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Accelerated Depreciation

A method that records greater depreciation than straight-line depreciation in the early years
and less depreciation than straight-line in the later years of an asset's holding period.
Accountants' Report
A formal document that communicates independent accountants' expression of assurance
(or lack thereof) on financial statements as a result of performing inquiry and analytical
The recording and reporting of financial transactions, including the origination of the
transactions, their recognition, processing and summarisation in the financial statements.
Accounting Blocks
The five basic types of accounts which are. Asset Accounts, Expense Accounts, Liability
Accounts, Net Worth Accounts and Revenue Accounts. These blocks arrange balance
sheet (statement of financial position) and income statement (statement of financial
performance) accounts into groups for transaction analysis.
Accounting Change
A change in an accounting principle, an accounting estimate or the reporting entity that
necessitates disclosure and explanation in published financial reports.
Accounting Equation
An equation that states that the value of a company's assets is balanced by the value of
claims on those assets by creditors (liabilities) and/or owners (net worth). This lays the
foundation for the balance sheet and the system of double-entry accounting.
Accounting Risk
The degree of uncertainty present in financial statements due to the existence of alternative
accounting assumptions, the use of less than rigorous accounting standards, and/or the
natural tendency of management to be optimistic in presenting business events.
Accounts Payable (or Trade Creditors)
Amounts owed to creditors for delivered goods or completed services but not yet paid for in
Accounts payable days (also called trade creditor days or supplier days)
The average number of days it takes a business to pay its trade suppliers. It is calculated as
Accounts Payable / Cost of Goods Sold x Number of Days in the Period.
Accounts Payable-Retentions
Amounts a business owes a supplier or subcontractor, which the company will not pay until
the work or product promised has been performed or delivered to its satisfaction. It is a
current liability (in most instances).
Accounts Receivable (or Trade Debtors)
Claims against debtors for uncollected amounts, generally from completed transactions of
sales or services rendered but not yet collected in cash.
Accounts receivable days (also called trade debtor days or debtor turnover days)
The average number of days it takes a business to collect its accounts receivable from its
clients. It is calculated as:
Net Accounts Receivable / Net Sales x Number of Days in the Period
Accounts Receivable-Retentions
Billings a business has made to a client, but which the client has agreed not to pay until the
company has performed further work or a contract has been completed, to the satisfaction
of the client. It is a current asset (in most instances).
Accrual Accounting
A method of recording accounting transactions in which revenue is recognised when earned
and expenses are recognised when incurred without regard to the timing of cash receipts
and expenditures.
Accrued Expenses (or Accrued Liabilities)
Expenses that represent the amount of a company's operating expenses that it has incurred
and recorded but not yet paid in cash.
Accumulated Depreciation
Total depreciation pertaining to an asset or group of assets from the time the assets were
placed into service until the date of the financial statement or tax return. This total is the
contra account to the related asset account.
A generic term which means purchase. In general usage, it could mean the purchase of

anything - a house, a car, or even a horse. In business terms, it is often used to refer to the
whole or partial purchase of one company by another.
Activity Ratios
Frequently referred to as turnover ratios. They measure how rapidly an asset or liability
"turns over" or is converted to something else. Since the conversion is frequently to cash,
activity or turnover ratios have significant implications for the cash position of a company.
Additional Paid-In Capital (or Share Premium)
Amounts paid for shares in excess of its par value or stated value. Also, other amounts paid
by shareholders and charged to equity accounts other than capital shares.
Affiliated Company
A company, or other organisation related through common ownership, common control of
management or owners, or through some other control mechanism, such as a long-term
Affirmative Covenants
A loan agreement will normally include a list of covenants, both affirmative and negative.
The affirmative covenants state what the borrower agrees to do. Generally, any violation of
a covenant will represent an event of default.
Allowance for Doubtful Accounts
An account that reduces trade accounts receivable and/or trade notes receivable to an
amount a company believes it will realistically be able to collect. It is a contra account.
Allowance Method
A method of accounting for bad debts in which the amount estimated to be uncollectible is
established at the end of an accounting period in an adjusting entry. Uncollectible accounts
are then written off by debiting Allowance for Doubtful Accounts.
A gradual and periodic reduction, such as the periodic writedown of the cost of an intangible
asset or periodic payment of debt.
Annual Report
A report to the shareholders of a company which includes the company's annual audited
balance sheet and related statements of earnings, shareholders' or owners' equity and cash
flows, as well as other financial and business information.
Appraisal (or Valuation Report)
A written report by an appraiser (or valuer) containing an opinion as to the value of a
property and the reasoning leading to that opinion.
Property or an economic resource owned by a business. Assets are presented on the
balance sheet in the order of liquidity. The usual major groupings are: current assets, noncurrent assets and intangibles.
Asset Conversion Cycle
The ongoing process through which a company's assets are used up in generating
revenues and cash flow through the business. The type and structure of assets required to
run a business varies greatly from one industrial sector to the next. Assets are everything
that goes into the production process, beginning with people and including plant and
equipment, materials, office space, supplies, accounts receivable from sales, and cash from
receivables collected.
Audit opinion
This is a formal opinion, or disclaimer, issued by either an internal auditor or an
independent external auditor as a result of an internal or external audit or evaluation
performed on a legal entity (the "audited"), or a subdivision of it.
Audit Risk
The risk that an auditor may unknowingly fail to modify his or her opinion appropriately on
financial statements that are materially misstated.
Audit scope
A definition of the range of the activities and the period (months or years) of records that are
included in to an audit examination.
Audited financial statements
"Audited financial statement" means a business's financial statements which have been
prepared in accordance with generally accepted accounting principles and that have been
audited by an independent certified accountant in accordance with generally accepted
auditing standards. They include notes to the financial statement that state whether or not

the audited business is in compliance with accounting requirements.

Auditing Standards
Guidelines to which an auditor adheres. Auditing standards encompass the auditor's
professional qualities, as well as his or her judgment in performing an audit and in preparing
the auditors' report.
Auditors' Report
A written communication issued by an independent accountant describing the character of
his/her work and the degree of responsibility taken. An auditors' report includes a statement
that the audit was conducted in accordance with specified standards, which typically require
that the auditor plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, as well as a statement that the
auditor believes the audit provides a reasonable basis for his/her opinion.
Average daily sales
The average amount of sales a business achieves on a daily basis.
Bad Debt
All or portion of an account, loan or note receivable considered to be uncollectible.
Bad Debts Written Off
A non-cash expense that reflects the possibility that some part of recorded sales will not be
collected in cash. They are added to a company's other recorded expenses, thereby
decreasing its calculated earnings. These expenses are estimates of uncollectible
receivables made by company management and do not reflect further obligations of the
company or cash outlays.
Balance Sheet (or Statement of Financial Position)
A basic financial statement, usually accompanied by appropriate disclosures that describe
the basis of accounting used in its preparation and presentation at a specified date. It
includes the entity's assets, liabilities and the equity of its owners.
Balloon Payment
A large extra payment that may be charged at the end of a loan or lease.
Bank loan
A loan made by a bank, to be repaid with interest, on or before a given date.
Bank Overdraft
A line item on a firm's balance sheet that indicates that a company has written cheques in
excess of the amount of cash it has on deposit. It is usually unclear whether such cheques
have been presented for collection and honored by the bank, even though there were
insufficient funds in the company's account. A bank overdraft is a current liability.
A legal process, governed by federal statute, whereby the debts of an insolvent person are
liquidated after being satisfied to the greatest extent possible by the debtor's assets. During
bankruptcy, the debtor's assets are held and managed by a court appointed trustee.
Basis Points
1/100th of 1%, e.g. .25% equals 25 basis points.
Billings in Excess of Costs and Profits
An account on a firm's balance sheet that indicates that a company has billed a client for
work still in progress for an amount that is more than the value of that portion of the work
completed to date, i.e. more than the company's costs and profits on that portion. It is
usually a current liability.
Board of Directors
A group of individuals responsible for overseeing the affairs of an entity, including the
election of its officers. The board of a company that issues shares is elected by
Book Overdraft
On occasion, companies will prepare cheques to pay suppliers but not immediately mail
those cheques. In such cases, the bank overdraft is termed a book overdraft since it is only
present on the company's books.
Book Value
The amount, net of contra account balances, that an asset or liability shows on the balance
sheet of a business. Also known as carrying value.
An entity (or a person) that receives a loan, typically from a financial institution
Break-even Point

