculation is subject to an international standard (IAS33). eps relates the profit attributable to shareholders to the equity capital base of the company and thus provides a trend of return, irrespective of growth

abbrev: epsprofits after tax ÷ no of shares in issueNOTE: the eps of different companies are not comparable

EBITDA a contemporary measure of financial performance that is a hybrid of profit & cash generation

Earnings Before Interest, Tax, Depreciation & Amortisation

efficient market hypothesis

a proposition that financial markets fairly, rapidly & rationally assimilate information into the price of

abbrev: EMH

18


NOTES

a share or other traded assetequity the value of shareholders’

interest in a company: represented in the accounts as the net asset value or capital & reserves figure in the balance sheetalso represented for a listed company by its market capitalisation

equity = net asset value = total assets – total liabilities = ord’ share capital +share premium + reserves + retained profitmarket value of equity = number of shares issued x share price

exceptional items significant costs or revenues that, whilst unusual, fall within the normal operations of a business and are disclosed separately in its income statement with the intention of conveying a fair view of underlying profitability

expenditure payment of cash, or the incurrence of a liability, to obtain an asset or service.may be classed as ‘revenue expenditure’ which is charged against profit or ‘capital expenditure’ which is ‘capitalised’ as an asset

ab aka: cost; expense

expense see ‘expenditure’face value the value cited on a security

when it is issued. It does not represent the cash received at the time or the market value of the share or bond

aka: par value; nominal value

facility an agreement, usually with a bank, that grants a line of credit that can be used in future

expressed as the maximum amount of the potential borrowing

factoring the sale by a company of its accounts receivables to a third party (often a bank subsidiary) at a discount in return for prompt cash and for a fee in return for the administration of the debtors’ ledger

the factor may assume responsibility for credit default risk (a ‘without-recourse’ agreement) but will then define credit terms & limits

19


NOTES

applied by the company

fair value the amount of money which it is assumed an asset or liability could be exchanged in an arms-length transaction between informed and willing parties

ODA

used in particular in acquisition accounting where the net assets of the target are brought onto the balance sheet of the predator

feedback the monitoring of actual output against plan with a view to retrospective action to correct the difference

as in a budgetary control system

feedforward the modelling of system resources & processes so as to compare forecast outputs against plan with a view to taking pre-emptive action to forestall difference

as in budgeting

finance the practice of manipulating & managing money.monetary capital raised for business purposes.verb: to raise monetary capital

ODA

aka: fundsaka: funding

finance lease a contract for the use of a specific non-current asset (eg equipment) which conveys the risks & rewards of ownership, but not ownership itself, to the user (the lessee)

requires recognition in the balance sheet as a non-current asset (even though it is not owned) and the associated liability represents future payments to the lessor

financial accounting the accounting process and database required to generate published periodic financial reports as regulated by law, accounting & reporting standards

financial investment an outlay of funds with a view to profit

investments may be differentiated between those that are ‘financial’ as in market securities & assets and

20


NOTES

‘productive’ investments made by a company’s management in conventional business assets

financial management the management of all the processes associated with the sourcing & deployment of funds with a view to providing suitable returns to investors

financial markets formalised institutions that engage in the trading of financial products including shares, bonds, notes, paper, currencies, derivatives, etc

in the UK, the pre-eminent markets are the London Stock Exchange, the AIM, the LIFFE

financial reporting the presentation of structured analyses of accounting data.the normal connotation of the meaning of the term is the package of statements that are made publicly available and the content & format of which are regulated

the International Accounting Standards Board has issued a series of financial reporting standards (IFRS)

financial risk generally refers to risks that are associated with monetary transactions & values but has a specific meaning in relation to debt in a company’s capital structure which induces risk on shareholders (who are residual claimants on profit after interest has been paid and upon net assets in the event of liquidation)

a higher gearing represents higher financial risk

fixed cost an expenditure whose level remains unaltered irrespective of moderate changes in the volume of turnover or intensity of operationsa term explicitly used in

examples include rent, depreciation, & the costs of salaried personnel

21


NOTES

marginal costingflexed budget the adjustment of sales &

variable cost elements within an original budget to reflect actual volumes of turnover or production achieved

the flexed budget becomes the ‘standard’ against which variances on resources consumed can be validly assessed

floating rate an interest rate which rises and falls in relation to the underlying base rate in the economy

most commercial lending is based upon LIBOR

flotation the launch of a company’s shares onto a capital market for the first time

aka: Initial Public Offering (IPO)

forecast a prediction and quantification of future events without a declared intent to achieve them

free cash flow the net cash generation of a business that is available for dividend distribution & capital redemptionnote that a negative FCF means that an entity requires external financing

abbrev: FCFFCF = operating cashflow – (net) investing cashflow

FTALLSH an index on the London Stock Exchange market that represents the aggregate movement in the price of all shares listed on the market, weighted by their market capitalisation

market indices provide a general benchmark against which the profile of an individual share’s price may be judged

