Professional Documents
Culture Documents
Terminology Guide
December 2008
Limitation of Liability
Neither the Company, nor any of their respective officers, directors, employees, affiliates or
agents makes any representation or warranty, express or implied, as to the accuracy or
completeness of this document or any of its contents, and no legal liability is assumed or is to be
implied against any of the aforementioned with respect thereto.
Document Version
Table of Contents
Limitation of Liability .................................................................................................................... 2
Terminology ................................................................................................................................... 7
A - Alfa ........................................................................................................................................... 7
Account ................................................................................................................................... 7
Acquisitions............................................................................................................................. 8
Accredited Investor ................................................................................................................. 8
Adjusted Trial Balance ............................................................................................................ 8
Adjusting Entry (Adjustments) ................................................................................................ 9
Agile software development.................................................................................................... 9
Angel Investor ....................................................................................................................... 10
Anti-Dilution Provisions ......................................................................................................... 10
Assets ................................................................................................................................... 11
B - Bravo...................................................................................................................................... 11
Bad Debts ............................................................................................................................. 11
Business Issue...................................................................................................................... 13
Business Plan ....................................................................................................................... 13
Business transaction............................................................................................................. 14
C - Charlie.................................................................................................................................... 14
CAPEX .................................................................................................................................. 14
Capital asset ......................................................................................................................... 15
CMLTD.................................................................................................................................. 15
Current assets....................................................................................................................... 15
Capital ................................................................................................................................... 16
Capitalization Table .............................................................................................................. 16
Cash basis accounting.......................................................................................................... 16
Closing the books ................................................................................................................. 17
Convertible Debt ................................................................................................................... 17
Convertible Notes ................................................................................................................. 17
Corporate Governance ......................................................................................................... 17
Corporation ........................................................................................................................... 17
Co-Sale or Tag-Along Rights................................................................................................ 19
Cram-Down Financing .......................................................................................................... 19
Cost-benefit analysis............................................................................................................. 19
Credit..................................................................................................................................... 19
Current assets....................................................................................................................... 20
Current Ratio......................................................................................................................... 20
D - Delta ....................................................................................................................................... 20
Debit...................................................................................................................................... 20
Debt Ratio ............................................................................................................................. 20
Debt to Equity Ratio .............................................................................................................. 20
Depreciation.......................................................................................................................... 21
Dilution .................................................................................................................................. 21
Direct Expenses.................................................................................................................... 21
Discounted Cash Flow .......................................................................................................... 21
Double Entry Accounting ...................................................................................................... 21
Down Round ......................................................................................................................... 21
Drag-Along Rights................................................................................................................. 21
Due Diligence........................................................................................................................ 22
E - Echo ....................................................................................................................................... 22
Earnings ................................................................................................................................ 22
EBITDA ................................................................................................................................. 22
EBITDA/Interest .................................................................................................................... 23
Employee’s Earnings Record ............................................................................................... 23
Equity .................................................................................................................................... 23
Exit Strategy.......................................................................................................................... 23
F - Foxtrot .................................................................................................................................... 24
Factoring ............................................................................................................................... 24
Family Trust .......................................................................................................................... 24
Feasibility study .................................................................................................................... 24
Financial statements ............................................................................................................. 26
Fiscal year............................................................................................................................. 26
Fixed Assets ......................................................................................................................... 27
Full-Ratchet, Anti-Dilution Protection.................................................................................... 27
G - Golf......................................................................................................................................... 27
General Journal .................................................................................................................... 27
Goodwill ................................................................................................................................ 27
Governance .......................................................................................................................... 27
Gross Profit Margin ............................................................................................................... 27
H - Hotel ....................................................................................................................................... 28
Hostile takeovers .................................................................................................................. 28
I - India ......................................................................................................................................... 28
Income .................................................................................................................................. 28
Indirect Expenses ................................................................................................................. 29
Initial Public Offering ............................................................................................................. 29
Intangible Assets................................................................................................................... 29
Issuer .................................................................................................................................... 29
J - Juliet ....................................................................................................................................... 29
Journal .................................................................................................................................. 29
K - Kilo ......................................................................................................................................... 29
Keiretsu ................................................................................................................................. 29
L - Lima ........................................................................................................................................ 31
Lead Investor ........................................................................................................................ 31
Ledger ................................................................................................................................... 32
Liability .................................................................................................................................. 32
Living Dead ........................................................................................................................... 32
Lock-Up Provision................................................................................................................. 32
Long-term liabilities ............................................................................................................... 32
M - Mike........................................................................................................................................ 33
MBO (management buy-out) ................................................................................................ 33
Mergers and Acquisitions...................................................................................................... 33
Mergers ................................................................................................................................. 33
Mezzanine Financing ............................................................................................................ 34
N - November .............................................................................................................................. 34
Negative Equity..................................................................................................................... 34
Net Present Value (NPV) ...................................................................................................... 35
Net Profit Margin ................................................................................................................... 36
Notes payable ....................................................................................................................... 36
No-Shop Requirement .......................................................................................................... 37
O - Oscar...................................................................................................................................... 37
Offering Memorandums ........................................................................................................ 37
Operating Expenses ............................................................................................................. 37
Ownership Equity.................................................................................................................. 37
Owner’s equity ...................................................................................................................... 38
P - Papa........................................................................................................................................ 38
Participation Right................................................................................................................. 38
Payment In-Kind Dividends .................................................................................................. 38
Payroll ................................................................................................................................... 38
Periodic inventory method .................................................................................................... 38
Perpetual inventory method .................................................................................................. 38
Petty cash fund ..................................................................................................................... 38
Post-closing Trial Balance .................................................................................................... 38
Post-Money Valuation........................................................................................................... 38
Pre-Emptive Rights ............................................................................................................... 38
Preferred Stock ..................................................................................................................... 39
Prepaid Expense................................................................................................................... 39
Pre-Tax Income .................................................................................................................... 39
Private Equity........................................................................................................................ 39
Private Charitable Foundation .............................................................................................. 40
Profit...................................................................................................................................... 41
Prospectus ............................................................................................................................ 41
Q - Quebec................................................................................................................................... 41
Quick ratio ............................................................................................................................. 41
R - Romeo.................................................................................................................................... 42
Purchases journal ................................................................................................................. 42
Revenue................................................................................................................................ 42
ROI (Return on Investment).................................................................................................. 42
S - Sierra ...................................................................................................................................... 42
Sales Discount ...................................................................................................................... 42
Sales journal ......................................................................................................................... 43
Seed Money.......................................................................................................................... 43
SG&A Expenses ................................................................................................................... 43
Shareholder .......................................................................................................................... 43
Shareholder’s Equity............................................................................................................. 44
Subordinated Debt ................................................................................................................ 44
Subsidiary Ledger ................................................................................................................. 45
Synoptic Journal ................................................................................................................... 45
T - Tango...................................................................................................................................... 45
T-4 Slip (Form)...................................................................................................................... 45
Term Sheet ........................................................................................................................... 45
Tranche ................................................................................................................................. 45
Trial Balance ......................................................................................................................... 45
U - Uniform .................................................................................................................................. 46
Unified Modeling Language (UML) ....................................................................................... 46
Underwriting.......................................................................................................................... 46
Unearned revenue ................................................................................................................ 46
Unlimited liability ................................................................................................................... 46
V - Victor ...................................................................................................................................... 46
Valuation ............................................................................................................................... 46
Venture Capital ..................................................................................................................... 48
Veto Rights ........................................................................................................................... 48
W - Whiskey................................................................................................................................. 48
Waterfall model ..................................................................................................................... 48
Warrants................................................................................................................................ 49
Weighted Average Anti-Dilution Protection........................................................................... 49
Working capital ..................................................................................................................... 49
Worksheet............................................................................................................................. 49
X - X-ray ....................................................................................................................................... 49
XML....................................................................................................................................... 49
Y - Yankee.................................................................................................................................... 50
Yield ...................................................................................................................................... 50
Z - Zulu......................................................................................................................................... 50
Zero Coupon Bond................................................................................................................ 50
Terminology
The following is a list of terms that define some of the services we provide at
planglobal. This is a "living document" and will be updated as we get suggestions
and questions from colleagues and clients. Many of the entries are from our own
writings, Wikipedia (these are accredited with a W), and most recently from the
Alberta Business Link (these entries are accredited with a †). Please use this
guide freely and send your suggestions to us at info@planglobal.ca.