The point in operations where total sales equal total fixed and variable costs; the point of
zero profit or loss.
Bridge Loan
A type of financing that provides the borrower with financing until a specific event occurs to
repay the loan at a clearly anticipated point in time.
A commercial enterprise or establishment. An organization that engages in commercial
dealings and has a paying clientele.
Business Combination
The joining of two or more business entities.
Cash or goods invested in a business.
Capital Expenditures
Expenditures for a plant asset that benefit more than one accounting period. Examples
include additions, betterments and extraordinary repairs. Capital expenditures create or
acquire capital assets, or they increase either the value or the life of such an asset and are
debited either to the plant asset account or to its accumulated depreciation account,
depending on the type of expenditure.
Capital Gain
A portion of the total gain recognised on the sale or exchange of a non-inventory asset
which is not taxed as ordinary income.
Capital goods
Assets, usually of a fixed or long-term nature, that are acquired for the purpose of
facilitating and/or sustaining business growth and income generation.
Capital investment cycle
The different phases of investment ownership, starting with the acquisition of an asset, its
management for income generating purposes, its diminishing returns, ending by its sale or
Capital Lease
A form of long-term debt usually associated with specific pieces of machinery or equipment
acquired by a company. The current capital lease obligation is the amount of the total
capital lease (or debt) scheduled to be paid down in the next operating period. Capital
leases are the leasing of equipment or assets where the economic responsibility has, in
reality, been transferred to the lessee.
Capital Markets
The marketplace in which corporate equity and longer-term debt securities (those maturing
in more than one year) are issued and traded.
Capital Shares (or Issued Capital, or Shareholders' Capital)
Ownership shares of a company authorised by its company constitution. The money value
assigned to a company's issued shares. The balance sheet account with the aggregate
amount of the par value (stated value) of all shares issued by a company.
Capitalised Costs
Expenditures identified with goods or services acquired and measured by the amount of
cash paid or the market value of other property, capital stock or services surrendered.
Expenditures that are written off during two or more accounting periods.
Capitalised Interest
The amount of interest expense for the period that a company records on its balance sheet
rather than on its income statement. It is interest cost incurred during the time necessary to
bring an asset to the condition and location for its intended use and included as part of the
historical cost of acquiring the asset.
Carrying Value
The amount, net of contra account balances, that an asset or liability shows on the balance
sheet of a company. Also known as book value.
Cash Accounting
A method for recording accounting transactions only when cash actually changes hands,
not when the transaction occurs. Consequently, a record of cash transactions may differ
considerably from a series of transactions recorded on an accrual basis.
Cash basis
An accounting method that recognizes revenues and expenses at the time in which cash
payments are actually received or made by a business.

Cash Equivalents
Short-term (generally less than three months), highly liquid investments that are convertible
to known amounts of cash.
Cash Flow
The amount of cash generated or consumed by business activity over a specified
accounting period.
Cash Flow Analysis
The evaluation of sources and uses of cash and how it flows through a company over a
specified accounting period or over several accounting periods. The purpose is to
determine how well a company's cash flow is managed and to ascertain if an enterprise is
generating sufficient cash flow to support debt service, purchases, investments, etc.
Cash Flow Statement
A cash flow statement may be one of the basic financial statements required as part of a
complete set of financial statements prepared in conformity with International Financial
Reporting Standards. Or it may be one structured under a number of other templates. One
version that is commonly used in commercial lending in many parts of the world is the
"Uniform Credit Analysis" or UCA version. Most such templates categorise net cash
provided or used during a period as operating, investing and financing activities, and this
reconciles beginning and ending cash and cash equivalent balances.
Certificate of Title
A document provided by a government titles office (or, in some countries, by a title company
or an attorney) stating that the title of real estate is legally held by the current owner.
The determination as to where an account should be properly placed on a spread sheet
during the process of statement spreading.
Clear Title
A title which has no charges on a specific piece of property.
Closely-held Company
A company that is owned by a small group of investors or a family.
Combined Financial Statement
A financial statement comprising the accounts of two or more entities.
Commercial paper
A form of business financing usually involving an unsecured promissory note, with a fixed
maturity which does not exceed 270 days.
Commitment Letter
A letter, used in some banks in some countries, from a lender to a borrower in which the
lender states the terms and conditions under which it commits to lending a specified amount
of money for a specified period of time. The borrower generally has a definite time period to
accept the commitment. The borrower may do so, in most instances, by acknowledging and
signing the commitment letter.
Common Size Balance Sheet
A report in which total assets are 100% and each balance sheet account is stated in its
relationship to that total. This report allows for analysis of proportionate changes from year
to year as well as the observation of trends.
Common Size Income Statement
A report in which total sales or revenues are 100% and each income statement account is
stated in its relationship to that total (also referred to as margins). This report allows for
analysis of proportionate changes from year to year and the observation of trends.
Common Shares
Capital shares having no preferences generally in terms of dividends, voting rights or
distributions. Common shares usually carries some par value, i.e. the base price per share
at issue date. When an owner pays more than par value for a share at time of issue, the
difference ends up being recorded as paid in capital.
Comparative Financial Statement
A financial statement presentation in which the current amounts and the corresponding
amounts for previous periods are shown and compared.
Comparative Market Analysis
An estimate of the value of a property based on an analysis of recent sales of similar
Comprehensive Income