FTSE100 an index on the London Stock Exchange market that represents the aggregate movement in the price of shares of the top 100 companies by value, weighted by their market capitalisation

the constituent companies of the index are changed annually based on their ranking by market capitalisation

full costing the complete attribution of relevant operating costs to a cost object

aka: absorption costing

funding the provision of monetary capital to facilitate

aka: financing

22


NOTES

productive investment and operational liquidity

funds monetary capital, which may be sourced externally or internally

the ‘equity’ figure in the balance sheet represents the accumulated, internal funds of a business or ‘shareholders’ funds’

futures contracts that carry an obligation to buy or sell a specified asset (eg foreign currency, oil) at a specified price at or over a specified time in the future

such contracts may be bi-lateral (eg between a company & a bank) of involve blocks of the asset on a derivatives market (eg LIFFE)

GAAP abbrev: Generally Accepted Accounting Principles

usually refer to accounting & reporting standards in the US

gain a profit usually made from a rise in the market price of an asset

gearing the relative amount of debt in the total capital structure of a businessa company is said to be highly geared when its proportion of debt is significantly higher than other companies in the same industry sectordebt financing creates a geared (multiplied) effect on earnings when sales are growing but the reverse when sales are in decline. Financing growth through the use of debt offers the prospect of higher returns for shareholders but at greater risk

ODA

gearing can be calculated in number of ways, but commonly:debt ÷ (debt + equity) x 100%based on balance sheet values, but the use of market values will be more representativealternatively, the debt:equity ratio may be used

23


NOTES

GILTS UK government bonds, regarded as a risk-free investment issued with a range of maturities, whose yield is used as a basis for setting corporate bond rates

abbrev: Government Issued Long Term Stock

going concern a fundamental accounting concept that determines the basis upon which accounts are prepared – that the business will continue to operate for the foreseeable future. Asset valuations and liabilities recognised are thus significantly affected by this presumption

the UK Corporate Governance code requires listed companies make a declaration in their annual reports to this effect

goodwill the difference between the amount paid to take over a company and the aggregate of the fair values of its net assets caused by reputation, customer base, and similar intangible factors

CIMA

it is recognised on acquisition of a company where the amount paid in excess of its net asset value is regarded as an intangible asset and subject to annual tests of impairment

gross profit the difference between the sales & the directly-attributable costs of sale of a business, but excluding distribution, administrative, & financing expenses.a key indicator in the retail sector which shows the effect of price discounting & buying power

(sales – cost of sales) ÷ sales x 100%

harvest a strategy, often adopted for mature products & services, which curtails investment to enhance cash generation

hedge a financial transaction or position designed to mitigate risk

ODA

historic cost the valuation of assets based on their original purchase price

hurdle rate the discount rate set in an

24


NOTES

investment appraisal over which the return on a project must ‘jump’ in order to be considered viable. It is normally set by applying a premium for risk on the underlying cost of capital

IASB global body which regulates principles, content, bases, & formats of published accounting reports and is subscribed to by 120 member states

International Accounting Standards Board

impairment reduction in the value of specific non-current assets shown in the accounts to reflect the recoverable value either through realisation or use in future economic activity

income US term for sales or revenue; note, net income is equivalent to profit

income smoothing the manipulation by companies of certain items in their financial statements so that they eliminate large movements in profit and are able to report a smooth trend over a number of years

ODA

this is legitimate providing the adjustment does not contravene accounting standards or audit opinion. Such adjustments are commonly made through accruals, provisions, and the carrying value of & policy on non-current assets

income statement an financial statement that discloses the revenue, operating profit, & earnings over the last accounting period

previously known in the UK as the ‘profit & loss account’

indirect cost a cost that cannot be specifically attributed to a cost object (ie an overhead expense) and, as such, is attributed indirectly by apportionment, secondary

aka: overhead

25


NOTES

allocation, & ultimately absorption

intangible a non-current asset that is documentary (eg a patent), contractual (eg a licence) or notional (eg a brand or goodwill)ie does not take physical form

they may be subject to regular write down, that is ‘amortised’, just like a tangiblel asset

interest a rent for the use of money, normally paid periodically, and expressed as an annualised percentage rate on the capital sum involved

interest cover measure of the vulnerability of interest payments to a drop in profit and thus financial risk

operating profit ÷ interest

internal audit an audit that an organisation carries out on its own behalf, normally to ensure that its own internal controls are operating satisfactorily

