Glossary of Terms

A list of words and definitions used in this subject

Accounting- art of recording business transactions; deals with the preparation of financial

statements

Accounting policies-specific principles, bases, conventions, rules, and practices applied by an

entity in preparing and presenting financial statements

Accrued expenses- costs that have been incurred by the business but not yet paid

Annuity- a series of consecutive equal investments or payments made at an equal interval of

time

Assets- resources controlled by the entity as result of past events and from which future
economic benefits are expected to flow to the entity

Bank- an institution authorized to operate and regulated by the BSP under the General
Banking Law of 2000; accepts deposits and bills payment, provides loans, and facilitates the
transfer of funds domestically or abroad

Bond- financial instrument that represent s a contractual debt of the party issuing the bond

Bond discount/premium- the difference between the issue price and the face value

Budget- plan which is expressed in a quantitative monetary value

Budgeting- process or act of preparing a financial budget

Business finance- area of finance that focuses on the handling and management of the
financial resources of a business organization

Business risk- inherent in the operation of the business; directly related to the inability of the
business to maintain stability and growth in its earnings as a result of losing its competitive
position in the market

Callable bond- a type of bond in which the issuing company has the option to redeem the
bond prior to its maturity date

Capacity for adaptation- ability of a business to invest excess available resources or raise
needed funds through borrowings without difficulty in times of need
Capital budget- long-range budget that incorporates the major expenditures for plant and
pieces of equipment or machinery

Capital market- financial market where stocks and bonds are issued for medium and long-
term periods

Capital structure- the mixture of long-term liabilities and capital

Carrying cost- the cost of holding an inventory; includes the cost of capital in the form of
opportunity cost, insurance, inventory taxes, and record-keeping

Cash- comprises cash on hand and demand deposits

Cash conversion cycle- the average time it takes for cash to go out through payment of raw
materials and for cash to enter through the collection of receivables

Cash equivalents- short-term, highly liquid investments that are readily convertible into
known amounts of cash near their maturity that they present insignificant risk of changes in
value or interest rates

Cash budget- budget that reflects the expected cash receipts from cash sales, collections of
account and notes receivable, sale of other assets, proceeds of borrowings, and the expected
cash disbursement on payments of operating expenses, interest, taxes, and loans

Capital budgeting- the process of determining whether or not to commit a significant amount
of long-term funds to projects whose usefulness is spread over several periods

Cash management- the proper matching of total cash requirements for a particular period
(e.g., month, quarter, or year) against the available or expected cash inflows in that period

Collateral trust bond- bond secured by the stocks or bonds of other companies

Commercial bank- a type of bank that provides commercial loans and offers investment
products in addition to the regular banking service of accepting deposits

Common stock- financial instrument whose holders do not have preferences over each other

Compound amount- the accumulated value of the principal or prevent value (PV) and all
interest amounts of prior periods
Compound interest- the interest of one compounding period is added to the principal of the
prior period to form the new principal as basis for computing the interest of succeeding
periods

Compounding period- the period of conversion made during the year. It can be annual, semi-
annual, quarterly, or monthly

Continuous budget- a one-year budget continuously prepared every month by adding another
month once the current month has passed

Convertible bond- bond which can be converted into a share of stock in a later date

Cost of capital- average minimum rate of return of an investment project

Credit period- the length of time or the number of days allowed before the customer makes
payment

Credit term- the standard or negotiated conditions offered by the seller to the buyer for goods
sold on credit

Credit union- financial depository institution that is mainly controlled and operated by its
members

Debenture bond- bond not supported by any collateral or security as assurance in times of
non-payment or default

Debt-to-equity ratio- a financial measure that shows the relationship between funds provided
by creditors and funds supplied by owners

Depository institution- a financial institution that accepts deposits (savings, current, and time
deposits) from individuals and corporate entities, extends loans to borrowers, transfers funds,
and manages funds for investment purposes

Discount- the amount deducted from the invoice price of the goods once payment is made
within the discount period

Discounting- the process of determining the present value of a single amount or series of cash
flows