A - Alfa
Account
Each separate category of asset, liability, equity, revenue or expense for which
transactions are recorded separately. An account can have a debit or credit
balance. Account records are usually kept as separate pages in a book called a
ledger. Accounts are sometimes called ledger accounts. †
Accounting
The process of measuring, recording, classifying, summarizing, communicating
and interpreting financial data. †
Accounting Equation
The span of time covered by an income statement. One year is the accounting
period for most financial reports, however financial statements are also prepared
by companies for each quarter or each month of the year. †
Accounts Payable
Money owed by the business for goods and services provided by its suppliers.
An Accounts Payable Ledger contains the individual ledger accounts of all
creditors. (A subdivision of current liabilities) †
Accounts Receivable
Money owed to the business by someone to whom the business has given goods
and services on credit (or on account.) (A subdivision of current assets.) †
Accumulated Depreciation
A contra-asset account shown as a deduction from the related asset account in
the balance sheet. Depreciation taken throughout the useful life of an asset is
accumulated in this account. †
Acquisitions
An acquisition, also known as a takeover, is the buying of one company (the
‘target’) by another. An acquisition may be friendly or hostile. In the former case,
the companies cooperate in negotiations; in the latter case, the takeover target is
unwilling to be bought or the target's board has no prior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger
or longer established company and keep its name for the combined entity. This is
known as a reverse takeover.
The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control
over the assets of the company, but since the company is acquired intact as a
going business, this form of transaction carries with it all of the liabilities accrued
by that business over its past and all of the risks that company faces in its
commercial environment.
The buyer buys the assets of the target company. The cash the target receives
from the sell-off is paid back to its shareholders by dividend or through
liquidation. This type of transaction leaves the target company as an empty shell,
if the buyer buys out the entire assets. A buyer often structures the transaction as
an asset purchase to "cherry-pick" the assets that it wants and leave out the
assets and liabilities that it does not. This can be particularly important where
foreseeable liabilities may include future, un-quantified damage awards such as
those that could arise from litigation over defective products, employee benefits
or terminations, or environmental damage. A disadvantage of this structure is the
tax that many jurisdictions, particularly outside the United States, impose on
transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-
neutral, both to the buyer and to the seller's shareholders. W
Accredited Investor
A person or entity that meets certain requirements under the securities laws for
investment purposes. For example, a natural person is an accredited investor if
he or she has a net worth (with spouse) that exceeds $1 million at the time of the
purchase of securities, or has income either individually that exceeds $200,000 in
each of the two most recent years or jointly with spouse that exceeds $300,000
for the two most recent years. There have been some rumblings that these
figures soon may change.
There are many specific agile development methods. Most promote development
iterations, teamwork, collaboration, and process adaptability throughout the life-
cycle of the project.
Agile chooses to do things in small increments with minimal planning, rather than
long-term planning. Iterations are short time frames (known as 'timeboxes') which
typically last from one to four weeks. Each iteration is worked on by a team
through a full software development cycle, including planning, requirements
analysis, design, coding, unit testing, and acceptance testing when a working
product is demonstrated to stakeholders. This helps to minimize the overall risk,
and allows the project to adapt to changes more quickly. Documentation is
produced as required by stakeholders. An iteration may not add enough
functionality to warrant releasing the product to market, but the goal is to have an
available release (with minimal bugs) at the end of each iteration. Multiple
iterations may be required to release a product or new features.
No matter what development disciplines are required, each agile team will
contain a customer representative. This person is appointed by stakeholders to
act on their behalf and makes a personal commitment to being available for
developers to answer mid-iteration problem-domain questions. At the end of
each iteration, stakeholders and the customer representative review progress
and re-evaluate priorities with a view to optimizing the return on investment and
ensuring alignment with customer needs and company goals.
Angel Investor
A wealthy individual (accredited investor) who provides seed or early-stage
financing from his or her own funds to entrepreneurs in return for equity. Angel
investors sometimes provide industry knowledge and contacts and sometimes
play a direct role on the board, but infrequently participate in management.
Angels invest either as individuals or in groups.
Anti-Dilution Provisions
An adjustment mechanism for preferred stock, options, or convertible securities
that provides the holder the right to receive additional securities in the event of a
future financing in which securities are sold at a lower price than originally paid
by the holder of the right. Typically, anti-dilution provisions come in two types: full
ratchet and weighted average. There are typically exceptions for the adjustment
mechanism that carve out situations such as the issuance of certain employee
options or existing convertible securities.
Assets
All of the possessions (physical things and other items of value) owned by the
business. These are listed on the left side of the balance sheet. Assets include
finished and unfinished inventory, land, building, cash, and money owed to the
business by customers. †
Auditing
The principal activity of a public accountant. Consists of an independent
examination of the accounting records and other evidence relating to a business
to support the expression of an impartial expert opinion about the fairness of the
financial statements. †
B - Bravo
Bad Debts
The amounts not paid when a customer fails to pay all or part of what is owed.
You make an adjusting entry to record it as an expense. †
Balance Sheet
A financial statement that shows the financial condition of a business in terms of
assets, liabilities, and owner’s equity as of a certain date. †
Board of Directors
A board of directors is a body of elected or appointed persons who jointly
oversee the activities of a company or organization. The body sometimes has a
different name, such as board of trustees, board of governors, board of
managers, or executive board. It is often simply referred to as "the board."
The legal responsibilities of boards and board members vary with the nature of
the organization, and with the jurisdiction within which it operates. For public
corporations, these responsibilities are typically much more rigorous and
complex than for those of other types.
Typically the board chooses one of its members to be the chair or chairperson of
the board of directors, traditionally also called chairman or chairwoman. W
Bookkeeping
The recording, sorting and summarizing of transactions that affect the financial
condition of a business. This is considered the record-making phase of
accounting. †
Book Value
The net amount at which an asset is shown in accounting records. For
depreciable assets, book value equals cost minus accumulated depreciation.
Also called the carrying value. †
Bridge Financing
Interim financing used to meet a short-term, cash-flow need until more
permanent financing (typically larger amounts) is secured. For example, bridge
financing can be used to carry a firm to an initial public offering, a venture round
of financing, or long-term debt.
Business entity
The concept of a business (an economic units that enters business transactions)
as separate from its owner(s). †
Business Intelligence
Business intelligence (BI) refers to skills, knowledge, technologies, applications
and practices used to help a business to acquire a better understanding of the
market behavior and business context. For this purpose it employs collection,
integration, analysis, interpretation and presentation of business information. In
simplified meaning it may refer to the collected information itself or the explicit
knowledge developed from the information. The purpose of business intelligence-
-a term that dates at least to 1958--is to support better business decision making.
Thus, BI system is also described as a decision support system (DSS):
BI is sometimes used interchangeably with briefing books, report and query tools
and executive information systems. In general, business intelligence systems are
data-driven DSS.
Business intelligence often uses key performance indicators (KPIs) to assess the
present state of business and to prescribe a course of action. Examples of KPIs
are things such as lead conversion rate (in sales) and inventory turnover (in
inventory management). Prior to the widespread adoption of computer and web
applications, when information had to be manually input and calculated,
performance data was often not available for weeks or months. Recently, banks
have tried to make data available at shorter intervals and have reduced delays.
The KPI methodology was further expanded with the Chief Performance Officer
methodology which incorporated KPIs and root cause analysis into a single
methodology.
Businesses that face higher operational/credit risk loading, such as credit card
companies and "wealth management" services, often make KPI-related data
available weekly. In some cases, companies may even offer a daily analysis of
data. This fast pace requires analysts to use IT systems to process this large
volume of data. W
Business Issue
An area that is traditionally negotiated between the clients, rather than lawyers
(or in some cases, an area that one or both lawyers don't want to negotiate for
whatever reason).
Business Plan
A business plan is a formal statement of a set of business goals, the reasons
why they are believed attainable, and the plan for reaching those goals. It may
also contain background information about the organization or team attempting to
reach those goals.
A business plan having changes in perception and branding as its primary goals
is called a marketing plan.