ODA

internal control an organisational process that is designed to assure the outcome of an activity is as intended

accounting systems are intended to monitor financial transactions and ensure probity

internal rate of return the annualised return over the life of a productive investment, calculated by:the discount rate which, when applied to future cashflows, generates an aggregate present value equal to the amount outlaid at the beginningie where the NPV is zero

abbrev: IRR, and is the ‘r’ inoutlay =∑ cashflowy ÷ (1 + r)y

where ‘y’ is each year over the life of the investment

inventory materials received & held in store, in progress of manufacture, or products not yet sold

traditional UK term: stock

investment any application of funds which is intended to provide a return by way of interest, dividend or capital

CIMA

productive investment is an ‘intermediate’ stage in which businesses

26


NOTES

appreciation. use the funds provided to expand or develop and thus generate enhanced profits from which financial returns are made

investor the individual or corporate entity that provides the funds for investment

though the majority of funding in unlisted companies is from internally-generated, retained profit

invoice a document stating the amount of money due to an organisation issuing it for goods or services supplied

ODA

invoice discounting the reduced amount received from a factor in advance of settlement by the customer

factors include departments or subsidiaries of banks

IPO the launch of a company’s shares onto a capital market for the first time

abbrev: Initial Public Offering (IPO)aka: flotation

job costing a process that attributes costs to a specific customer order

common in companies that offer bespoke products or professional services

junk bonds unsecured corporate bonds that carry a high coupon and/or yield because of the perception of a high risk of default

KPI a main internal indicator of performance toward achieving a corporate goal based on monitoring a factor critical to the success of the strategy

abbrev: Key Performance Indicator

leasing a contract for the use of a tangible asset which incorporates its funding,

the accounting treatment varies according to the

27


NOTES

from the vendor itself or an independent lessor, who retains ownership.finance leases tend to be for specialised assets (eg bespoke machinery) over a longer termoperating leases tend to be for general use assets (eg cars; photocopiers) for shorter periods

classification. Only finance leases are represented in a balance sheet under non-current assets & non-current liabilities, as if they were owned by the user; operating leases are simply expensed as rent

leverage US term for the relative amount of debt in the total capital structure of a business

aka: gearing

liability an obligation to make a future payment to another entity because of a past transaction

LIBOR the average rate of interest in the short-term money market at which banks in the UK lend money amongst themselves.it is normally marginally above the base rate in the UK economy, set by the discount rate on government issued treasury bills and, in itself, acts as the base rate for most variable rate commercial lending both in the UK & overseas

abbrev: London Inter-Bank Offer Rate

life cycle costing an assessment of the total cost of a physical asset from ‘cradle-to-grave’: eg a product’s development, manufacture, servicing, & disposal

important to decisions over economic use and environmental impact

LIFFE the market in London for trading derivatives on currencies, shares, commodities, & equity indices

abbrev: London International Financial Futures options Exchange

liquidity the ability of a business to meet its current debts when due, either through the

28


NOTES

possession of cash or assets that can be readily converted into cash

listing the registration of a company on a capital market which enables its shares to be publicly issued and, subsequently, other of its securities to be traded (eg corporate bonds)

loan a bi-lateral contract on the provision of specified funds

loan note medium-term traded loan, in bearer form

both specify a ‘coupon’ or fixed rate on interestloan stock longer-term traded loan, in

bearer formloss an excess of cost over its

related salesmanagement accounting

the concepts and techniques used to assimilate, analyse, & internally report financial, quantitative & qualitative data for organisational planning, control & decision making

management buy-out where a management team buy the company they run from its existing shareholders

margin the profit made on the sale of products or services, usually expressed as a percentage of selling price

marginal costing a costing & decision making technique that charges only variable costs to cost objects and treats fixed costs as a lump sum to be deducted from total contribution to derive the profit or loss for the accounting periodimportant approach for examining the effect on profit of changes in sales’ volumes

ODA

aka: variable costing (US)S – VC = C = FC + PS: sales; C: contribution; P: profit; VC: variable cost; FC: fixed cost