Discount period- the length of time or the number of days that the customer can be granted
the cash discount
Dissolution- the cessation of business operations

Dividend- the amount of income distributed to the shareholders of the corporation

Economics- a social science concerned with the efficient utilization of scarce resources to
satisfy human needs and wants

Effective interest rate- the true or actual rate of interest that investors earn from investment
in bonds

EOQ model- an approach that determines the level of inventory to order when the inventory
costs are at their lowest or optimum level

Equity- residual interest in the assets of the entity after deducting all its liabilities

Expenses- decreases in economic benefits during the accounting period in the form of
outflows or depletion of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distribution to equity participants

Finance- both a science and an art of correct application of the economic and accounting
concepts and principles that define the system, structure, and process of management,
allocation, and utilization of financial resources, investments, and expenditures

Financial budget- a budget that usually includes the cash budget and budgeted balance sheet

Financial flexibility- the ability of the business to raise long-term funds when needed

Financial institutions- organizations that provide financial services, among others, in the form
of loan, credit, fund administration, financing, depository, and safekeeping

Financial instruments- refer to contracts that give rise to the formation of financial assets of
one entity and at the same time, the creation of a financial liability or an equity instrument in
another entity

Financial intermediary- type of financial institution that acts as the middleperson between
two parties- the investors and the borrowers

Financial investment- resources that are expected to provide income and achieve
appreciation or growth of the business
Financial leverage- the business has more funds like bonds and long-term bank borrowings
coming from long-term creditors in the capital structure. Bonds and bank borrowings usually
have a fixed rate of interest

Financial management- focuses on capital budgeting decision or investment decision on the

acquisition of assets and its corresponding financing scheme; includes business decisions
about the value and price of stocks and bonds, portfolio analysis, market analysis, security
analysis, and behavior of the investors

Financial market- place where the selling-buying activity occurs, particularly to trade equity
securities such as bonds and stocks, currencies, derivatives securities, notes, and mortgages

Financial mix ratio analysis- an analytical tool employing the ratio or proportion of a certain
item in the financial statement in relation to other related items in the same financial
statement or other statements to determine comparative performance

Financial resources- funds of a business which are provided by the owner or by the creditors
Financial risks- a risk directly related to the liquidity problem of the business, that is, not being
able to settle its obligations as they mature

Financial statements- final product of the whole accounting process; structured

representations of the financial position, financial performance, and cash flow of the business.

Financial statement analysis- process of selecting related data from financial statements to
evaluate the entity's past financial position and operating performance and to predict the
outcome of future operations

Financial structure- indicates the amount of capital or resources financed by creditors and the
amount provided by owners

Financial system- principally responsible for the flow of money or funds from the lender to the
borrower

Financing activities- activities that result in changes in the size and composition of the
contributed equity and liabilities of the entity

Fixed budget- budget prepared based only on one level of production capacity

Fixed cash outlay- cash requirement that remain constant during the month or period

Flexible budget- budget prepared showing the projected cost at different levels of production
capacity
Frequency of conversion- the number of times the interest is added to the principal during the
year

Goal- where all the business and operation of the business are directed; the refine version of
the vision of the business

Gold bullion- a precious material which carries a high market value most especially when the
market is volatile

Gross profit rate- measure the percentage of gross profit to sales as well as the percentage of
gross profit margin available to cover the operating expenses for the period

Horizontal or comparative analysis- analytical tool that evaluates the present performance of
an entity compared to last year

Income- summary of increases in economic benefits during the accounting period in the form
of inflows or enhancement of assets or decreases of liabilities that result in increases in equity
other than those relating to contributions from equity participants

Inflation premium- the amount of interest charged by the investor for the effect of inflation
while the money is used by another party

Insurance company- acts as a financial intermediary by pooling together the proceeds of

insurance policies sold to the public and investing the accumulated funds in high-yield
maturing securities from investment houses

Insurance fund- money collected and pooled by insurance companies from the premiums paid
by the insured or policyholders to be used as protection or hedge against uncertain risks

Investing activities- involve the acquisition and disposal of long-term assets and other
investments not included into cash equivalents