The change in equity of a business enterprise during a period from transactions and other
events and circumstances from sources not shown in the income statement. The period
includes all changes in equity except those resulting from investments by owners and
distributions to owners.
Conditions Precedent
Conditions that must be met before a lender will advance funds.
Confidence Interval
A range of values around the mean where the "true" (for the entire population) mean can be
expected to be located (with a given level of certainty).
Conservatism Principle
A principle that suggests that financial data should be recorded to cast a company's
operation in a less rather than more favourable light when there is a choice. The
conservatism principle also suggests that a company should reduce the value of its assets if
market value falls below the cost of assets (adjusted for any usage).
A procedure in which one business (the consignee) accepts goods from another business
(the consignor) for sale on a commission basis. Consigned goods should be counted in the
inventory of the consignor.
An accounting convention which stipulates that, except as otherwise noted in the financial
statement, the same accounting policies and procedures have been followed from period to
period by an organisation in the preparation and presentation of its financial statements.
Consolidated Financial Statements
The financial statements of a chief entity and one or more of its subsidiaries as one
economic unit.
Contingent Liability
potential liability arising from a past event or commitment.
Continuing Operations
A portion of a business entity expected to remain active.
Contra Account
An account considered to be an offset to another account. Generally established to reduce
the other account to amounts that can be realised or collected.
Convertible Shares
Shares that may be exchanged for other securities of the issuer.
A form of business organisation. Corporations typically are characterised by the issuance of
freely transferable shares, perpetual life, centralised management and limitation of owners'
liability to the amount they invest in the business.
Cost Accounting
Procedures used for classifying, recording and allocating current or predicted costs that
relate to a certain product or production process.
Cost of Goods Sold (COGS)
An account on an income statement that represents the cost of producing the product sold.
Such costs will include the following general elements. goods and materials, labour,
depreciation and amortisation expense associated with production and overhead
associated with production.
Cost Principle
A principle wherein assets are valued at historical cost, i.e. at the dollar amount paid at the
time the transaction was recorded. However, the recorded value may change over time.
The amount of the asset shown on the company's financial statement may change because
it uses the asset and thereby reduces its value, but the starting cost basis does not change.
Cost Recovery Method
A method of revenue recognition which recognises profits after costs are completely
recovered. Used only when the total amount of collections is highly uncertain.
Costs and Profits in Excess of Billings
An account on a firm's balance sheet that means that a company has billed a client for work
still in progress in an amount that is less than the value of that portion of the work
completed to date, i.e. less than the company's costs and profits on that portion. It is a
current asset.

An entry on the right side of a double-entry bookkeeping system that represents the
reduction of an asset or expense or the addition to a liability or revenue.
Credit Agreement
An arrangement in which one party borrows or takes possession in the present by
promising to pay in the future.
Credit History
A record of how a person or business has borrowed and repaid debts. A credit history helps
to determine if a borrower has a history of repaying debts in a timely manner.
Credit Report
A report of a person's credit history (including legal history on bankruptcy) prepared by a
credit reporting agency and used by a lender in determining a loan applicant's
Credit Risk (or Default Risk)
The risk that a loan will not perform as agreed, or that it will be charged off as a loss. Higher
relative credit risk must be compensated with a higher yield.
A party that loans money or other assets to another party.
Credit- worthiness
A creditor's measure of a borrower's past and future ability and willingness to repay debts.
Current Asset
An asset that one can reasonably expect to convert into cash, sell or consume in operations
within a single operating cycle, or within a year if more than one cycle is completed each
Current Liability
A liability or obligation that will normally be liquidated by cash payment or the creation of
other current liabilities within one year or the next operating cycle.
Current Maturities - Long-term Debt (or Current Portion - Long-term Debt)
The amount of long-term debt that a company is scheduled to pay down in the next
operating period. It is reflected as a current liability.
An entry on the left side of a double-entry bookkeeping system that represents the addition
of an asset or expense or the reduction to a liability or revenue.
A general name for money, notes, bonds, goods or services which represent amounts
Debt factoring
The sale, usually at a discount, of a business's receivables to a third party. The third party
then processes and collects the invoices. Factoring is a method by which the selling entity
generates blocks of cash inflow more rapidly than it otherwise would.
Debt Service
The periodic payments made on loans or other debts.
A party owing money or other assets to a creditor.
A failure to meet any financial obligation. Default triggers a creditor's rights and remedies
identified in the loan agreement and under the law.
Deferred Charge
The cost incurred for subsequent periods which is reflected as an asset in the current
Deferred Income
Income received but not earned until all related events have occurred. Deferred income is
reflected as a liability.
Deferred Income Taxes
Assets or liabilities that arise from timing or measurement differences between tax and
accounting principles.
Deferred Tax Assets
Taxes already paid and scheduled to be used at some future point. Deferred tax assets may
be either a current or a long-term asset.
Deferred Tax Liabilities
Taxes that will fall due and payable at some future point. For the present, they have been

deferred and reflect future tax consequences of current operations. May be both a current
and/or a long-term liability.
The failure to make a payment when it is due.
Demand Deposit
A deposit that may be withdrawn at any time without prior written notice to the depository
institution. A chequing account is the most common form of demand deposit.
A method of computing a deduction to account for a reduction in value of extractable natural
Advance payments for benefits that will extend beyond the next operating period. For
example, a company may pay a license fee in advance to permit the use of a product name
over a specific number of units or period of time.
The reduction in the value of a fixed or capital asset from use or obsolescence. The decline
is recognised by a periodic allocation of the original cost of the asset as a current expense.
Discontinued Operations
The portion of a business that is planned to be or is discontinued.
In business or accounting terms, the sale or disposal of assets, shares or property. In more
general terms, the action or process of throwing away or getting rid of something.
The termination of a company.
Distance to Default
The likelihood that the value of a firm will decline from its current value to below its liabilities
(technical insolvency).
Distribution Expense
The expense of advertising, selling, and delivering goods and services.
Payments by a business entity to its owners of items such as cash assets, shares or
The distribution of earnings to owners of a company in cash, other assets of the company
or the company's capital shares.
Double-entry Bookkeeping
A method of recording financial transactions in which each transaction is entered in two or
more accounts and involves two-way, self-balancing posting. Total debits must equal total
Down Payment
The difference between the purchase price and that portion of the purchase price being
Earnings before interest, taxes, depreciation and amortization. This figure is commonly
used as an indicator of a business's profitability.
Earnings Per Share (EPS)
A measure of company performance calculated by dividing the net earnings of a company
by the average number of shares outstanding during a period.
Economic Growth
An increase in a nation's capacity to produce goods and services.
Effective Tax Rate
Total income taxes expressed as a percentage of net income before taxes.
Engineering Report
A report generated by an engineer describing the current physical condition of the property
and its major building systems.
The fixed assets of a business "except for land and buildings " used in the operations of that
The residual interest in the assets of an entity that remains after deducting its liabilities; the