29


NOTES

market capitalisation the market value of equity in a company

market efficiency the degree to which a financial market observes the proposition of the Efficient Market Hypothesis

market value the unit price or aggregate value determined by trading activity on a market

mark-up the percentage applied to unit cost to determine the selling price of a product or serviceit may be applied to the full or variable cost

mark-up = (selling price – cost) ÷ cost x 100%

master budget the budget summary into which all subsidiary budgets are consolidated and represented by the projections of the principal financial statements

budgeted income statement

budgeted financial position at start & end of the ensuing year

cash flow budgetmatching an essential procedure in

accruals-based accounting where the costs relate to the sales recognised in the accounting period

adjusting entries are pre-payments & inventories in current assets & accruals in current liabilities

materiality a concept that governs the required accuracy of accounting data & information. The omission or mis-statement of data is significant if it could influence decisions by the readers of accounts

judgements on materiality determine an auditor’s extent of examination & willingness to contest a figure in the accounts

merger a combination of two or more companies on an equal footing that results in the creation of a new reporting entity in which the shareholders of the separate entities mutually share risk and neither gain overall control

aka: acquisition; takeoverin reality, genuine mergers are rare and the appellation is a euphemism to maintain the pretence of equality

money a medium of exchange that functions as a unit of

ODA

30


NOTES

account, a store of value, and a means of deferred payment

money market a short-term wholesale exchange for financial instruments such as treasury bills, certificates of deposit, & commercial paper but also includes bullion and foreign exchange

mortgage a long-term loan secured on land or property

multi-dimensional performance models

a monitoring framework that contains many aspects or perspectives beyond that of profit and the interest of shareholders

eg Balanced Scorecard;Results-Determinants FrameworkPerformance Prism

mutually exclusive the choice of an item, action, or use which precludes alternatives

net the amount remaining after specific deductions have occurredoften involves netting off two sides of accounts

ODA

eg net asset value; net cash flow

net present value the aggregate of the present values of all the future cashflows generated over the life of a productive investment less the amount outlaid at the beginning

abbrev: NPV, and is equal to:∑ cashflowy ÷ (1 + r)y - outlaywhere ‘y’ is each year over the life of the investment & ‘r’ is the hurdle rate

net profit gross profit less the expenses in an accounting period.note that net margin is an important expression of operational profitability

aka: operating profit; trading profit profit before interest & tax; net income (US)net margin= net profit ÷ sales x 100%

non-current a greater duration than one year

adjective used to classify the longevity of assets &

31


NOTES

liabilitiesnotional cost a cost used in product

evaluation, decision making, & performance measurement to represent the cost of using resources which have no conventional actual cost (or cash cost)

CIMA

eg depreciation; rent on owned property; interest on capital at sub-corporate level; transfer prices

obligation a commitment, duty, or promise that is enforceable in law

eg to repay a debt

operating cycle the average time between payment for supplies and the receipt of cash from related sales

indicates the funding needed to maintain operational liquidityaka: working capital cycle

operating lease a contract for the hire of plant or equipment where the period of use by the lessee is substantially less than the economic life of the asset and where many risks of ownership remain with the lessor

there is no recognition in the balance sheet and lease payments are simply expensed against profiteg: fleet cars; office equipment

operating profit the profit or loss made in an accounting period from the main trading activities of a business

aka: trading profit; net profit; profit before interest & tax; net income (US)

opportunity cost the economic cost of an action measured in terms of the benefit foregone (ie sacrificed) by not pursuing the best alternative.in other words, the cost of the lost opportunity

ODA

eg: the cost of funds must be judged in terms of the returns they could earn on market securities of similar risk

option a contract that carries a right, but not an obligation, to buy or sell a specified asset at a specified price at or over a specified time in the future

can take the form of a block-traded derivativealso see ‘future’

ordinary shares partial ownership of a company that entitles the holder to a share of the distributable profits (ie

ordinary shares are undated and normally carry the right to vote on

32


NOTES

earnings) and the residual net asset value in the event of its liquidation

proposals by the company’s board of directors in general meeting

outlay initial expenditure on a productive investment

out-turn a UK term for a revised forecast in a budgetary feed-forward system, commonly adopted in the public sector

over/under capitalisation

an opinion on the adequacy of funds available to a business in relation to the structure of its net assets and its strategic intentions

over-capitalisation implies inefficient use of funds; under-capitalisation, its inadequacy or illiquidity

overdraft an arrangement with a company’s bank that allows the current account to go into deficit up to a prescribed limit (eg the ‘overdraft facility’)

overhead the indirect costs of an organisation

overhead absorption the final stage in the attribution of indirect costs to a cost object (eg a product) using an estimated rate based on the relation between the budgeted overhead cost and a factor linked to the planned output over the same period