Internally focused business plans target intermediate goals required to reach the
external goals. They may cover the development of a new product, a new
service, a new IT system, a restructuring of finance, the refurbishing of a factory
or a restructuring of the organization. An internal business plan is often
developed in conjunction with a balanced scorecard or a list of critical success
factors. This allows success of the plan to be measured using non-financial
measures. Business plans that identify and target internal goals, but provide only
general guidance on how they will be met are called strategic plans.
Business transaction
Any event expressed in dollars that is related to a business and affects the
assets, liabilities, or owner’s equity of that business. †
C - Charlie
CAPEX
Capital expenditures (CAPEX or capex) are expenditures creating future
benefits. A capital expenditure is incurred when a business spends money either
to buy fixed assets or to add to the value of an existing fixed asset with a useful
life that extends beyond the taxable year. Capex are used by a company to
acquire or upgrade physical assets such as equipment, property, or industrial
buildings. In accounting, a capital expenditure is added to an asset account
("capitalized"), thus increasing the asset's basis (the cost or value of an asset as
adjusted for tax purposes). Capex is commonly found on the Cash Flow
Statement as "Investment in Plant Property and Equipment" or something similar
in the Investing subsection.
For tax purposes, capital expenditures are costs that cannot be deducted in the
year in which they are paid or incurred, and must be capitalized. The general rule
is that if the property acquired has a useful life longer than the taxable year, the
cost must be capitalized. The capital expenditure costs are then amortized or
depreciated over the life of the asset in question. As stated above, capital
expenditures create or add basis to the asset or property, which once adjusted,
will determine tax liability in the event of sale or transfer. In the US, Internal
Revenue Code §§263 and 263A deal extensively with capitalization requirements
and exceptions.
Capital asset
Capital asset has two related meanings in the fields of accounting and financial
economics. In accounting, a capital asset is an asset that is recorded on a
balance sheet as capital - that is, property that creates more property, e.g. a
factory that creates shoes, or a forest that yields a quantity of wood. In financial
economics, capital assets also include financial assets such as stocks or bonds.
CMLTD
"Current Maturity of Long-Term Debt ("CMLTD") shall mean, for any period, the
current scheduled principal or capital lease payments required to be paid during
the applicable period.
Current assets
Current assets are cash and other assets expected to be converted to cash, sold,
or consumed either in a year or in the operating cycle. These assets are
1. Cash and cash equivalents — it is the most liquid asset, which includes
currency, deposit accounts, and negotiable instruments (e.g., money
orders, cheque, bank drafts).
2. Short-term investments — include securities bought and held for sale in
the near future to generate income on short-term price differences (trading
securities).
3. Receivables — usually reported as net of allowance for uncollectable
accounts.
4. Inventory — trading these assets is a normal business of a company.
The inventory value reported on the balance sheet is usually the historical
cost or fair market value, whichever is lower. This is known as the "lower
of cost or market" rule.
5. Prepaid expenses — these are expenses paid in cash and recorded as
assets before they are used or consumed (a common example is
insurance). See also adjusting entries.
The phrase net current assets (also called working capital) is often used and
refers to the total of current assets less the total of current liabilities. W
Capital
The ownership of the assets of a business by the proprietor(s). See Owner’s
equity. †
Capitalization
The combined sources of capital, consisting of debt capital (liabilities) and equity
capital (capital stock and retained earnings).
Capitalization Table
Short for capitalization table, it is a summary of a company's issued and
outstanding securities.
Chart of Accounts
A list of the accounts in a ledger, arranged by account number. (These accounts
are traditionally set up in the order of the accounting equation.) †
Closing entries
Journal entries that usually occur at the end of the accounting period to eliminate
the balances in the temporary capital account and to transfer these balances to
the income summary account and eventually to the permanent capital account. †
Convertible Debt
In finance, a convertible bond (or convertible debenture) is a type of bond that
can be converted into shares of stock in the issuing company, usually at some
pre-announced ratio. It is a hybrid security with debt- and equity-like features.
Although it typically has a low coupon rate, the holder is compensated with the
ability to convert the bond to common stock, usually at a substantial discount to
the stock's market value.
From the issuer's perspective, the key benefit of raising money by selling
convertible bonds is a reduced cash interest payment. However, in exchange for
the benefit of reduced interest payments, the value of shareholder's equity is
reduced due to the stock dilution expected when bondholders convert their bonds
into new shares. W
Convertible Notes
Debt instrument (such as a promissory note) that can be converted to equity
(either common stock or preferred stock).
Corporate Governance
Corporate governance is the set of processes, customs, policies, laws and
institutions affecting the way a corporation is directed, administered or controlled.
Corporate governance also includes the relationships among the many
stakeholders involved and the goals for which the corporation is governed. The
principal stakeholders are the shareholders, management and the board of
directors. Other stakeholders include employees, suppliers, customers, banks
and other lenders, regulators, the environment and the community at large. W
Corporation
A corporation is a legal entity separate from the persons that form it. In British
tradition it is the term designating a body corporate, where it can be either a
corporation sole (an office held by an individual natural person, which is a legal
entity separate from that person) or a corporation aggregate (involving more
persons). In American and, increasingly, international usage, the term denotes a
body corporate formed to conduct business, and this meaning of corporation is
discussed in the remaining part of this entry (the limited company in British
usage).
Corporations exist as a product of corporate law, and their rules balance the
interests of the shareholders that invest their capital and the employees who
contribute their labor. People work together in corporations to produce value and
generate income. In modern times, corporations have become an increasingly
dominant part of economic life. People rely on corporations for employment, for
their goods and services, for the value of the pensions, for economic growth and
social development.
The defining feature of a corporation is its legal independence from the people
who create it. If a corporation fails, shareholders only stand to lose their
investment, and employees will lose their jobs, but neither will be liable for debts
that remain owing to the corporation's creditors. This rule is called limited liability,
and it is why the names of corporations in the UK end with "Ltd." (or some variant
like "Inc." and "plc").
Despite not being natural persons, corporations are recognized by the law to
have rights and responsibilities like actual people. Corporations can exercise
human rights against real individuals and the state, and they may be responsible
for human rights violations. Just as they are "born" into existence through its
members obtaining a certificate of incorporation, they can "die" when they lose
money into insolvency. Corporations can even be convicted of criminal offences,
such as fraud and manslaughter. Five common characteristics of the modern
corporation, according to Harvard University Professors Hansmann and
Kraakman are...
Cram-Down Financing
A financing that results in significant dilution of a non-participating existing
shareholder, usually reducing the value of that investor's original investment or
the rights held by such investors.
Cost-benefit analysis
Cost-benefit analysis is a term that refers both to:
• a formal discipline used to help appraise, or assess, the case for a project
or proposal, which itself is a process known as project appraisal; and
• an informal approach to making decisions of any kind.
A hallmark of CBA is that all benefits and all costs are expressed in money
terms, and are adjusted for the time value of money, so that all flows of benefits
and flows of project costs over time (which tend to occur at different points in
time) are expressed on a common basis in terms of their “present value.” Closely
related, but slightly different, formal techniques include Cost-effectiveness
analysis, Economic impact analysis, Fiscal impact analysis and Social Return on
Investment (SROI) analysis. The latter builds upon the logic of cost-benefit
analysis, but differs in that it is explicitly designed to inform the practical decision-
making of enterprise managers and investors focused on optimizing their social
and environmental impacts. W
Credit
An entry that signifies a decrease in asset and expense accounts, and an
increase in liability, owner’s equity, and revenue accounts. This entry is a positive
balance on the right-hand side. Increasing the balance of an account with a
normal credit balance is called crediting. †
Current assets
Assets which can be converted to case or realized in the ordinary course of
business, usually within one year. †
Current Liabilities
In accounting, current liabilities are considered liabilities of the business that are
to be settled in cash within the fiscal year or the operating cycle, whichever
period is longer.
For example accounts payable for goods, services or supplies that were
purchased for use in the operation of the business and payable within a normal
period of time would be current liabilities.
Bonds, mortgages and loans that are payable over a term exceeding one year
would be fixed liabilities. However the payments due on the long-term loans in
the current fiscal year could be considered current liabilities if the amount were
material.
Current Ratio
The current ratio gauges how capable a business is in paying current liabilities by
using current assets only. Current ratio is also called the working capital ratio. A
general rule of thumb for the current ratio is 2 to 1 (or 2:1 or 2/1). However, an
industry average may be a better standard than this rule of thumb. The actual
quality and management of assets must also be considered.