amount of an entity's total assets less total liabilities; or the third section of a balance sheet,
the other two being assets and liabilities.
Equity Account
An account in the equity section of the balance sheet which includes capital shares (or
issued capital or shareholders' capital), additional paid in capital (or share premium) and
retained earnings.
Equity in Income
An account that represents the amount of a subsidiary's, or associate company's, profits
that "belong" to a company by virtue of its ownership in the subsidiary or associate. It is a
revenue account and considered as proceeds from the investment in (ownership of) another
company that belongs to the investing company. The proceeds may or may not be in the
form of cash.
Equity Method of Accounting
An investor's cost basis is adjusted up or down (in proportion to the percentage of share
ownership) as the investee's retained earnings fluctuate. This method of accounting is used
for long-term investments in equity securities of affiliate where the holder can exert
significant influence; ownership of 20% or greater is arbitrarily presumed to have significant
influence over the investee.
Equity Securities
Capital shares and other securities that represent ownership shares, or the legal rights to
purchase or acquire capital shares.
Money or property put into the custody of a third party for delivery to a grantee, only after
fulfillment of specified conditions.
Estimated Tax
The amount of tax liability a taxpayer may expect to pay for the current tax period. Usually
paid through quarterly installments.
Events of Default
A detailed specification of events that, should they occur, constitute default.
Except for opinion
An opinion expressed by the auditor of a set of financial statements in which the general
conclusion is that the financial statements are fair and true except for some unusual
transactions, which are usually indicated.
Expected Default Frequency
The probability or likelihood that a company will default on a loan within a given timeframe,
typically one year.
Expected Loss
A measurement of the average loss a lender expects to incur over a specific time horizon.
A monetary figure reflecting goods or services consumed in operating a business, such as:
cost of goods sold, operating expenses, miscellaneous expenses, income taxes and
extraordinary expense.
Exposure at Default
The amount of a credit facility that is outstanding at the time a borrower defaults.
External Funding
Financing that a business acquires from third parties "such as banks and new equity
providers "in contrast to internal financing that comes from retention of business profits or
liquidation of assets.
Extraordinary Items
Events and transactions distinguished by their unusual nature and by the infrequency of
their occurrence. Extraordinary items are reported separately, less applicable income taxes,
in the entity's statement of income or operations.
Selling a receivable at a discounted value to a third party for cash.
Fair Market Value
The price at which property would change hands between a buyer and a seller without any
compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.
A person who is responsible for the administration of property owned by others. Company
management is a fiduciary with respect to company assets which are beneficially owned by

the shareholders and creditors. Similarly, a trustee is the fiduciary of a trust and partners
owe fiduciary responsibility to each other and to their creditors.
Finance Lease
A financing device whereby a user can acquire use of an asset for most of its useful life.
The lessee is responsible for maintenance, taxes and insurance. Payments plus the
residual and tax advantages over the life of the lease are sufficient to enable the lessor to
recover the cost of the equipment plus a return on its investment.
Financial assets
Assets that derive their value from a contractual claim, as for example a bank deposit,
bonds and stocks.
Financial Institution
An institution that uses its funds chiefly to purchase financial assets (loans, securities) as
opposed to tangible property. Organisations engaged in financial activity include
commercial banks, investment banks, building societies, credit co-operatives, securities
brokers and dealers, credit unions, investment companies, and insurance companies.
Financial position
The status of the assets, liabilities and owner's equity of a business, as represented in its
financial statements. It is also known as financial condition.
Financial results
The amount of profit or loss that a business makes during a given period of time (e.g. 3, 6,
12 months). Also a report showing this amount.
Financial risk
Financial risk is a general term used to describe several kinds of risk related to financing,
including financial transactions and company loans with risk of default.
Financial Statement Analysis
The process of reviewing and analysing a company's financial statements to assess and
evaluate its financial condition and operations. This is done to evaluate risk, or the
probability that the company will be able to repay interest and principal on a loan.
Financial Statements (or Financial Accounts)
A presentation of financial data including balance sheets, income statements (or profit and
loss accounts) and statements of cash flow, or any supporting statement that is intended to
communicate an entity's financial position at a point in time and its results of operations for
a period then ended.
Financing Cost
The cost of using money loaned and money contributed to support a company's assets.
The cost of money contributed customarily takes the form of dividends. Partnership and
proprietorship withdrawals could also be in this category, although they may be considered
compensation and therefore included in the cash operating expenses area of the cash flow
Financing Requirement
The cash needed to run a company apart from that generated internally.
First In, First Out (FIFO)
An accounting method of valuing inventory under which the costs of the first goods acquired
are the first costs charged to expense.
Fiscal Year
A period of 12 consecutive months chosen by an entity as its accounting period which may
or may not be a calendar year.
Fixed Asset
Any tangible asset with a life of more than one year used in an entity's operations.
Floor Plan
A form of financing where suppliers provide inventory in accordance with special terms. For
example, a retailer may obtain some of its inventory from a supplier that is willing to extend
90-day financing on the condition that the retailer sign a formal loan agreement and be
obligated to pay interest on the amount of the loan.
Footnotes (or Notes to the Financial Statements)
Additional information provided at the end of a financial statement which clarifies the
manner in which the statements are put together and gives more details about the
company's activities thus making them more valuable to the statement reader.
Prospective financial statements that present, to the best of the responsible party's

knowledge and belief, an entity's expected financial position, results of operations and
changes in financial position. A financial forecast is based on the responsible party's
assumptions reflecting conditions it expects to exist and the course of action it expects to
A seizure of security by a creditor when default under a loan agreement occurs.
Foreign Currency Translation
The restating foreign currency in equivalent local currency; gains or losses are carried in
shareholders' equity.
Fund Accounting
A method of accounting and presentation whereby assets and liabilities are grouped
according to the purpose for which they are to be used. Generally used by government and
not-for-profit entities.
Fundamental Risk (or Cash) Drivers
A company's fundamental profitability indicators, represented by the gross margin and
operating expense percentage.
The excess of revenues over costs relating to a specific transaction.
Gain on Sale (or Profit on Sale)
A gain that occurs when a company sells an asset for more than the book value recorded
for that asset on its financial statements. The gain is recorded on the company's income
statement and consequently affects its profits for the year. Whether or not there is a cash
inflow to the company at the time of the sale depends on the payment terms between the
buyer and seller.
Gearing (or Leverage)
The relationship between a company's assets and the relative funding for those assets that
is provided by the owners of the company.
General Partnership
A form of partnership. The term "general" applies to the personal liability of each partner. A
general partnership means that all partners are individually liable for all debts of the
partnership without limitation (no limited partners).
Going Concern
An assumption that a business can remain in operation beyond the current operating cycle.
A premium paid in the acquisition of an entity over the fair value of its identifiable tangible
and intangible assets less liabilities assumed.
Goods & Services Tax (GST)
A broad based consumption tax charged in some countries. It applies the % rate set by the
government to most day to day goods and services purchased and sold. In some countries
it has replaced a range of indirect taxes, including wholesale and sales tax.
Gross Domestic Product (GDP)
The total value of goods and services produced and property located in a country during a
specific period.
Gross margin
A ratio that reflects the percent of sales left over after deducting the amount a business has
spent to make or acquire the products being sold. It is calculated as Gross Profit / Net
Sales.Gross profit
The actual dollar amount remaining from sales after deducting the cost of goods sold. The
cost of goods refers to the amount spent on making or acquiring products being sold by a
A legal arrangement involving a promise by one person to perform the obligations of a
second person to a third person, in the event the second person fails to perform.
Historical Cost
The original cost of an asset.
Income Statement (or Statement of Financial Performance, also commonly referred
to as Profit and Loss Account)
A statement showing revenues earned by the business; the expenses incurred in earning
the revenues and the resulting net income or loss during a stated period of time (the
statement period).

