HEDGING A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies

, or securities. In effect, hedging is a transfer of risk without buying insurance policies. Hedging employs various techniques but, basically, involves taking equal and opposite positions in two different markets (such as cash and futures markets). Hedging is used also in protecting one's capital against effects of inflation through investing in high-yield financial instruments (bonds, notes, shares), real estate, or precious metals. DEFENSIVE RESPONCE Management's admission of some errors and taking of only legally required steps to solve social and environmental problems caused by a firm's activities. It is one of the four ways in which an organization may choose to respond. For the other three see accommodating response, obstructive response, and proactive response AMORTIZATION 1. Accounting: Preferred term for the apportionment (charging or writing off) of the cost of an intangible asset as an operational cost over the asset's estimated useful life. It is identical to depreciation, the preferred term for tangible assets. The purpose of both terms is to (1) reflect reduction in the book value of the asset due to usage and/or obsolescence, (2) spread a large expenditure proportionately over a fixed period, and thereby (3) reduce the taxable income (not the actual or cash income) of a firm. In effect, it is a process by which invested capital of a firm is recovered by gradual sale of the firm's asset(s) to its customers over the years. 2. Banking: Gradual repayment of a loan in equal (or nearly equal) installments which include portions of interest and principal amounts. See also level payment amortization. FINANCAIL MANAGEMENT The planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. GAP ANALYSIS A technique for determining the steps to be taken in moving from a current state to a desired future-state. Also called need-gap analysis, needs analysis, and needs assessment.

Gap analysis consists of (1) listing of characteristic factors (such as attributes, competencies, performance levels) of the present situation ("what is"), (2) cross listing factors required to achieve the future objectives ("what should be"), and then (3) highlighting the gaps that exist and need to be filled. CAPITALISM
Economic system based (to a varying degree) on private ownership of the factors of production (capital, land, and labor) employed in generation of profits. It is the oldest and most common of all economic systems and, in general, is synonymous with free market system.

PAYMENT TERMS The conditions under which a seller will complete a sale. Typically, these terms specify the period allowed to a buyer to pay off the amount due, and may demand cash in advance, cash on delivery, a deferred payment period of 30 days or more, or other similar provisions. LINE OF CREDIT
1. Banking: Alternative term for overdraft. 2. Trading: Extent to which a seller will extend credit payment terms to a buyer. It is the total of the amounts of (a) unpaid invoices, (b) goods in transit, and (c) orders confirmed but yet to be shipped.

DISTRIBUTION CHANNEL A path through which goods and services flow in one direction (from vendor to the consumer), and the payments generated by them that flow in the opposite direction (from consumer to the vendor). A marketing channel can be as short as being direct from the vendor to the consumer or may include several interconnected intermediaries such as wholesalers, distributors, agents, retailers. Each intermediary receives the item at one pricing point and moves it to the next higher pricing point until it reaches the final buyer. Also called channel of distribution or marketing channel. INTERCHANNEL CPMPETITION Market situation where the members of the same distribution channel have to compete with each other for the same customer. For example, independent retailers having to compete with a manufacturer's own outlets.

MORTGAGE A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender's security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full. Virtually any legally owned property can be mortgaged, although real property (land and buildings) are the most common. When personal property (appliances, cars, jewelry, etc.) is mortgaged, it is called a chattel mortgage. In case of equipment, real property, and vehicles, the right of possession and use of the mortgaged item normally remains with the mortgagor but (unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take its possession (by following the prescribed procedure) at any time to protect his or her security interest. In practice, however, the courts generally do not automatically enforce this right when it involves a dwelling house, and restrict it to a few specific situations. In the event of a default, the mortgagee can appoint a receiver to manage the property (if it is a business property) or obtain a foreclosure order from a court to take possession and sell it. To be legally enforceable, the mortgage must be for a definite period, and the mortgagor must have the right of redemption on payment of the debt on or before the end of that period. Mortgages are the most common type of debt instruments for several reasons such as lower rate of interest (because the loan is secured), straight forward and standard procedures, and a reasonably long repayment period. The document by which this arrangement is effected is called a mortgage bill of sale, or just a mortgage. WHITE ELEPHANT A business or investment that is unprofitable and is likely to remain unprofitable. In the case of a business, a business usually becomes known as a white elephant if it is unable to turn a profit because it is so expensive to operate and maintain. Very few people are interested in owning or purchasing something considered to be a white elephant. The term is derived from a traditional Asian practice of a monarch owning a white elephant; the elephant was considered sacred, but it was very costly and impractical to own. LIEN Creditor's conditional right of ownership (called security interest) against a debtor's asset or property that bars its sale or transfer without paying off the creditor. In a contractual arrangement, a lien is the right of a contracting-party to take possession of a specific asset of the other contracting party, in case the contract is not performed according to its terms. A mortgage agreement is a lien on the mortgaged property and a bond is a lien on the bond issuer's assets. Liens are also granted by the courts to satisfy a judgment against a losing defendant. All liens are for a limited period (which varies with the jurisdiction), apply only to the asset or property that forms part of an express or implied contract, and (if attached to a real property) must be properly registered to be valid and enforceable. In case of a default, the party holding the lien (called lienholder or lienor) generally does not except in the case of a special lien have an automatic