Investment- the amount of money invested in financial asses like bonds, stocks, mutual funds,
or insurance policies

Investment institution- company engaged in buying securities of other companies which are
listed in the stock exchange for investment purposes only

Inventories- products that are intended for sale but remain unsold at the end of the period

Inventory conversion period- the length of time it takes to convert raw materials into finished
products
Inventory management tools- mathematical approaches that are used to determine the
optimum level of inventory, the inventory order size, of the timing of placing an order

Inventory turnover ratio- measures the number of times inventories are acquired and sold
during the year

Islamic Bank- created and organized under R.A. No, 6848; aims to promote and accelerate the
socio-economic development of the Autonomous Region of Muslim Mindanao by performing
banking, financing, and investment operations and to establish and participate in agricultural,
commercial, and industrial ventures based on the Islamic concept of banking

Liabilities- present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits

Liquidation- the process of selling the non-cash assets, settling liabilities, and finally,
distributing the remaining cash to shareholders

Liquidity- ability of a business entity to settle its currently maturing financial obligations 

Liquidity ratios- a group of ratios that measure the ability of the business firm to pay off short-
term obligations as they mature

Long-term budget- the financial expression of the vision-mission of the business

Marginal analysis of credit policy- an analysis that compares the expected incremental profit
contribution or returns with the incremental costs from the change in credit policy

Market- place where the sellers and the buyers of goods or services meet

Master budget- overall budget of the business

Medium-term budget- a type of budget that sets the budgetary requirements of the business
for the next three or five years of operations

Money market- financial marker where the financial securities being traded have a period of
less than one year

Mutual fund- financial intermediary that accumulates money by selling shares of stocks or
bonds of publicly-listed corporations to individuals or corporate investors

Net profit margin- a profitability ration that measures the overall operating results of an entity
Nominal rate- the rate of investment or borrowings

Non-spontaneous debt- debt that arises not from ordinary business activities but from
borrowings from bank

Operating activities- principal revenue-producing activities of the entity and other activities
that are neither investing nor financing

Operating budget- budget that reflects the sales and production budgets

Operating leverage- the extent to which the business uses fixed cost in its operation

Operating profit margin- a profitability ratio that measures the percentage of profit available
after deducting the cost of sales and operating expenses from the sales

Optimum level of cash- the best level of cash in which the business is able to meet all the
operating activities that require cash settlement and, at the same time, no excess amounts
remain idle

Ordering cost- the expense in making an order which includes cost in requisition, processing
an order, receipt of ordered goods, arranging inventory, and payment of suppliers

Patents- intangible non-financial instruments granted by the government

Payable deferral period- the length of time from the day the raw materials are purchased or
received up to the time payment is made

Par value- the value of the share of stock authorized by the Securities and Exchange
Commission (SEC)

Periodic interest rate- the interest rate per compounding period. It is computed by dividing
the nominal rate by the compounding period

Pension fund- set up by a business for the purpose of paying the pension requirements of all
private-sector employees who retire from the business organization upon reaching their
retirement age

Permanent current asset- the portion of current assets that accumulates and remains fixed
through the operating cycles (e.g., level of inventories displayed in the shelves)

Personal finance- a sub-category of private finance which is directed towards management of

the personal resources of an individual
Personal savings- the amount of money set aside by a person or a family for future financial
requirement

Preference share- a kind of stock that is preferred over common stock

Private finance- management of financial resources of private individuals, non-governmental

organizations, and private organizations in accordance with the prescribed financial policy and
priority of the person or business organizations

Personal finance- a sub-category of private finance; the management of financial activities of a

person

Present value- the value of the money at present

Primary market- financial market where a corporation can issue new shares of stock

Production budget- budget that shows the cost of producing the product

Profitability ratios- a group of ratios that reflect the combined effects of liquidity and
management efficiency in handling the assets and liabilities on the operating results of the
business

Public finance-allocation of government income generated from either taxation or borrowings

and the government expenditure based on the approved national and local appropriation or
budget

Public market- market in which the financial securities of publicly-listed corporation are
traded following a standardized contract agreement and procedures