Income Tax Basis

For tax purposes, the concept of basis determines the proper amount of gain or loss to
report when an asset is sold. Basis is generally the cost paid for an asset plus the amounts
paid to improve the asset less deductions taken against the asset, such as depreciation and
Income Tax Refund Receivable
The amount of previously paid taxes a company is due because it reported an operating
Income Taxes Payable
The amount of taxes owed but not yet paid; a current liability.
A rise, over time, in the level of prices.
Initial Public Offering (IPO)
An event that occurs when a private company goes public for the first time.
A negative financial situation that occurs when an entity's liabilities exceed its assets.
Installment Method
A tax accounting method of reporting the gain on the sale of an asset exchanged for a
receivable. In general, the gain is reported as the note is paid off.
Intangible Assets
Assets or costs capitalised which have no tangible existence, yet have value to the
Interest Rate
The sum charged for borrowing money, expressed as a percentage.
Interim Financial Statements
Financial statements that report the operations of an entity for less than one year.
International Financial Reporting Standards (IFRS; also referred to as International
Accounting Standards, or IAS)
Authoritative statements of financial accounting standards, by the International Accounting
Standards Board (IASB) which are part of International Financial Reporting Standards
(IFRS) globally. For countries recognising IFRS as an acceptable set of accounting
standards, compliance should normally provide for the fair presentation of financial
statement information.
International Accounting Standards Board (IASB)
An independent authority that establishes IFRS globally.
Inventory (or Stock)
Tangible property held for sale, or materials used in a production process to make a
product. Customarily recorded on the financial statements at the lower of its cost or market
Inventory Conversion
The time it takes to acquire, process and sell inventory.
Inventory days (also called inventory days on hand, inventory turnover days, or
stock days)
A measure of how long it takes a business to sell its inventory or products. It is calculated
as Total Inventory / Total Cost of Goods Sold x Number of Days in the Period.
Joint Venture
A working relationship that occurs when two or more parties gather capital to provide a
product or service. A joint venture is often carried out as a partnership.
Junk Bonds
Debt securities issued by companies with higher than normal credit risk. Considered "noninvestment grade" bonds, these securities ordinarily yield a higher rate of interest to
compensate for the additional risk.
Key Person Insurance
Company-owned life insurance contract typically on the lives of principal officers that
normally provides for guaranteed death benefits to the company and the accumulation of a
cash surrender value.
Last In, First Out (LIFO)
An accounting method of valuing inventory under which the costs of the last goods acquired
are the first costs charged to expense.

A conveyance of land, buildings, equipment or other assets from one person (lessor) to
another (lessee) for a specific period of time for monetary or other consideration, usually in
the form of rent.
Property interest a lessee owns in leased property.
Any book of accounts containing the summaries of debit and credit entries.
The financial institution which loans money to others.
Lender Covenants
A set of agreements or stipulations, expressed or implied, in contracts, deeds, leases,
mortgages, etc., that restrict a customer's ability to take actions without lender approval.
A person or entity that has the right to use property under the terms of a lease.
The owner of property, the temporary use of which is transferred to another (lessee) under
the terms of a lease.
Letter of Credit (LC)
An conditional bank commitment issued on behalf of a customer to pay a third party in
accordance with certain terms and conditions. The two primary types are commercial letters
of credit and standby letters of credit.
Leveraged Buy Out (LBO)
The acquisition of a controlling interest in a company in a transaction financed by the
issuance of debt instruments by the acquired entity.
Leveraged Lease
A transaction under which the lessor borrows funds to acquire property which is leased to a
third party. The property and lease rentals are security for the lessor's indebtedness.
The claim of a creditor against the assets owned by another party, or obligations to give
assets or provide services to another party. Liabilities are presented on the balance sheet in
order of maturity. The usual major groupings are current and non-current liabilities.
An acronym for the London Interbank Offered Rate. It is the rate of interest used as a
benchmark or reference rate for short-term interest rates.
Lien (or Charge)
The right to take and hold or sell the property of a debtor as a security or payment for a
LIFO Reserve
The difference between the market value of inventory and that inventory valued under LIFO.
Limited Partnership
A type of partnership. The term "limited" applies to the personal liability of each partner. A
limited partnership is one in which one or more of the partners, but not all, has a specific
limitation on the amount of partnership debt for which that partner will be personally liable.
The amount is set forth in the partnership agreement. Limited partners are generally not
permitted to participate actively in the management of the business without losing their
limited liability.
Line of credit (also called a credit facility or, in some venues, an overdraft)
An arrangement between a lender, usually a bank, and customer, which allows the
customer to borrow up to a certain pre-set amount. If it is a revolving line of credit, the
borrower can pay down amounts outstanding and re-borrow without negotiating a new
Liquid Company
A company that generates enough cash from core, internal business operations to meet its
ongoing obligations.
Dissolving a business entity by distributing its assets to the appropriate parties and settling
its debts.
Definition 1. The extent to which a company has sufficient cash from internal operations to
pay interest and amortise its maturing debt. A company is considered liquid if it is able to

pay for all its typical costs and expenses - including interest expense and maturing principal
payments - from cash generated through the normal course of business. Definition 2. A
relative term reflecting a company's access to capital; i.e., a company with high liquidity by
this definition would have excellent access to a variety of forms of capital, whereas a
company with low liquidity would have little access to additional capital.
Liquidity Ratios
Ratios that indicate the likely ability of a company to meet all of its liabilities coming due (the
current liabilities) by conversion of the company's current assets to cash.
An amount of money given by one party (a lender) to another party (a borrower), usually for
a prescribed use over a predetermined period of time. It typically accrues interest (charged
the borrower by the lender) that serves as the rent paid by the borrower for the privilege of
using the money for the specified time period.
Loan Agreement (or Letter of Offer)
A document that contains and references every element and point of agreement and
understanding between and among all parties to the loan transaction.
Loan from Shareholder
The amount of money a company owes one of its owners, generally because that owner
has loaned money to the company. It can either be a current or long-term liability,
depending on the agreement between the company and the shareholder.
Loan Pricing
The process of setting the interest rate to be charged on loans. A broader view of loan
pricing recognises that most borrowers have other account relationships with their lenders.
In the broadest sense, loan pricing means setting an interest rate consistent with the
customer's total bank relationship and competitive conditions.
Loan to Shareholder
The amount of money a shareholder of a company owes that company. It can either be a
current or long-term asset, depending on the agreement between the company and the
Loan-to-value (LTV) ratio
The loan-to-value (LTV) ratio reflects the amount of a loan compared to the value of an
asset purchased by the proceeds of that loan. It is calculated as
Loan Amount / Asset Value = Loan-to-Value Ratio (expressed as a percentage).
Long-term Debt
Debt with a maturity of more than one year from the current date.
Long-term Liability (or Non-current Liability)
A liability that will be liquidated or paid over a period extending beyond the next operating
Loss Given Default
A measurement of the amount that will likely be lost in the event of borrower default.
Loss on Sale
A loss that occurs when a company sells an asset for less than the book value recorded for
that asset on its financial statements. The loss is recorded on the company's income
statement and consequently affects its profits for the year. Whether or not there is a cash
inflow to the company at the time of the sale depends on the payment terms between the
buyer and seller.
Lower of Cost or Market
Valuing assets for financial reporting purposes. Ordinarily, "cost" is the purchase price of the
asset and "market" refers to its current replacement cost.
The preservation of property or equipment. The process of maintaining or preserving those
A business that adds value to tangible products or natural resources before selling them.
Manufacturing includes creating a basic product from natural resources, such as producing
plastics from three primary materials (petroleum, natural gas and coal). It also includes
creating a component part for a finished product, such as a plastic case for a laptop
computer, or assembling a finished product, such as a laptop computer from electronic
components and the plastic case.
Marketable Securities