D - Delta
Debit
A positive balance on the left-hand side of an account. Increasing the balance of
an account which normally has a debit balance is called debiting. †
Debt Ratio
A ratio that indicates what proportion of debt a company has relative to its assets.
The measure gives an idea to the leverage of the company along with the
potential risks the company faces in terms of its debt-load.
between the capital invested by owners and investors and the funds provided by
creditors. The higher the ratio, the greater the risk to a current or future creditor.
A lower ratio means your client's company is more financially stable and is
probably in a better position to borrow now and in the future. However, an
extremely low ratio may indicate that your client is too conservative and is not
letting the business realize its potential.
The formula is: Total Liabilities (or Debt) / Net Worth (or Total Equity) W
Depreciation
Allocation of the cost of a physical asset (such as a piece of equipment) over its
useful life. Depreciation transactions debit the depreciation expense account and
credit (reduce) the value of the asset.†
Dilution
The reduction in the ownership percentage of shareholders caused by the
issuance of new securities or the conversion of convertible securities of the
issuer, typically with the connotation that the new securities are issued at a lower
price than paid in the previous round of financing.
Direct Expenses
Are those costs directly related to the principal activity of the business. Examples
include the raw materials used to manufacture a product and the labor costs
associated with the work performed to produce the product.
Down Round
A financing in which the new securities are issued at a lower price than the
previous round of financing.
Drag-Along Rights
Rights that enable a shareholder or group of shareholders (usually those who
own a controlling interest in the company) to compel other shareholders to sell
their stock in the event a purchaser desires to purchase more than what the
controlling shareholder(s) own(s).
Due Diligence
A number of concepts involving either the performance of an investigation of a
business or person, or the performance of an act with a certain standard of care.
It can be a legal obligation, but the term will more commonly apply to voluntary
investigations. A common example of due diligence in various industries is the
process through which a potential acquirer evaluates a target company or its
assets for acquisition.
In business transactions, the due diligence process varies for different types of
companies. The relevant areas of concern may include the financial, legal, labor,
tax, IT, environment and market/commercial situation of the company. Other
areas include intellectual property, real and personal property, insurance and
liability coverage, debt instrument review, employee benefits and labor matters,
immigration, and international transactions. W
E - Echo
Earnings
The accumulated total of after-tax profits and losses from operations over the life
of the company. Profits add to the total, and losses subtract from it.†
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate
measure of a company's operating cash flow based on data from the company's
income statement. Calculated by looking at earnings before the deduction of
interest expenses, taxes, depreciation, and amortization. This earnings measure
is of particular interest in cases where companies have large amounts of fixed
assets which are subject to heavy depreciation charges (such as manufacturing
companies) or in the case where a company has a large amount of acquired
intangible assets on its books and is thus subject to large amortization charges
(such as a company that has purchased a brand or a company that has recently
made a large acquisition). Since the distortionary accounting and financing
effects on company earnings do not factor into EBITDA, it is a good way of
comparing companies within and across industries. This measure is also of
interest to a company's creditors, since EBITDA is essentially the income that a
company has free for interest payments. In general, EBITDA is a useful measure
only for large companies with significant assets, and/or for companies with a
significant amount of debt financing. It is rarely a useful measure for evaluating a
small company with no significant loans. Sometimes also called operational cash
flow. W
EBITDA/Interest
This assesses the company's ability to meet interest payments. It also evaluates
the capacity to take on more debt. The higher the ratio, the greater the
company's ability to make its interest payments or perhaps take on more debt.
The formula is: Earnings Before Interest Taxes Depreciation and Amortization /
Interest Charges W
An ERP system supports most of the business system that maintains in a single
database the data needed for a variety of business functions such as
Manufacturing, Supply Chain Management, Financials, Projects, Human
Resources and Customer Relationship Management.
Ideally, the data for the various business functions are integrated. In practice the
ERP system may comprise a set of discrete applications, each maintaining a
discrete data store within one physical database. W
Equity
The worth of a business to its owner. It is shown on the right side of the
accounting equation. To calculate the owner’s equity, subtract the liabilities from
the assets.†
Expenses
The cost of doing business. These amounts are those a business spends to
provide goods or services to its customers or to carry on its business, excluding
amounts spent to acquire assets.†
Exit Strategy
The method for enabling shareholders to sell their shares and earn a return on
F - Foxtrot
Factoring
Factoring is a financial transaction whereby a business sells its accounts
receivable (i.e., invoices) at a discount. Factoring differs from a bank loan in
three main ways. First, the emphasis is on the value of the receivables
(essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring
is not a loan – it is the purchase of a financial asset (the receivable). Finally, a
bank loan involves two parties whereas factoring involves three.
The three parties directly involved are: the one who sells the receivable, the
debtor, and the factor. The receivable is essentially a financial asset associated
with the debtor’s Liability to pay money owed to the seller (usually for work
performed or goods sold). The seller then sells one or more of its invoices (the
receivables) at a discount to the third party, the specialized financial organization
(aka the factor), to obtain cash. The sale of the receivables essentially transfers
ownership of the receivables to the factor, indicating the factor obtains all of the
rights and risks associated with the receivables. Accordingly, the factor obtains
the right to receive the payments made by the debtor for the invoice amount and
must bear the loss if the debtor does not pay the invoice amount. Usually, the
debtor is notified of the sale of the receivable, and the factor bills the debtor and
makes all collections. However, at times, the seller will collect the payments
made by the debtor, and will remit them to the factor. The factor usually charges
the seller a service charge, as well as interest based on how long the factor must
wait to receive payments from the debtor. The seller also estimates the amount
that may not be collected due to non-payment, and makes accommodation for
this when determining the amount that will be given to the seller. The factor's
overall profit is the difference between the price it paid for the invoice and the
money received from the debtor, less the amount lost due to non-payment. W
Family Trust
A discretionary trust is a legal document to secure a family's assets and to
safeguard a family business. The trust is established for asset protection or tax
purposes.
Feasibility study
A feasibility study is a preliminary study undertaken to determine and document a
project's viability or the discipline of planning, organizing, and managing
resources to bring about the successful completion of specific project goals and
objectives. The term is also used to describe the preliminary analysis of an
existing system to see if it is worth upgrading all or a part. Also known as
feasibility analysis. The term is also used to refer to the resulting document. The
results of this study are used to make a decision whether or not to proceed with
the project. If it indeed leads to a project being approved, it will — before the real
work of the proposed project starts and be used to ascertain the likelihood of the
project's success. It is an analysis of possible alternative solutions to a problem
and a recommendation on the best alternative. It can decide, for example,
whether order processing can be carried out by a new system more efficiently
than the previous one.
If a project is seen to be feasible from the results of the study, the next logical
step is to proceed with it. The research and information uncovered in the
feasibility study will support the detailed planning and reduce the research time.
Market Feasibility Study typically involves testing geographic locations for a real
estate development project, and usually involves parcels of real estate land.
Developers often conduct market studies to determine the best location within a
jurisdiction, and to test alternative land uses for a given parcels. Jurisdictions
often require developers to complete feasibility studies before they will approve a
permit application for retail, commercial, industrial, manufacturing, housing, office
or mixed-use project.
This involves questions such as whether the technology needed for the system
exists, how difficult it will be to build, and whether the firm has enough
experience using that technology. The assessment is based on an outline design
of system requirements in terms of Input, Processes, Output, Fields, Programs,
and Procedures. This can be quantified in terms of volumes of data, trends,
frequency of updating, etc in order to estimate if the new system will perform
adequately or not.
Resource Feasibility
This involves questions such as how much time is available to build the new
system, when it can be built, whether it interferes with normal business
operations, type and amount of resources required, dependencies, etc.
Contingency and mitigation plans should also be stated here so that if the project
does over run the company is ready for this eventuality.
Cultural Feasibility
In this stage, the project's alternatives are evaluated for their impact on the local
and general culture. Further an enterprise's own culture can clash with the results
of the project.
Operational feasibility
Do the current work practices and procedures support a new system. Also social
factors i.e. how the organizational changes will affect the working lives of those
affected by the system..
Legal Feasibility
Determines whether the proposed system conflicts with legal requirements, e.g.
a Data Processing system must comply with the local Data Protection Acts.