eg budget overhead cost: £1,000planned output: 100 machine hoursoverhead absorption rate =£10 per machine hour

over-trading a severe liquidity problem caused by a business over committing itself to contracts for which it has inadequate short-term funding resource

commonly caused by rapid growth in SMEs that have long cash operating cycles

par value the value cited on a security when it is issued. It may not bear any relation to the cash received at the time or the market value of the share or bond

aka: face value; nominal value

payback the period of time required a simple, but widely

33


NOTES

for the cash inflows from an investment to recover the outlay

used, investment appraisal technique

payment cash outflowPBIT abbreviation for Profit Before

Interest & Tax, the principal measure of operational profitability

aka: trading profit; net profit; operating profit; net income (US)

pension a fund for an individual, accumulated by contributions during their working life, which pays an annuity & potentially a lump-sum upon retirement or the reaching of a specified age

performance progress toward achievement of predetermined goals but can also be measured by reference to performance in the past or by that of peers

perpetuity an annuity that is everlastingportfolio a set of assets, usually

financial securities, held by an investor. The constituents are chosen to reflect the risk/return preferences of the investor

preference shares shares that carry a fixed rate of dividend and have a prior claim on company profits or assets to the ordinary share holders

prepayment a cash payment in respect of a supply or service which is received in a later accounting period

present value a cash equivalent now of a future sum discounted at a required return on investment

price the exchange value of something in its market

price earnings ratio an important relation between the market price of an ordinary share and its

abbrev: PER; P/E ratio

34


NOTES

current ability to earn profit.High PERs are associated with rapidly growing companies whilst low multiples suggest maturity. PERs are perhaps best judged by comparison with peers in the same sector of the market

Calculated by:share price ÷ earnings per shareormarket capitalisation ÷ earnings

pricing the approach adopted by a business toward the setting of prices for its products or services

this may be based upon cost, prevailing prices in the market, or a competitive strategy or tactic

principal budget factor market demand or a specific resource that constrains the scale of operations of an organisation and which is evaluated first in the preparation of the organisation’s budget

proceeds receipts from sale, but the term is usually used in conjunction with an extra-ordinary event

eg IPO of shares; disposal of non-current assets

process costing a method of collecting & attributing costs where products or services result from a continuous process

eg steel rods from a furnace which is never shut-down; electricity from a turbine

productive investment a term which differentiates investment made by a company in its business as distinct from financial assets (by external investors)

profit the excess of revenue over related cost

the normal motive of business

profitability a criterion of economic performance

provision an amount set aside out of profits for an anticipated future liability, though uncertain as to amount & time.the establishment and subsequent release of

appears in the balance sheet but may be included in current or non-current liabilities or netted off a current asset (as in provisions for

35


NOTES

provisions offer scope for creative accounting

doubtful debts and stock obsolescence)

prudence an accounting principle that requires the approach to the preparation of published accounts to be cautious, particularly in relation to the outcome of future events

the prudence concept seeks to ensure that assets & income are not overstated and liabilities & expenses are not understated

purchases the buying of a supplied product or service which is recognised in the accounts at the time it is received or undertaken

put option a right but not an obligation to sell an asset at a pre-specified (exercise) price over a pre-specified future period of time or date

quick ratio an indicator of the liquidity of a company, the level of which must be judged in relation to the context of the business being examined

aka: acid test(current assets – inventories) ÷ current liabilities

quoted companies companies whose shares are listed on a recognised exchange

ratio analysis a systematic approach to the appraisal of accounting data contained in the balance sheet & income statement to inform an assessment of profitability, efficiency, liquidity & financial risk

textbooks are overly prescriptive in the use of these ratios. insufficient attention is paid to the underlying accounting data and to the context of the company under examination

real option an approach to the financial appraisal of productive investment opportunities in a similar way to financial investment opportunities.in essence this views opportunities as buy, sell, or option decisions – ie invest, dispose, or defer a decision

a decision to invest is analogous to a call option; a decision to divest is analogous to a put option; the duration of the exercise period facilitates deferral of the decision until contextual

36


NOTES

on a non-current asset or project

uncertainties clarify

realisable value the future economic benefit anticipated from an asset (eg inventories)

the prudence concept requires that assets be stated in the balance sheet at the lower of cost or net realisable value

receipt cash inflow; or a document issued to a third party to acknowledge such

reconciliation an accounting procedure undertaken to ensure that account balances or statements are supported by documentation

eg a comparison between the balance on a cash account and the bank statement & money in hand

redemption the repayment of bonds & other securities

regulatory framework company law, market & professional rules, standards & codes that govern the preparation of published accounts

reliability an accounting principle that the financial information provided by a company should have the characteristics of faithful representation, neutrality, completeness, freedom from material error, and caution