Shares and other negotiable instruments which can be easily bought and sold on either
listed exchanges or over-the-counter markets.
Matching Principle
A fundamental concept of basic accounting. In any one given accounting period, the
revenue being reported should be matched with the expenses it took to generate that
revenue in the same time period, or over the periods in which benefits from that expenditure
will be received.
The termination period of a loan or the date it becomes due.
A business combination that occurs when one entity directly acquires the assets and
liabilities of one or more entities and no new company or entity is created.
Minority Interest
When an acquiring company does not purchase all the shares of the company it is
acquiring, the remaining shares held outside its control represent a minority interest.
Minority interest is a liability account usually shown on the balance sheet after all other
liabilities and just before the owners' equity or net worth block of accounts. Liquidation of
that liability will occur only if the chief entity acquires all the remaining shares of the
Of, or relating to currency or money.
The exclusive ownership or control of supply or trade of a certain service, product or
commodity in a marketplace.
A legal instrument evidencing a security interest in assets, usually real estate. Mortgages
serve as security for loans.
Negative Covenants
A loan agreement will usually include a list of covenants, both affirmative and negative. The
negative covenants state what the borrower agrees not to do. Generally, any violation of a
covenant will represent an event of default.
Negative financing gap
The case or scenario in which a bank's interest sensitive liabilities exceed its interest
sensitive assets. The size of a bank's gap indicates to what extent interest rate changes will
have an impact on a bank's net interest income.
Net Capital Spending
The difference between the amount of cash spent on fixed assets and the amount of cash
received from the sale or disposition of fixed assets in any one year.
Net Income
The excess or deficit of total revenues and gains compared with total expenses and losses
for an accounting period.
Net Sales
Sales at gross invoice amounts less any adjustments for returns, allowances or discounts
Net Worth
Similar to equity, the excess of assets over liabilities. Represents the equity of the owners in
the assets of the business.
Non-Cash Expense
An expense recorded by a company that is not matched by a cash outflow during the
current accounting period.
Non-Current Asset
An asset that will normally not be converted into cash within one year; includes fixed or
capital assets.
Non-Current Liability (or Long-term Liability)
A liability or obligation that matures beyond one year and normally will not be liquidated by
cash payment within one year.
Normal Distribution
A probability distribution shaped like a bell, often found in statistical samples.
Notes Payable-Trade
An explicit promise to pay for a purchase (including interest charges). Notes payable-trade

is usually a current liability.

Notes Receivable-Trade
An explicit promise to pay for something purchased. The buyer generally incurs interest on
the amount owed until the note is fully paid.
Not-for-Profit Organisation (or Tax-exempt Organisation)
An organisation that exists for educational or charitable purposes, and from which its
shareholders or trustees do not benefit financially.
Operating cash flow
The amount of cash a business generates from its sales activities. It is calculated by
adjusting net income for items such as depreciation, changes to accounts receivable,
accounts payable and changes in inventory.
Operating Costs
Operating costs are the expenses which are related to the operation of a business. They
are the cost of resources used by an entity to continue its existence.
Operating Cycle
The period of time between the acquisition of goods and services in the manufacturing
process and the final cash realisation from sales and subsequent collections.
Operating expenses percentage
The portion of a company's sales consumed by expenses related to selling, general, and
administrative expenses. It is calculated as Total Selling, General and Administrative
Expenses / Net Sales.
Operating Leases
Essentially rental payments in situations wherein a company gets the use of various capital
assets (e.g. computers, storage space, warehouses) without claiming ownership and
without showing the assets or obligations on its financial statements. The assets are never
intended to be owned by the company; it just wants access to their use for a period of time.
They frequently represent non-cancelable obligations for a number of years in the future,
yet such obligations do not show up on the balance sheet (in contrast to capital leases).
Instead, operating lease obligations are usually summarised in the notes.
The right to buy (call option) or sell (put option) a fixed amount of a security at a specific
price during a specific period of time. If the holder does not exercise the option, it expires
and the amount paid for the option (the premium) is forfeited.
Ordinary Shares
Shares having no preferences generally in terms of dividends, voting rights, or distributions.
Ordinary voting shares
Ordinary shares are any shares that are not preferred shares and do not have any
predetermined dividend amounts. Voting shares give the shareholder the right to vote on
matters of corporate policy making, as well as on who will be the members of the board of a
Generally speaking, this means that a reported amount (e.g. prepaid expenses) of an item
is more than its true or correct amount.
Owners' Equity (or Shareholders' Equity)
The excess of assets over liabilities. Represents the claims of owners against the assets
Paid in Capital
The portion of the shareholders' equity which was paid in by the shareholders, as opposed
to capital arising from profitable operations.
Par Value
The stated amount per share set forth in the company constitution of a company.
Parent Company (or Chief Entity)
A company that controls subsidiary companies.
A relationship between two or more persons and/or entities based on a written, oral or
implied agreement whereby they agree to carry on a trade or business for profit and share
the resulting profits. Unlike a company's shareholders, the partnership's general partners
are liable for the debts of the partnership.
Partnership Agreement
An agreement made between partners that sets forth the terms of their partnership, such as

the amount of cash or other assets each is to invest, the amount of time each is to devote to
running the business, and how the net income or loss will be divided.
Money required to be paid, or due.
Peer Group Comparison
A comparison of one company's financial position with the composite financial position of
other firms in the same line of business using common size financial statements.
Permanent Working Capital Financing
Frequently referred to as asset-based lending. Near-term repayment of principal is not
anticipated. Like an owner, the lender or debt investor looks to a required rate of return on
permanently invested funds.
Perpetual Inventory
A system that requires a continuous record of all receipts and withdrawals of each item of
Personal Financial Statements
Financial statements prepared for an individual or family to show financial status.
Personal Property
Movable property that is not affixed to the land (real property). Personal property includes
tangible items such as cash, cars, computers, etc., as well as intangible items, such as
royalties, patents and copyrights.
Pledged Asset
An asset placed in a trust and used as security for a debt.
Prepaid Expense
The cost incurred to acquire economically useful goods or services that are expected to be
consumed in the revenue-earning process.
Prepaid Taxes
The estimated income taxes that are paid throughout the year rather than all at once at the
end of the year.
Pricing Decision Process
A process engaged to determine the price (i.e., interest rate and fees) that will be charged a
borrower for a credit facility. This process generally entails the following steps: credit
request, credit analysis, loan structure, cost analysis, competitive analysis, rate
negotiations, rate approval and loan accounting.
Pricing Risk
The risk that the return expected from a customer relationship will fall short of target
profitability, despite the fact that the borrower performed as agreed. Arises primarily from.
loan amount forecast error, deposit balance forecast error or unrealistic overhead
Prime Rate
The rate of interest charged by some major banks on loans made to their preferred
The amount of debt (excluding interest) that remains on a loan. The basis for interest
Prior Period Adjustment to Retained Earnings
An adjustment to a company's retained earnings in one year, based on events or
transactions that occurred in a prior year which subsequently unfolded. Affects the owners'
equity (or net worth) section of the balance sheet. Frequently, the adjustment has a
negative impact on the amount of retained earnings and also on the owners' equity account.
Privately held company
A business owned either by a relatively small number of shareholders or company
members, or non-governmental organizations, which do not trade or offer the company
stock (shares) to the general public.
Private Placement
Sales of securities not involving a public offering and exempt from registration pursuant to
certain exemptions.
Product life cycle
The cycle through which every product goes, from introduction to withdrawal from the
market, or its eventual demise.
Pro Forma