When an organization has either internal or external legal counsel, such reviews
are typically standard. However, a project may face legal issues after completion
if this factor is not considered at this stage.it is about the authorization
A business plan needs to be based on the market forces that could affect the
commercial viability of the business. Internal projects must establish the cost-
effectiveness of the proposed system i.e. if the benefits do not outweigh the costs
then it is not worth going ahead. This includes a cost benefit analysis.
Schedule Feasibility
A project will fail if it takes too long to be completed before it is useful. Typically
this means estimating how long the system will take to develop, and if it can be
completed in a given time period using some methods like payback period W
Financial statements
Documents prepared to summarize the effects of business transactions. See
Balance Sheet and Income Statement.†
Fiscal year
The twelve-month period which a company chooses for accounting purposes. It
is not necessarily the same as a calendar year.†
Fixed Assets
Assets such as land, buildings, equipment, and trucks that are used in operating
the business and which have a long life.†
G - Golf
General Journal
Those transactions that cannot go into one of the special journals (i.e. purchase,
sales, cash receipts, cash payment journals.) This includes any payroll entries,
adjusting entries or closing entries.†
Goodwill
Goodwill is an accounting term used to reflect the portion of the book value of a
business entity not directly attributable to its assets and liabilities; it normally
arises only in case of an acquisition. It reflects the ability of the entity to make a
higher profit than would be derived from selling the tangible assets. Goodwill is
also known as an intangible asset. W
Governance
Governance relates to decisions that define expectations, grant power, or verify
performance. It consists either of a separate process or of a specific part of
management or leadership processes. Sometimes people set up a government
to administer these processes and systems.
H - Hotel
Hostile takeovers
If management may not be acting in the best interest of the shareholders (or
creditors, in cases of bankrupt firms), a hostile takeover allows a suitor to bypass
intransigent management. This enables the shareholders to choose the option
that may be best for them, rather than leaving approval solely with management.
In this case, a hostile takeover may be beneficial to shareholders, which is
contrary to the usual perception that a hostile takeover is "bad."
• The board rejects the offer, but the bidder continues to pursue it, or
• The bidder makes the offer without informing the board beforehand
A hostile takeover can be conducted in several ways. A tender offer can be made
where the acquiring company makes a public offer at a fixed price above the
current market price. Tender offers in the USA are regulated with the Williams
Act. An acquiring company can also engage in a proxy fight, whereby it tries to
persuade enough shareholders, usually a simple majority, to replace the
management with a new one which will approve the takeover. Another method
involves quietly purchasing enough stock on the open market, known as a
creeping tender offer, to effect a change in management. In all of these ways,
management resists the acquisition but it is carried out anyway.
The main consequence of a bid being considered hostile is practical rather than
legal. If the board of the target cooperates, the bidder can conduct extensive due
diligence into the affairs of the target company. It can find out exactly what it is
taking on before it makes a commitment. But a hostile bidder knows about the
target only the information that is publicly available, and so takes a greater risk.
Also, banks are less willing to back hostile bids with the loans that are usually
needed to finance the takeover. W
I - India
Income
The amount left over after all the revenues for a period are accounted of, and all
costs and expenses for the same period are deducted. Income is also called net
income, profit, or net profit.†
Income statement
A statement which show the revenues, expenses, and the net income for a
particular period.†
Indirect Expenses
Are those not directly related to the principal activity of the business. Examples
include Sales activities, Research and Development activities, and Administrative
activities.
Intangible Assets
Intangible assets are defined as identifiable non-monetary assets that cannot be
seen, touched or physically measured, which are created through time and/or
effort and that are identifiable as a separate asset. There are two primary forms
of intangibles - legal intangibles (such as trade secrets (e.g., customer lists),
copyrights, patents, trademarks, and goodwill) and competitive intangibles (such
as knowledge activities (know-how, knowledge), collaboration activities, leverage
activities, and structural activities). Legal intangibles generate legal property
rights defensible in a court of law. Competitive intangibles, whilst legally non-
ownable, directly impact effectiveness, productivity, wastage, and opportunity
costs within an organization - and therefore costs, revenues, customer service,
satisfaction, market value, and share price. Human capital is the primary source
of competitive intangibles for organizations today. Competitive intangibles are the
source from which competitive advantage flows, or is destroyed. The area of
finance that deals with intangible assets is known as Intangible Asset Finance. W
Issuer
Refers to the company who issued or sold its securities.
J - Juliet
Journal
A record of all business transactions in daily or chronological order. All
transactions are recorded in a journal - this is a book of original or first entries.†
K - Kilo
Keiretsu
A keiretsu (系列? lit. system or series) is a set of companies with interlocking
business relationships and shareholdings. It is a type of business group.
The prototypical keiretsu are those which appeared in Japan during the
"economic miracle" following World War II. Before Japan's surrender, Japanese
industry was controlled by large family-controlled vertical monopolies called
zaibatsu.
During the occupation of Japan, under the Supreme Commander of the Allied
Powers, General Douglas MacArthur, a partially successful attempt was made to
dissolve the zaibatsu in the late 1940s. Sixteen zaibatsu were targeted for
complete dissolution, and twenty six more for reorganization after dissolution.
However, the companies formed from the dismantling of the zaibatsu were later
reintegrated. The dispersed corporations were re-interlinked through share
purchases to form horizontally-integrated alliances across many industries.
Where possible, keiretsu companies would also supply one another, making the
alliances vertically integrated as well. In this period, official government policy
promoted the creation of robust trade corporations which could withstand heavy
pressures from intensified world trade competition.[1]
The major keiretsu were each centered around one bank, which lent money to
the keiretsu's member companies and held equity positions in the companies.
Each bank had great control over the companies in the keiretsu and acted as a
monitoring entity and as an emergency bail-out entity. One effect of this structure
was to minimize the presence of hostile takeovers in Japan, because no entities
could challenge the power of the banks.
There are two types of keiretsu: vertical and horizontal. Vertical keiretsu
illustrates the organization and relationships within a company (for example all
factors of production of a certain product will be connected), while a horizontal
keiretsu shows relationships between entities and industries, normally centered
around a bank and trading company. Both are complexly woven together and
self-sustain each other.
Although the divisions between them have blurred in recent years, there are six
major postwar keiretsu: Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai-Ichi Kangyo,
Sanwa, with Toyota is considered the biggest of the "vertically-integrated"
keiretsu groups.[2]
The Japanese recession in the 1990s had profound effects on the keiretsu. Many
of the largest banks were hit hard by bad loan portfolios and forced to merge or
go out of business. This had the effect of blurring the lines between the keiretsu:
Sumitomo Bank and Mitsui Bank, for instance, became Sumitomo Mitsui Banking
Corporation in 2001, while Sanwa Bank (the banker for the Hankyu-Toho Group)
became part of Bank of Tokyo-Mitsubishi UFJ. Additionally, many companies
from outside the keiretsu system, such as Sony, began outperforming their
counterparts within the system.
Generally, these causes gave rise to a strong notion in the business community
that the old keiretsu system was not an effective business model, and led to an
overall loosening of keiretsu alliances. While the keiretsu still exist, they are not
as centralized or integrated as they were before the 1990s. This, in turn, has led
to a growing corporate acquisition industry in Japan, as companies are no longer
able to be easily "bailed out" by their banks, as well as rising derivative litigation
by more independent shareholders.
The keiretsu model has not appeared outside Japan, but many non-Japanese
businesses are described as keiretsu such as the Virgin Group (UK), Tata Group
(India) and Cisco Systems (USA). Airline alliances such as Oneworld and the
Star Alliance have also been described as keiretsu. Generally, these groups
exhibit more top-down management, centralized control or (in the case of airline
alliances) looser equity ownership connections than do "true" keiretsu. Banks
cited as being central to keiretsu-like systems include Deutsche Bank and the
early years of JP Morgan and Mellon Financial in the United States. One
economic group, the Colombian Grupo Empresarial Antioqueño, is often
described as such.
The venture capital firm of Kleiner, Perkins, Caufield & Byers (KPCB), a major
player in the dot.com boom, describes its investment portfolio as a
keiretsu.[citation needed] Like the Japanese keiretsu of the postwar period,
KPCB has invested in independent companies covering a number of business
sectors, and encouraged business connections between those companies,
making its portfolio one of the closest analogues to a keiretsu outside Japan.