ODA

remuneration the salary & monetary rewards of employees and particularly those enjoyed by directors

the existence of a remuneration committee & its non-executive composition are regarded as an important check on excess by codes of corporate governance

rent a payment made for the use of an asset over a period of time

37


NOTES

replacement cost the price at which identical goods or capital equipment could be purchased at the date of valuation

CIMA

reporting standards the approach formulated by an authoritative body (eg the IASB) for the format & content of published reports

reserves part of the equity figure in a balance sheet, reserves are created from primary share transactions, transfers from retained profit, revaluations, acquisitions, disposals, etc. Reserves as a whole are classified as distributable or non-distributable: whilst both form part of shareholders’ funds, only distributable reserves can be used for the payment of dividends

notes to the published accounts will provide an analysis of the figure in the balance sheet. The statement of changes in equity will show movements into, between & out of reserves in the past year

responsibility accounting

a performance management approach which aligns account structures and budget centres with organisational responsibilities, so that managers can be held individually accountable for the sales, costs & even net assets associated with their organisational units

retained profit/earnings

the distributable profits of a business that remain after the dividend has been declared.

the earnings figure in the Income Statement is prior to distribution; the retained profit figure in the balance sheet is the accumulated earnings of past years less the aggregate dividend distribution

return the profit on an investment expressed as a percentage

in the case of shares, this will include any capital gain as well as the dividend received

38


NOTES

return on capital employed

principal accounting measure of the profitability of operations

abbrev: RoCE, calculated as:operating profit ÷ capital employed x 100%

return on equity an accounting measure of shareholder return

earnings ÷ equity x 100%

revaluation an adjustment in the book value of an asset to reflect, for example, an increase in its market value or an impairment

land & property is commonly revalued in the balance sheet to reflect an independent market valuation with the adjustment made to a non-distributable reserve

revenue sales from the main activities of a business, recognised in the income statement at the time the transaction occurred (eg product delivered)

aka: sales; turnover; gross income (US)

revenue expenditure costs of operations charged to the income statement in the same accounting period as the revenue to which they relate

day-to-day running costs

revolving credit a loan facility that allows the company to borrow & repay debt as required, within an overall limit and for a set time period

reward the return gained on the use of assets

the level of the reward should be related to the level of risk taken

risk any variation in potential outcome from an action or event

risk exposure the level of assessed risk on an action or event expressed in gross or probability-weighted terms

risk management an organisational process that seeks to identify, assess, mitigate or transfer,

the COSO framework offers guidance on this and appropriate

39


NOTES

and monitor risks associated with strategy & operations

internal controls

risk-free rate the interest rate on government borrowing in the economy which sets a platform for risk premia to be applied for commercial lending

see LIBOR; GILTS

sale & leaseback a transaction in which the owner of an asset sells it and immediately agrees the right to use the asset under a lease

a common motive is to generate cash for strategic purposes or to boost working capital

sales see revenue ake: turnover; gross income (US)

secondary trading trading in shares & securities after they have been issued and from which no cash inflow occurs to the issuer

this is analogous to a ‘used’ market in goods and dominates trading volumes

secured a borrowing or bond that entitles the lender or holder to ownership of assets of the borrower in the event of default

thus the term ‘security’

securities shares & other traded financial instruments

segmental analysis a regulated disclosure in the notes to published accounts of the financial results of major business & geographic divisions of a company

usually contains information on total sales, operating profit, and attributed capital employed

sensitivity analysis a modelling process that assesses risk by changing individual variables and examining the effect on the overall outcome

it is commonly adopted in investment appraisals where each factor in the discounted cashflow is adjusted to the point where the NPV becomes zero. In this way, the percentage variation (risk) in each variable that would erode viability of the proposal is

40


NOTES

determinedservice costing the costing of internal

services, which commonly involves the inclusion of quantitative data

eg maintenance; IT support

settlement a payment which satisfies a contractual obligation

share the unit of ownership in a company

share buy-back the re-purchase by a company of its own shares on the market (or by private agreement) for cash and their subsequent cancellation or reservation for alternative use (eg to meet the needs of an employee share ownership scheme).if the shares are cancelled this results in a reduction in equity capital

now relatively common in cash generative companies that find themselves over-capitalised.buybacks result in an increase in EPS and gearing

share options a right to buy a specified quantity of a company’s shares at specified price and time

commonly used to reward senior management and incentivise them to act in the shareholders’ interest