The presentation of financial information that gives effect to an assumed event (e.g. a
Pro Rata
The distribution of an expense, fund or dividend proportionate with ownership.
Probability Distribution
A curve that shows all the values that a variable can take and the likelihood that each will
Probability of Default (PD)
The probability or likelihood that a company will default on a loan within a given timeframe,
typically one year.
A financial gain which is realized when the income gained from a business activity exceeds
the expenses, costs and taxes needed to keep up that activity.
Profit Sharing Plan
A defined contribution plan characterised by the setting aside of a portion of an entity's
profits in participants' accounts.
The state or condition of generating a financial profit or gain. The ability of a business to
earn a profit.
Prospective financial statements that present, to the best of the responsible party's
knowledge and belief, given one or more hypothetical assumptions, an entity's expected
financial position, results of operations and changes in financial position.
Promissory Note
A written agreement containing a promise of the signer to pay a definite sum of money at a
specified date or on demand.
A thing or things belonging to someone or a business. Something that is owned.
Public Offering
An offering of shares to the public.
Publicly held company
A company that has issued securities (i.e., shares) by the means of an initial public offering,
and whose shares are traded freely on the open market.
A calculation wherein, in its simplest form, one figure (typically from a company's financial
statements) is divided by another number. The result of that calculation, especially when
viewed over time or in comparison with the same computation from another entity, provides
analytical insight into the company and its financial performance.
Ratio Analysis
A comparison of historical or projected ratios for a particular company to other data for that
company, or to ratios from other firms, in order to analyse trends or relationships.
Raw materials
The basic materials out of which a product is made.
Real Estate (or Real Property)
Land and improvements, including buildings and personal property that are permanently
attached to the land or customarily transferred with the land.
Amounts of money due from customers or other debtors.
A significant decline in general economic activity extending over a period of time.
Definition 1. A significant improvement in general economic activity extending over a period
of time. Definition 2. The amount a company records to income if a customer pays on a
receivable after it has been written off.
Redemption Value
The price to be paid by an entity to retire its bonds or preferred shares.
Related Party Transaction
A business or other transaction between persons who do not have an arm's-length
relationship (e.g. a relationship with independent, competing interests). The most common
is between family members or controlled entities.

Courses of action that can be taken if an event of default occurs. The remedies may either
be spelled out in the events of default section of a loan agreement or set out in a separate
section. Such remedies can range from nothing to full and immediate repayment of all
interest and principal.
Reporting Period
The period of time covered by a financial statement.
Research and Development (R&D)
Research is a planned activity aimed at developing new or improved products and services.
Development is the translation of research findings into a plan or design for new or
improved products and services.
The action or process of replacing something or someone.
An account used to earmark a portion of equity or fund balance to indicate that it is not
available for distribution.
Reserve Requirements
In some countries, these are requirements set by central banks for the amounts that certain
financial institutions must set aside in the form of reserves. Reserve requirements act as a
control on the expansion of money and credit and may be raised or lowered within limits
specified by law. (Lowering reserve requirements allows more bank lending and money
growth; raising requirements reduces lending and money growth.)
Restricted Assets
Cash or other assets whose use in whole or in part is restricted for specific purposes bound
by virtue of contracted agreements.
A business that sells to the end consumer, for examplean office supply store which sells
binders, pens, and printer paper.
Retained Earnings
Accumulated undistributed earnings of a company retained for future needs or for future
distribution to its owners that helps support, or finance, a company's assets. This equity is
less permanent than common shares and paid in capital as it may generally be distributed
to shareholders in the form of dividends.
For a business, the removal of an asset, equipment, or property from service, after the end
of its useful life, or its sale.
Return on Assets (ROA)
A ratio that measures the rate of return a firm earns on its assets. ROA is computed by
dividing net income for the past 12 months by total assets. The result is shown as a
percentage. It can be split into return on sales (net income/sales) multiplied by asset
utilisation (sales/assets). Within a specific industry, ROA can be used to compare how
efficient a company is relative to its competitors.
Return on Equity (ROE)
A ratio that measures the rate of return a firm earns on shareholders' equity. ROE is
computed by dividing net income from the past 12 months by net worth (or book value). The
result is shown as a percentage. Investors use ROE as a measure of how effectively a
company is using its investors' money. It can be split into return on assets (ROA) multiplied
by financial leverage (total assets/total equity). Within a specific industry, it can be used to
compare how efficient a company is relative to its competitors.
Return on Investment (ROI)
A ratio that measures the profits achieved by a firm through its basic operations; an
indicator of management's general effectiveness and efficiency. The simplest version is the
ratio of net income to total equity.
Returns and Allowances
Goods returned to a company after purchase by clients for either full or partial credit to the
original buyer. It is a contra account which reduces a company's revenue and, therefore, its
calculated earnings.
An inflow of assets, not necessarily cash, in exchange for goods or services sold. The usual
groupings are: operating revenues, miscellaneous income and extraordinary income.

Revenue Recognition
A method of determining whether or not a sale has met the conditions of being earned and
realised or is realisable.
Right of Set-off
A debtor's legal right to discharge all or a portion of the debt owed to another party by
applying against the debt an amount that the other party owes
the debtor.
Risk-free Interest Rate
The rate of return that a risk-free asset offers.
Risk Management
The process of identifying, monitoring and mitigating business risks in a manner that offers
a risk/return relationship that is acceptable to an entity's operating philosophy.
The exchange of goods, property or services for an agreed amount of money, or credit.
Sale-Leaseback Transaction
The sale of property where the seller simultaneously leases the property back from the
Sales Conversion
The time it takes to convert a sale into cash.
Sales growth
The amount by which the sales volume of business's products or services has grown,
usually from one year to the next. When expressed as a percentage, it is the annual rate of
change in sales from one accounting period to the next, and is calculated as (Recent Period
Sales - Prior Period Sales) / Prior Period Sales
Salvage Value
The selling price assigned to retired fixed assets or merchandise that is unsaleable through
usual channels.
Sarbanes-Oxley Act of 2002
Legislation passed in the United States largely as a result of a number of accounting
scandals. Among the many features is the creation of the Public Company Accounting
Oversight Board. Important issues this board is charged with include: 1) registering public
accounting firms; 2.establishing or adopting, by rule, auditing, quality control, ethics,
independence, and other standards relating to the preparation of audit reports for issuers;
(3) conducting inspections of accounting firms; (4) conducting investigations and
disciplinary proceedings, and imposing appropriate sanctions; (5) enforcing compliance with
the Act, the rules of the Board, professional standards, and the securities laws relating to
the preparation and issuance of audit reports and the obligations and liabilities of
accountants with respect thereto.
Scheduled Debt Amortisation
The portion of long-term debt required to be repaid per period.
Seasonal Loan
A short-term, self-liquidating loan or funds advanced on a short-term basis that are repaid in
full when the assets purchased by the funds are converted to cash.
A source of financing whereby an entity's assets (typically loans, lease obligations or other
types of receivables) are placed in a Variable Interest Entity (VIE) that issues securities
secured by such assets.
Property that is offered to secure a loan or other credit that may become subject to seizure
on default; also, any kind of transferable certificate of ownership including equity securities
and debt securities.
Security Agreement (Document)
An instrument that allows a lender to establish a security interest in pledged assets.
Security Interest
The legal interest of one party in the property of another to assure performance of a second
party under a contract.
Sensitivity Analysis
An analysis of the impact on a pro forma or forecasted statement by a change in one or

more of the input variables.