South Korean conglomerates, called chaebol, are often compared to keiretsu, but
the chaebol conglomerations are much more similar to a Western conglomerate
like General Electric or a pre-World War II zaibatsu. W
L - Lima
Lead Investor
The investor who manages the negotiation, documentation, and closing of a
round of financing, and typically makes the largest investment in such round.
Ledger
This is a book of second or final entries of transactions in which each page
contains the records of one account, thus a ledger consists of a group of
accounts. A ledger may be a computer printout, a bound book, or a loose-leaf
type book.†
Liability
In financial accounting, a liability is defined as an obligation of an entity arising
from past transactions or events, the settlement of which may result in the
transfer or use of assets, provision of services or other yielding of economic
benefits in the future. Individual or group must adopt corporate charter and file it
with the state.
Living Dead
Refers to investors who go through a few down rounds of financing, are unwilling
or unable to invest any more, and for whose interests in the company there is no
liquidation event on the horizon. When the term is applied to a company, it
means that the company continues to operate, even though the company is
insolvent or has little chance of thriving.
Lock-Up Provision
A contractual requirement that for a period of time, (such as 180 days) a
shareholder is restricted from selling such shareholder's securities following a
public offering.
Long-term liabilities
Long-term liabilities are liabilities with a future benefit over one year, such as
notes payable that mature greater than one year. In accounting, the long-term
liabilities are shown on the right wing of the balance-sheet representing the
sources of funds, which are generally bounded in form of capital assets.
Examples of long-term liabilities are debentures, mortgage loans and other bank
loans (note: not all bank loans are long term as not all are paid over a period
greater than a year, the example is bridging loan.)
By convention, the portion of long-term liabilities that must be paid in the coming
12-month period are classified as current liabilities. For example, a loan for which
two payments of $1000 are due, one in the next twelve months and the other
after that date, would be 'split' into two: $1000 would be classified as a current
liability, and $1000 as a long-term liability (note this example is simplified, and
does not take into account any interest or discounting effects, which may be
required depending on the accounting rules). W
M - Mike
MBO (management buy-out)
Management buyouts are similar in all major legal aspects to any other
acquisition of a company. The particular nature of the MBO lies in the position of
the buyers as managers of the company, and the practical consequences that
follow from that. In particular, the due diligence process is likely to be limited as
the buyers already have full knowledge of the company available to them. The
seller is also unlikely to give any but the most basic warranties to the
management, on the basis that the management know more about the company
than the sellers do and therefore the sellers should not have to warrant the state
of the company.
The purpose of such a buyout from the managers' point of view may be to save
their jobs, either if the business has been scheduled for closure or if an outside
purchaser would bring in its own management team. They may also want to
maximize the financial benefits they receive from the success they bring to the
company by taking the profits for themselves. This is often a way to ward off
aggressive buyers. W
Mergers
A merger is a tool used by companies for the purpose of expanding their
operations often aiming at an increase of their long term profitability. There are
15 different types of actions that a company can take when deciding to move
forward using M&A. Usually mergers occur in a consensual (occurring by mutual
consent) setting where executives from the target company help those from the
purchaser in a due diligence process to ensure that the deal is beneficial to both
parties. Acquisitions can also happen through a hostile takeover by purchasing
the majority of outstanding shares of a company in the open market against the
wishes of the target's board. In the United States, business laws vary from state
to state whereby some companies have limited protection against hostile
takeovers. One form of protection against a hostile takeover is the shareholder
rights plan, otherwise known as the "poison pill".
Mezzanine Financing
Typically a hybrid of debt and equity financing that is used to finance the
expansion of an existing company. It is generally subordinated to debt provided
by senior lenders such as banks.
N - November
Negative Equity
A term used to refer to when the value of an asset used to secure a loan is less
than the outstanding balance on the loan. A person holding negative equity is
said to be upside down. This can occur when the value of the asset stays fixed
but the loan balance increases because loan payments are less than the interest,
a situation known as negative amortization. The typical assets securing such
loans are real property - commercial, office and residential. The typical loan is
one secured when the property owner mortgages the property to secure the loan.
When the loan is nonrecourse the lender can only look to the security, that is, the
real property when the borrower fails to repay the loan. W
Each cash inflow/outflow is discounted back to its present value (PV). Then they
The rate used to discount future cash flows to their present values is a key
variable of this process. A firm's weighted average cost of capital (after tax) is
often used, but many people believe that it is appropriate to use higher discount
rates to adjust for risk for riskier projects or other factors. A variable discount rate
with higher rates applied to cash flows occurring further along the time span
might be used to reflect the yield curve premium for long-term debt.
Another approach to choosing the discount rate factor is to decide the rate which
the capital needed for the project could return if invested in an alternative
venture. If, for example, the capital required for Project A can earn five percent
elsewhere, use this discount rate in the NPV calculation to allow a direct
comparison to be made between Project A and the alternative. Related to this
concept is to use the firm's Reinvestment Rate. Reinvestment rate can be
defined as the rate of return for the firm's investments on average. When
analyzing projects in a capital constrained environment, it may be appropriate to
use the reinvestment rate rather than the firm's weighted average cost of capital
as the discount factor. It reflects opportunity cost of investment, rather than the
possibly lower cost of capital.
A NPV amount obtained using variable discount rates (if they are known for the
duration of the investment) better reflects the real situation than that calculated
from a constant discount rate for the entire investment duration.
For some professional investors, their investment funds are committed to target a
specified rate of return. In such cases, that rate of return should be selected as
the discount rate for the NPV calculation. In this way, a direct comparison can be
made between the profitability of the project and the desired rate of return.
To some extent, the selection of the discount rate is dependent on the use to
which it will be put. If the intent is simply to determine whether a project will add
value to the company, using the firm's weighted average cost of capital may be
appropriate. If trying to decide between alternative investments in order to
maximize the value of the firm, the corporate reinvestment rate would probably
be a better choice.
Using variable rates over time, or discounting "guaranteed" cash flows different
from "at risk" cash flows may be a superior methodology, but is seldom used in
practice. Using the discount rate to adjust for risk is often difficult to do in practice
(especially internationally), and is really difficult to do well. An alternative to using
discount factor to adjust for risk is to explicitly correct the cash flows for the risk
elements, then discount at the firm's rate.
NPV is an indicator of how much value an investment or project adds to the value
of the firm. With a particular project, if Ct is a positive value, the project is in the
status of discounted cash inflow in the time of t. If Ct is a negative value, the
project is in the status of discounted cash outflow in the time of t. Appropriately
risked projects with a positive NPV could be accepted. This does not necessarily
mean that they should be undertaken since NPV at the cost of capital may not
account for opportunity cost, i.e. comparison with other available investments. In
financial theory, if there is a choice between two mutually exclusive alternatives,
the one yielding the higher NPV should be selected. W
Notes payable
A subdivision of liabilities that refers to money the business owes to a creditor as
Notes receivable
A subdivision of assets that refers to money owed to the business as seen by
actual note.†
No-Shop Requirement
A contractual requirement that prevents a company from soliciting or negotiating
offers to purchase its securities for a specified period of time while it is
exclusively negotiating with a particular investor or group of investors.
O - Oscar
Offering Memorandums
Offering memorandum (“OM”) is a legal document stating the objectives, risks
and terms of investment involved with a private placement. This includes items
such as the financial statements, management biographies, detailed description
of the business, etc. An offering memorandum serves to provide buyers with
information on the offering and to protect the sellers from the liability associated
with selling unregistered securities.
Operating Expenses
An operating expense, operating expenditure, operational expense, operational
expenditure or OPEX is an on-going cost for running a product, business, or
system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing
or providing non-consumable parts for the product or system. For example, the
purchase of a photocopier is the CAPEX, and the annual paper and toner cost is
the OPEX. For larger systems like businesses, OPEX may also include the cost
of workers and facility expenses such as rent and utilities.
Ownership Equity
In accounting terms, after all liabilities are paid, ownership equity is the
remaining interest in assets. If valuations placed on assets do not exceed
liabilities, negative equity exists.†
An account that lists the increases and decreases in capital that an owner has
invested in the business.†
Owner’s equity
The owner’s claim against the assets of the business after liabilities have been
deducted. Also called capital, proprietorship, or net worth.†
P - Papa
Participation Right
A right that enables the holder to purchase the holder's pro-rata percentage of
the company's equity securities in future rounds, enabling the holder to maintain
his, her or its percentage ownership in the company.