share price the price of a share on a capital market

shareholder owner of a share in a company

shareholder wealth a largely abstract notion, the maximisation of which is regarded as being the over-arching financial aim of the management of a commercial entity

probably best represented in reality by Total Shareholder Return

shareholders’ funds the ‘equity’ figure in the balance sheet which represents the shareholders’ interest in a company

aka: capital & reserves; equity; net asset value

SME abbreviation for Small & Medium sized Enterprise

41


NOTES

social responsibility an ethical and popular view that business has obligations to the society that grants it the right to operate. In contemporary terms, these obligations extend toward the environment and the minimisation of impact.many companies now publish an annual sustainability report which recognises a wider responsibility to society

responsibilities include those to: employees (as welfare), customers (as fitness for purpose), communities (as public investment), government (in tax contributions)

solvency the financial state of a company that is able to pay all its debts as & when they fall due

ODA

speculation engagement in a risky transaction (often a financial investment) on a chance of quick or considerable profit

fd the term is associated with whimsical decisions that are not rationally-based and are thus inconsistent with conventional finance theory

stakeholder a person, group or societal entity who can affect or is affected by the actions of a business and have thus a legitimate interest in its affairs

eg customers; suppliers; employees; communities; pressure groups; lenders; shareholders; government

stakeholder theory that management of a commercial entity should recognise & address the interests of stakeholders and treat them fairly on the basis of either ethical conduct or pragmatic business

Freeman 1984

this contradicts agency theory and its view of the paramount duty of management owed to shareholders

standard cost a predetermined unit cost of a product or service

ODA

standard hour a measure of production output (and not time) that represents the amount of work that can be achieved within an hour under normal

ODA

acts as a benchmark for judging labour or machine efficiencytotal standard hours

42


NOTES

conditions are an important measure of equivalent output where a diverse range of products are manufactured

standard costing a planning, control & accounting technique that establishes and uses pre-determined resource consumption, costs & prices to determine a benchmark against which actual costs & revenues are compared and variances analysed

suitable in repetitive operations, such as batch manufacturing

statement of changes in equity

a main financial statement that appears in published accounts, the purpose of which is to reconcile opening & closing balances in the capital & reserves section of the balance sheet and identify the nature of the movements during the intervening accounting period

statement of financial position

the title formally adopted in reporting standards issued by the IASB for the balance sheet

aka: balance sheet

stewardship traditional term for the duty of care owed by management toward the shareholders of a company in the custody of their assets and maintenance of their capital

stock UK term for inventoryUS term for ordinary shares

stockbroker an individual or firm that acts as an agent for investors, buying & selling shares & other securities on their behalf

aka: broker

stock turnover a measure of the utilisation of inventories, either as the number of times inventory is

purchases & consumption data are not usually

43


NOTES

‘turned over’ or consumed in a year or in the average number of days material remains in stock

available in published accounts so ‘cost of sales’ is used as an approximation

strategy a coherent suite of plans which seek to achieve a declared organisational objective

strategic management accounting

a range of concepts and techniques which provide information to senior management on the strategic position of a business in its environment, its competitiveness, and its options for the future.the concepts, variously, tend to use non-financial data, external data, multiple perspectives, & informed guesswork

abbrev: SMA, contrasts with conventional management accounting which is largely concerned with operations, the present, & internal performance

substance over form a principle according to which transactions are accounted for on the basis of their intended purpose in reality rather than the strictly legal form they take. This is UK practice

important to inhibiting the opportunity for creative accounting and hidden financingUS GAAP accepts the legal form and is thus more vulnerable to fraudulent accounting (as in Enron)

sunk cost a cost already incurred and unalterable that has no relevance to current decisions

ham

eg installation costs of plant; design costs on a failed tender

surplus the excess of revenue over expenditure

a term commonly in not-for-profit organisations

systematic risk the extent of total risk that is inherent in the market and

eg the volatility in a share’s price that is

44


NOTES

cannot be avoided through diversification

due to movements in the market index as a whole

tangible adjective used to describe non-current assets that take physical form (eg machinery)

as opposed to intangibles such as goodwill, brands, & patents

target costing the setting of unit cost targets based upon an anticipated market price that customers would be willing to pay and the planning & subsequent monitoring of the emerging unit cost down to the target level

tax a legal levy imposed by the state to raise revenue to fund government expenditure, commonly applied to sales, remuneration, profits, & capital gains

the knowledge of tax required for basic corporate finance is limited to corporation tax on profits and the tax relief on debt funding

term an indicator of the duration of time over which a business activity extends or until a financial security matures (ie is redeemed or repaid)

requires a prefix: eg short-term (< 1 year); medium-term (2-5 years); long-term (> 5 years) approx

throughput accounting a short-term decision making approach which seeks to increase profit by optimising the mix of products through a process based on the return generated on a ‘bottleneck’.it assumes that contemporary manufacturing facilities are a fixed cost and the only variable aspects are purchases & sales

throughput = sales – purchasesprofit = throughput – fixed costs

time value of money the concept, used as a basis for discounted cashflow calculations, that cash received earlier is worth more than the same nominal