Service Business
An entity that provides a service such as transporting merchandise or people, repairing
computers, providing legal advice or providing entertainment and recreation. It does not sell
a tangible product except as a byproduct ancillary to the primary business.
Shareholders' Equity
See "Owners' Equity".
Current, ordinarily due within one year.
Short-term Financing Gap
The difference between the days of receivables and inventory on hand and the days of
supplier credit provided in the form of accounts payable.
SIC Code
Stands for "Standard Industrial Classification" code, which identifies the type of business
activity in which a company operates.
The extent to which a company could pay off all its outstanding obligations by liquidating all
its assets. A company is considered solvent if the cash that could be generated from
liquidating all its assets were sufficient to pay off all its obligations.
The transfer of all or a portion of a subsidiary's shares or other assets to the shareholders
of its chief entity on a pro rata basis.
A form permitting arrangement of information from financial statements into a convenient,
concise and consistent format for analytical purposes to facilitate the interpretation of
financial information.
The process of transferring and properly classifying the relevant data (accounts) from a
company's financial statements to a spread sheet.
Standard Deviation
A statistical measure of the distance a quantity is likely to lie from its average value. In
quantitative analytics it represents the volatility of a firm's value over a specific time period.
Start-up Costs
The costs, excluding acquisition costs, incurred to bring a new unit into production; or costs
incurred to begin a business.
Stated Value
The per share amount set by the board of directors to be placed in the capital shares
account upon issuance of no-par value.
Statement of Cash Flows
A statement of cash flows is one of the basic financial statements required as part of a
complete set of financial statements prepared in conformity with International Financial
Reporting Standards. It categorises net cash provided or used during a period as operating,
investing and financing activities, and this reconciles beginning and ending cash and cash
equivalent balances.
Statement of Changes in Shareholders' Equity
Statement summarising the changes in the equity accounts of a business during a stated
period of time (the statement period).
Steady State
The theoretical point at which the company reaches maturity.
Straight-line Depreciation
The accounting method that reflects an equal amount of wear and tear during each period
of an asset's useful life. For instance, the annual straight-line depreciation of a $2,500 asset
expected to last five years is $500.
Strike Price
The price at which a share trade will take place if an option is exercised. Also known as the
exercise price.
Subordinated Debt
Debt which is secondary or junior to that of other creditors with respect to the priority of
Subsequent Event

A material event that occurs after the end of an accounting period and before the
publication of an entity's financial statements. Such events are generally disclosed in the
notes to the financial statements.
A company controlled by another (the parent) which owns 50% or more of the voting
Swing Factors
Accounts receivable, inventory and accounts payable days are referred to as the swing
factors in the context of cash flow analysis. Any movement in them can impact cash in a
significant way. Consequently, management's decisions relative to the control of these
factors influence cash flow.
Tangible Asset
Any asset having a physical existence, such as cash, land, buildings and machinery, or
claims on property, investments or goods in process.
Tangible Net Worth
Usually defined as net worth less all intangible assets.
A charge levied by a government on income, consumption, wealth or other basis.
Tax Benefit
The amount of income tax relief provided to reduce a loss. The tax benefit reflects tax
considerations for all income tax authorities at the federal, state and local levels. A tax
provision decreases a company's income, while a tax benefit decreases its loss.
Tax Charge
An encumbrance placed on property as security for unpaid taxes.
Tax Provision
The amount of income taxes a company records as an expense in calculating its net
income. A tax provision decreases a company's income.
An option's specific period of time to expiration.
Term Loan
Generally defined as a loan whose repayment term exceeds one operating cycle of the
business, but more specifically a loan for a specified time period. The borrower usually
repays the loan in periodic payments from cash flow generated through the operations of
the business, whereas a seasonal loan is repaid at the end of the seasonal asset
conversion cycle.
A written, legal document establishing the right of ownership of a specific piece of property.
Trading Cycle
The repeating cycle, within the larger asset conversion cycle, which all businesses go
through involving the conversion of cash to a product or service and then the sale of that
product or service, collection of receivables and generation of new cash.
Transaction Analysis
The process of determining the accounting entries that properly record a transaction. After a
transaction is analysed, the associated accounting entries are typically recorded in a
Troubled Debt Restructuring
An agreement between debtor and creditor which amends the terms of a debt that has little
chance of being paid in accordance with its contractual terms. The agreement may involve
the transfer of assets in full or partial satisfaction of the debt.
This term means that the reported amount of a given item is too small, i.e., less than the
true amount.
A reported amount of an item that is valued below its real worth or intrinsic value.
Unearned Income
Payments received for services which have not yet been performed.
Unexpected Loss
The amount of the loss a lender incurs which exceeds the amount anticipated in the
expected loss.

The action of using something, or the state of being used for some purpose.
To put to use; turn to profitable account. In basic accounting terms, it is a measure of the
actual revenue earned by assets, against the potential revenue they could have earned.
The process determining the degree of validity of a measuring device.
Valuation Allowance
A method of lowering or raising an object's current value by adjusting its acquisition cost to
reflect its market value by use of a contra account.
Value of Firm
In quantitative analytics, the market value of a firm's assets and is equal to the sum of the
firm's liabilities and the market value of the firm's equity.
Variable Costs
Costs that vary in total as production varies, but remain the same per unit regardless of how
many units are produced.
Variable Rate
An interest rate that changes periodically in relation to an index. Payments may go up or
down as the rate is adjusted.
Venture Capital
New capital invested largely in companies developing new ideas, products or processes.
A measurement of how much a value fluctuates over a period of time. In financial analysis it
represents fluctuation around a company's sales growth trend. In quantitative analysis it
represents the measurement of how much the market value of a firm's assets fluctuates
over a given period of time.
An option to purchase additional securities from the issuer.
A business that purchases finished products from manufacturers for re-sale to retailers, or
component parts for sale to other manufacturers or to service businesses. A wholesaler
does not generally sell directly to consumers.
Withdrawals During the Year
The amount of funds a proprietor takes out of the business during the year, as well as the
amounts partners take out of their partnership business during the year. It affects the
amount of owner's capital for proprietorships and the amount in the capital account for
An inventory account consisting of partially completed goods awaiting completion and
transfer to finished inventory. Also known as Work in Process.
Working Capital
The excess of current assets over current liabilities. Working capital represents the amount
of long-term funding (long-term liabilities and owners' equity) over and above that required
to support long-term assets that is used to support working (current) assets.
Working Papers
Records kept by the auditor of the procedures applied, the tests performed, the information
obtained, and the pertinent conclusions reached in the course of the audit, or any records
developed by an accountant during an audit.