Payroll
A list of all employees and their respective salaries for a given period.†
Post-Money Valuation
The value of the company after investors invest in a given round of financing.
Pre-Emptive Rights
The right of an existing shareholder to purchase such shareholder's pro rata
share of any new stock that is being issued by the company prior to that stock
being offered to new investors. They are similar to participation rights.
Preferred Shares
Shares that gives its holders certain rights, preferences, and privileges over
holders of common shares in certain instances.
Preferred Stock
Preferred stock, also called preferred shares or preference shares, is typically a
higher ranking stock than voting shares, and its terms are negotiated between
the corporation and the investor.
Preferred stock usually carry no voting rights, but may carry superior priority over
common stock in the payment of dividends and upon liquidation. Preferred stock
may carry a dividend that is paid out prior to any dividends to common stock
holders. Preferred stock may have a convertibility feature into common stock.
Preferred stockholders will be paid out in assets before common stockholders
and after debt holders in bankruptcy. Terms of the preferred stock are stated in a
"Certificate of Designation". W
Prepaid Expense
An asset account. It is an item that has been paid in advance yet is normally
considered an expense, at such a time as the asset is used up, an adjusting
entry will convert this prepaid expense (asset) to an actual expense. (An example
is insurance on buildings, etc.)†
Pre-Tax Income
The amount earned from a business or investment before deducting income
taxes.
Private Equity
In finance, private equity is an asset class consisting of equity securities in
operating companies that are not publicly traded on a stock exchange.
business that are generating revenue but may not yet be profitable or
generating cash flow to fund future growth.
One of the characteristics of the legal entities existing under the status of
"Foundations", is a wide diversity of structures and purposes. Nevertheless, there
are some common structural elements that are the first observed under legal
scrutiny or classification.
Some of the above must be, in most jurisdictions, expressed in the document of
establishment. Others may be provided by the supervising authority at each
particular jurisdiction.
own name for the purposes set out in its constitutive documents, and its
administration and operation are carried out in accordance with its statutes or
articles of association rather than fiduciary principles. The foundation has a
distinct patrimony independent of its founder.
Foundations are often set up for charitable purposes, family patrimony and
collective purposes.
Profit
The amount left over after all the revenues for a period are accounted for, and all
costs and expenses for the same period are deducted. Profit is also called net
profit, income, or net income.†
Prospectus
A prospectus is a legal document that institutions and businesses use to describe
the securities they are offering for participants and buyers. A prospectus
commonly provides investors with material information about mutual funds,
stocks, bonds and other investments, such as a description of the company's
business, financial statements, biographies of officers and directors, detailed
information about their compensation, any litigation that is taking place, a list of
material properties and any other material information. In the context of an
individual securities offering, such as an initial public offering, a prospectus is
distributed by underwriters or brokerages to potential investors.
Q - Quebec
Quick ratio
In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a
company to use its near cash or quick assets to immediately extinguish or retire
its current liabilities. Quick assets include those current assets that presumably
can be quickly converted to cash at close to their book values. Such items are
cash, cash equivalents such as marketable securities, and some accounts
receivable. This ratio indicates a firm's capacity to maintain operations as usual
with current cash or near cash reserves in bad periods. As such, this ratio implies
a liquidation approach and does not recognize the revolving nature of current
assets and liabilities. The ratio compares a company's cash and short-term
investments to the financial liabilities the company is expected to incur within a
year's time.
Generally, the acid test ratio should be 1:1 or better, however this varies widely
by industry . W
R - Romeo
Purchases journal
A journal that records all purchases made on credit.†
RAD calls for the interactive use of structured techniques and prototyping to
define user's requirements and design the final system. Using structured
techniques the developer first builds preliminary data models and business
process models of the business requirements. Prototyping then helps the analyst
and users to verify those requirements and to formally refine the data and
process models. The cycle of models, then prototypes, then models, then
prototypes and so forth on, ultimately results in a combined business
requirements and technical design statement to be used for constructing new
systems.
Revenue
The amounts that a business earns through sales of products or services.†
S - Sierra
Sales Discount
A reduction of sales price offered by a seller to a buyer. The difference between
the amount owed by the customer and the amount of cash received is known as
the sales discount.†
Sales journal
A journal used to record all sales of goods and services on credit.†
Seed Money
A seed round, sometimes known as a friends and family round or seed funding,
is a securities offering whereby one or more parties that have some connection
to a new enterprise invest the funds necessary to start the business so that it has
enough funds to sustain itself for a period of development until it reaches either a
state where it is able to continue funding itself, or has created something in value
so that it is worthy of future rounds of funding. Seed money refers to the money
so invested.
SG&A Expenses
Selling, General and Administrative Expenses. Income statement item which
combines salaries, commissions, and travel expenses for executives and
salespeople, advertising costs, and payroll expenses.
Shareholder
A mutual shareholder or stockholder is an individual or company (including a
corporation) that legally owns one or more shares of stock in a joint stock
company. A company's shareholders collectively own that company. Thus, such
companies strive to enhance shareholder value. Stockholders are granted
special privileges depending on the class of stock, including the right to vote
(usually one vote per share owned, but sometimes this is not the case) on
matters such as elections to the board of directors, the right to propose
shareholder resolutions, the right to share in distributions of the company's
income, the right to purchase new shares issued by the company, and the right
to a company's assets during a liquidation of the company. However,
stockholder's rights to a company's assets are subordinate to the rights of the
company's creditors. This means that stockholders typically receive nothing if a
company is liquidated after bankruptcy (if the company had had enough to pay its
creditors, it would not have entered bankruptcy), although a stock may have
value after a bankruptcy if there is the possibility that the debts of the company
will be restructured.
Although directors and officers of a company are bound by fiduciary duties to act
in the best interest of the shareholders, the shareholders themselves normally do
not have such duties towards each other.
However, in a few unusual cases, some courts have been willing to imply such a
duty between shareholders. For example, in California, majority shareholders of
closely held corporations have a duty to not destroy the value of the shares held
by minority shareholders.
The largest shareholders (in terms of percentage owned of companies) are often
mutual funds, especially passively managed exchange-traded funds.
Shareholder’s Equity
In accounting terms, after all liabilities are paid, ownership equity is the remaining
interest in assets. If valuations placed on assets do not exceed liabilities,
negative equity exists.
At the start of a business, owners put some funding into the business to finance
assets. Businesses can be considered to be, for accounting purposes, sums of
liabilities and assets; this is the accounting equation. After liabilities have been
accounted for, the positive remainder is deemed the owner's interest in the
business. W
Subordinated Debt
Also known as subordinated loan, subordinated bond, subordinated debenture or
junior debt is debt which ranks after other debts should a company fall into
receivership or be closed.
Such debt is referred to as subordinate, because the debt providers (the lenders)
have subordinate status in relationship to the normal debt. A typical example for
this would be when a promoter of a company invests money in the form of debt,
rather than in the form of stock. In the case of liquidation (e.g. the company
winds up its affairs and dissolves) the promoter would be paid just before
stockholders -- assuming there are assets to distribute after all other liabilities
and debt has been paid.
Subordinated debt has a lower priority than other bonds of the issuer in case of
liquidation during bankruptcy, below the liquidator, government tax authorities
and senior debt holders in the hierarchy of creditors. Because subordinated debt
is repayable after other debts have been paid, they are more risky for the lender
of the money. It is unsecured and has lesser priority than that of an additional
debt claim on the same asset. W
Subsidiary Ledger
A detailed record of individual customer or creditor accounts which when totaled
equal the control account in the general ledger.†
Synoptic Journal
This journal’s meaning is derived from the Greek meaning “see everything at
once.” This ledger is sometimes called a combined journal or combined/ledger
journal.†
T - Tango
T-4 Slip (Form)
A document indicating an employee’s total earnings during the calendar year and
also the total taxes withheld from his or her salary. (Used for individual’s personal
income tax return.)†
Term Sheet
The document that outlines most of the key terms of an investment between an
investor and a company. The term sheet is typically non-binding, except for
certain provisions.