Real rate of return- the interest charged by the investor to the other party for using the
money without considering the eroding effect of the inflationary changes

Real properties- non-financial instruments that represent hard or fixed assets usually attached
to the soil

Receivable collection period- the length of time from the selling of goods on account up to the
full collection of credits

Receivable turnover- a liquidity ratio that measures the velocity of conversion of trade
receivables into cash during the year
Reserves- line-item in the equity section that includes appropriation reserve, share premium,
revaluation adjustment, and foreign currency translation reserve

Retained earnings- line-item in the equity that represents the accumulated amount of net
income or loss, errors of prior periods, dividends distributions changes in accounting policy,
and other equity adjustments other than those arising from contributions from shareholders

Return on investment (ROI) - also called return on assets; a profitability ratio that measures
the amount of net income per peso of investment in a business

Revaluation adjustment- the excess of the depreciated replacement cost or sound value of
the revalued property, plant and equipment over the book value

Risk premium- the risk associated with the investment. It is comprised of business risk and
financial risk, among others

Rural banks- banks organized and operating in rural areas intended to promote and expand
the rural economy by providing the people in the rural communities with basic financial
services

Sales budget- budget that reflects the expected number if units to be sold based on forecast
made from the performance of previous years and other marketing variables

Saving and loan association- a financial institution that is engaged in the business of
accumulating the savings of its members and stockholders, and using such accumulations for
loans or investments in securities of productive enterprises

Secondary market- financial market where financial securities are traded between or among
investors

Secured bond- type of bond that is secured by the issuing company

Serial bond- kind of bond that has a series of several maturity dates instead of a single
maturity date

Share premium- the excess amount contributed by the shareholders over the par value

Short-term budget- a type of budget that provides the financial requirements of all
departments for one year

Short-term security- a type of financial security not intended to be held for more than one
year
Simple interest- the amount of interest is computed only once during the term of the
investment or borrowing regardless of whether the term is less than one year, equal to one
year, or more than one year

Solvency- ability of a business to pay its long-term financial obligations

Solvency ratios- otherwise known as the stability ratios; a group of financial ratios that
measure the ability of a business to settle its financial obligations when they mature and to
remain still financially stable

Spontaneous debt- short-term debt that arises from the normal course of business operation

Statement of changes in equity- statement that reflects all the elements that cause changes in
an entity's equity between two dates of the statement of financial position

Statement of comprehensive income- structured financial statement that shows the financial
performance of a business entity for a given period

Statement of financial position- structured financial statement that shows the assets,
liabilities, and equity of a business entity as of a given date 

Stock- financial security that signifies ownership of the assets of the corporation

Stockholders- owners of a corporation

Temporary current assets- the portion of current assets that fluctuates or varies in relation to
the seasonal or cyclical movement of sales

Term bond- a bond that has a single maturity date

Total compounding period (n) - the number of times an interest is computed during the term
of the investment

Trade accounts- a financial instrument that represents the right to collect a sum of money in
the near future

Trading activity- the selling-buying transaction happening in the financial market

Trend percentage approach- used to analyze the financial  statements that extend  beyond
two years through the use of index numbers or percentages
Thrift bank- as defined in Republic Act No. 7906, includes savings and mortgage banks, private
development banks, savings and loan associations, and microfinance thrift banks

Times interest earned- a tool that measures the debt-paying ability of the business

Trust company- a legal business entity, usually a major division of a universal or commercial
bank, that acts as a fiduciary agent or trustee  on behalf of an individual person or corporate
entity for the purpose of management, administration, and final transfer of property to the
beneficiary  

Trust fund doctrine- a doctrine that requires that the funds provided by the stockholders
protect the interest of the creditors

Universal bank- considered the biggest bank in terms of assets, loan portfolio, and revenue;
has the widest scope of banking activities authorized by the BSP and usually has the most
number of branches nationwide and abroad

Unlevered capital structure-a capital structure in which the company does not finance its
operation using long-term debt

Variable cash outlays- cash requirements of the business that vary with the volume of sales