ODA

45


NOTES

amount received later because it can earn interest in the intervening period

total shareholder return

the actual return enjoyed by a shareholder over an annual period based on market prices & the dividend received

(closing share price - opening share price + dividend per share) ÷ opening share price x 100%

trade credit granted by suppliers on their invoices and represents a short-term, and much-abused, source of funding for businesses

accounts payable figure in the balance sheet

trading profit a term for operating profit commonly adopted by retailers & traders

aka: operating profit; PBIT; net income (US)

trading volumes the number of shares bought & sold on a capital market

transactions an external or internal eventtreasury bill issued, at a discount to its

par value, by treasuries or central banks to raise funds in the short-term for governments. It is repaid in full on the date designated on the bill

abbrev: T-billforms the base interest rate in an economy (aka: ‘repo rate’)

true & fair view an audit opinion on a published annual report that accounts have been prepared in accordance with the regulatory framework and faithfully represent the state of financial affairs at the balance sheet date & of financial performance over the reporting period

fair representation (US)

turnover the total sales for the accounting period.in more general terms, it refers to the amount of times a specified classification of assets is utilised in a year

aka: revenue; gross income (US)

eg inventory; non-current assets

unrealised a profit that results from the holding of an asset and, hence, not yet ‘realised’ as a

aka: paper gain

46


NOTES

cash inflowvalue has a wide range of

meanings, even when definitions are confined to economics. ‘exchange values’ commonly form the basis for many accounting entries as these are market prices but examine the adjective linked to the word ‘value’ to determine the basis on which a monetary amount has been determined

there is a particular connotation that is important in finance – and that is ‘shareholder value’. This normally pertains to the market price of an ordinary share. Under agency theory, management should aim to create (add to) such value

value chain analysis a strategic appraisal of the whole sequence of suppliers & customers involved in the products or services of an organisation with a view to identifying the sections where value is created

it is often undertaken to understand the relative competitive position of a business or as a prelude to its repositioning

value analysis a systematic inter-disciplinary study of factors affecting the cost of a product or service, in order to maintain its purpose, quality & reliability, but more economically

CIMA

value engineering an activity that helps (re)design products at the lowest cost whilst meeting customer needs and required standards of quality & reliability

CIMA

variable cost a cost which varies with the level of activity

CIMA

aka: marginal cost

variable costing US term for marginal costingvariance the difference between the

standard or budgeted levels of cost or sales and the actual costs or sales achieved

venture capital risky finance for SMEs with high growth potential which usually involves a package

if the management perform well, the existing owners

47


NOTES

of unsecured loans & equity. The equity often takes the form of a core number of shares which don’t convey control of the company plus share options, the exercise of which will depend on the subsequent financial performance of this business

retain control but if growth in earnings is inadequate, the venture capitalist takes control. For this reason venture capital is commonly used in management buy-outs

viability in a commercial sense, this is the ability of a business or project to be self-sustainable

its connotes a combination of profitability & liquidity

watchdog a government or independent agency that monitors commercial companies for illegal or unethical practice

eg Office of Fair Trading; Greenpeace; ‘Which?’ magazine

whistle-blowing where an employee with inside knowledge of wrong-doing by their employer, notifies external authorities (eg auditors or regulators)

corporate governance & ethics codes of professional bodies encourage this practice despite the fear of retribution (ie loss of job)

white-collar crime fraud or other illegal conduct by an administrative or professional member of staff

working capital the funding available for conducting the day-to-day operations of a business and represented as the net current assets in the balance sheet

current assets – current liabilities

work-in-progress the amount of partly-completed work in a manufacturing operation or construction/client project

it is valued in current assets at the lower of accumulated cost or net realisable value where a loss against contract price is evident

yield a measure of the current return on the market value of an investment

eg earnings yield = eps ÷ share price

dividend yield = dps ÷

48


NOTES

share priceyield to redemption = IRR

on interest & repayment cashflows on a bond

49


NOTES

Glossary of accounting

Documents

Transcript of Glossary of accounting