Tranche
The literal French translation is portion or slice. In the world of finance and
lending a tranche is a portion of a loan that is part of the entire loan. For example
if a person is requesting a total loan amount of $1,000,000 and the loan is made
up of 10 smaller loans of $100,000 each, the smaller loans are each called a
tranche.
Trial Balance
A record that may be prepared at any moment in time to prove the accuracy of
the ledger. (i.e. the equality of the debts and credits.)†
U - Uniform
Unified Modeling Language (UML)
The Unified Modeling Language (UML) is a graphical language for visualizing,
specifying and constructing the artifacts of a software-intensive system. The
Unified Modeling Language offers a standard way to write a system's blueprints,
including conceptual things such as business processes and system functions as
well as concrete things such as programming language statements, database
schemas, and reusable software components. UML combines the best practice
from data modeling concepts such as entity relationship diagrams, business
modeling (work flow), object modeling and component modeling. It can be used
with all processes, throughout the software development life cycle, and across
different implementation technologies. W
Underwriting
Underwriting refers to the process that a large financial service provider (bank,
insurer, investment house) uses to assess the eligibility of a customer to receive
their products (equity capital, insurance, mortgage or credit). The name derives
from the Lloyd's of London insurance market. Financial bankers, who would
accept some of the risk on a given venture (historically a sea voyage with
associated risks of shipwreck) in exchange for a premium, would literally write
their names under the risk information which was written on a Lloyd's slip created
for this purpose. W
Unearned revenue
An advance payment for services that still must be performed. Unearned revenue
represents a liability or obligation of the business receiving the payment for a
service not yet rendered.†
Unlimited liability
A characteristic of a sole proprietorship or partnership organization that allows
creditors to settle their debt by claiming the personal property of the owners of
the business when business assets are inadequate to settle the obligation.†
V - Victor
Valuation
In finance, valuation is the process of estimating the market value of a financial
asset or liability. Valuations can be done on assets (for example, investments in
marketable securities such as stocks, options, business enterprises, or intangible
assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a
company). Valuations are required in many contexts including investment
analysis, capital budgeting, merger and acquisition transactions, financial
reporting, taxable events to determine the proper tax liability, and in litigation.
Valuation of financial assets is done using one or more of these types of models:
1. Relative value models determine the value based on the market prices of
similar assets.
2. Absolute value models determine the value by estimating the expected future
earnings from owning the asset discounted to their present value.
3. Option pricing models are used for certain types of financial assets (e.g.,
warrants, put options, call options, employee stock options, investments with
embedded options such as a callable bond) and are a complex present value
model. The most common option pricing models are the Black-Scholes-Merton
models and lattice models.
Common terms for the value of an asset or liability are fair market value, fair
value, and intrinsic value. The meanings of these terms differ. The most common
term is fair market value defined as the cash price an item would sell for between
a willing buyer and willing seller assuming they both have knowledge of the
relevant facts and they have no compulsion to buy or sell. Fair value is used in
different contexts and has multiple meanings. Some people use the term to mean
the same thing as fair market value. Fair value is also a term used in accounting
and law. It is used in generally accepted accounting principles (GAAP) for
financial reporting and in law in shareholder rights legal statutes. In these cases,
fair value is defined in the accounting literature or the law, respectively. Fair
value may be different from fair market value in the accounting and legal
contexts. Intrinsic value is an asset's true value regardless of the market price.
When an analyst determines a stock's intrinsic value is greater than its market
price, the analyst issues a "buy" recommendation and vice versa. The
determination of intrinsic value may be subject to personal opinion and vary
among individual analysts.
Venture Capital
Venture capital (also known as VC or Venture) is a type of private equity capital
typically provided to early-stage, high-potential, growth companies in the interest
of generating a return through an eventual realization event such as an IPO or
trade sale of the company. Venture capital investments are generally made as
cash in exchange for shares in the invested company. Venture capital typically
comes from institutional investors and high net worth individuals and is pooled
together by dedicated investment firms.
Veto Rights
Negotiated rights that enable the holder to prevent a company from taking certain
actions or cause it to take certain actions.
W - Whiskey
Waterfall model
The waterfall model is a sequential development process, in which development
is seen as flowing steadily downwards (like a waterfall) through the phases of
requirements analysis, design, implementation, testing (validation), integration,
and maintenance.
The first formal description of the waterfall model is often cited to be an article
published in 1970 by Winston W. Royce (1929–1995), although Royce did not
use the term "waterfall" in this article. Ironically, Royce was presenting this model
as an example of a flawed, non-working model (Royce 1970). This is in fact the
way the term has generally been used in writing about software development - as
a way to criticize a commonly used software practice.
In Royce's original waterfall model, the following phases are followed in order:
1. Requirements specification
2. Design
3. Construction (AKA implementation or coding)
4. Integration
5. Testing and debugging (AKA Validation)
6. Installation
7. Maintenance
To follow the waterfall model, one proceeds from one phase to the next in a
purely sequential manner. For example, one first completes requirements
specification, which are set in stone. When the requirements are fully completed,
one proceeds to design. The software in question is designed and a blueprint is
drawn for implementers (coders) to follow — this design should be a plan for
implementing the requirements given. When the design is fully completed, an
implementation of that design is made by coders. Towards the later stages of this
Thus the waterfall model maintains that one should move to a phase only when
its preceding phase is completed and perfected. However, there are various
modified waterfall models (including Royce's final model) that may include slight
or major variations upon this process. W
Warrants
A derivative security that gives the holder the right to purchase securities (usually
common shares) from the issuer at a specific price within a certain time frame.
Working capital
Also known as net working capital is a financial metric which represents
operating liquidity available to a business. Along with fixed assets such as plant
and equipment, working capital is considered a part of operating capital. It is
calculated as current assets minus current liabilities. If current assets are less
than current liabilities, an entity has a working capital deficiency, also called a
working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if its
assets cannot readily be converted into cash. Positive working capital is required
to ensure that a firm is able to continue its operations and that it has sufficient
funds to satisfy both maturing short-term debt and upcoming operational
expenses. The management of working capital involves managing inventories,
accounts receivable and payable and cash. W
Worksheet
An expanded trial balance which consists of a list of all the accounts in the
ledger, used to work out the balance sheet and income statement in a manual
accounting system. The purpose of the worksheet is to enable the accountant to
prepare easily the adjusting entries as well as various financial statements.†
X - X-ray
XML
XML is an acronym for Extensible Markup Language and it is a markup language
much like HTML, but XML is used to carry data, where as HTML is used to
display data. When you use XML you define your own tags so that you can use
the data later to output or refer to. For instance if the XML is used in a letter it
would describe the who the letter is from, who it is to, the greeting, address lines,
phone numbers, and all other data points.
Y - Yankee
Yield
In finance, yield is a percentage that measures the cash returns to the owners of
a security. Normally it does not include the price variations, at the difference of
the total return. Yield applies to various stated rates of return on stocks (common
and preferred, and convertible), fixed income (bonds, notes, bills, strips, zero
coupon), and some other investment type insurance products (e.g. annuities).
Z - Zulu
Zero Coupon Bond
A Zero coupon bond (also called a discount bond or deep discount bond) is a
bond bought at a price lower than its face value, with the face value repaid at the
time of maturity.[1] It does not make periodic interest payments, or so-called
"coupons," hence the term zero-coupon bond. Investors earn return from the
compounded interest all paid at maturity plus the difference between the
discounted price of the bond and its par (or redemption) value. Examples of zero-
coupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-
coupon bonds,[1], and any type of coupon bond that has been stripped of its
coupons.
In contrast, an investor who has a regular bond receives income from coupon
payments, which are usually made semi-annually. The investor also receives the
principal or face value of the investment when the bond matures.
Some zero coupon bonds are inflation indexed, so the amount of money that will
be paid to the bond holder is calculated to have a set amount of purchasing
power rather than a set amount of money, but the majority of zero coupon bonds
pay a set amount of money known as the face value of the bond.
Zero coupon bonds may be long or short term investments. Long-term zero
coupon maturity dates typically start at ten to fifteen years. The bonds can be
held until maturity or sold on secondary bond markets. Short-term zero coupon
bonds generally have maturities of less than one year and are called bills. The
U.S. Treasury bill market is the most active and liquid debt market in the world.
W