right to seize and sell the asset or property, but must obtain a foreclosure order after giving a reasonable notice to the debtor or obligor (called lienee). GDP PER CAPITA An estimate of how much an individual spends as a consumer compared to the total population spending on products and services. SOCIAL SECURITY TAX This tax was created under the Federal Insurance Contributions Act (FICA). The amount taken from a contributor's earnings covers support for retired workers, those on disability, and individuals who are entitled to survivorship benefits, which provide financial support for individuals of a deceased family member who was the primary breadwinner. SWAP Exchange of one type of asset, cash flow, investment, liability, or payment for another. Common types of swap include: (1) Currency swap: simultaneous buying and selling of a currency to convert debt principal from the lender's currency to the debtor's currency. (2) Debt swap: exchange of a loan (usually to a third world country) between banks. (3) Debt to equity swap: exchange of a foreign debt (usually to a Third World country) for a stake in the debtor country's national enterprises (such as power or water utilities). (4) Debt to debt swap: exchange of an existing liability into a new loan, usually with an extended payback period. (5) Interest rate swap: exchange of periodic interest payments between two parties (called counter parties) as means of exchanging future cash flows. SKIMMING PRICE
High price aimed at higher income groups for luxury or status goods, or at extracting maximum returns from a market for a new technology product before competitors emerge. OBSOLESCENCE Significant decline in the competitiveness, usefulness, or value of an article or property. Obsolescence occurs generally due to the availability of alternatives that perform better or are cheaper or both, or due to changes in user preferences, requirements, or styles. It is distinct from fall in value (depreciation) due to physical deterioration or normal wear and tear. Obsolescence is a major factor in operating risk, and may require write off of the value of the obsolete item against earnings to comply with the accounting principle of showing inventory at lower of cost or market value. Insurance companies take obsolescence into account to reduce the amount of claim to be paid on damaged or destroyed property. See also planned obsolescence.

LIQUIDITY 1. A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. 2. Accounting: The ability of current assets to meet current liabilities. 3. Investing: The ability to quickly convert an investment portfolio to cash with little or no loss in value. RETURN ON EQUITY

Ratio measuring stockholders' (shareholders') profitability, expressed as a percentage of the firm's net worth. ROE indicates a firm's efficiency in applying common-stockholders' (ordinaryshareholders') money. Formula: Net income ÷ Net worth. DEBENTURE A promissory note or a corporate bond which (in the US) is backed generally only by the reputation and integrity of the borrower and (in the UK) by the borrower's specific assets. When unsecured, it is called a bare debenture or naked debenture; when secured by a charge on a specific property, it is called a mortgage debenture.
NON RECURRING COST

Unusual charge, expense, or loss that is unlikely to occur again in the normal course of a business. Non recurring costs include write offs such as design, development, and investment costs, and fire or theft losses, lawsuit payments, losses on sale of assets, and moving expenses. Also called extraordinary cost. INCOME
1. The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent). 2. Accounting: (1) An excess of revenue over expenses for an accounting period. Also called earnings or gross profit. (2) An amount by which total assets increase in an accounting period. 3. Economics: Consumption that, at the end of a period, will leave an individual with the same amount of goods (and the expectations of future goods) as at the beginning of that period. Therefore, income means the

maximum amount an individual can spend during a period without being any worse off. Income (and not the GDP) is the engine that drives an economy because only it can create demand. 4. Law: Money or other forms of payment (received periodically or regularly) from commerce, employment, endowment, investment, royalties, etc. NON RECURRING INCOME

Gain of an infrequent or unique nature that is unlikely to occur again in the normal course of a business. Such income includes gain on sale of assets, insurance settlement, one-time sale, etc. Also called extraordinary income. REVENUE The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover. CASH COW Well established brand, business unit, product, or service, that generates a large, regular, predictable, and positive cash flow. Cash cows are often 'milked' for developing, promoting, or supporting new or struggling counterparts. See also portfolio planning matrix. CASH FLOW Incomings and outgoings of cash, representing the operating activities of an organization. In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative. Cash flow is increased by (1) selling more goods or services, (2) selling an asset, (3) reducing costs, (4) increasing the selling price, (5) collecting faster, (6) paying slower, (7) bringing in more equity, or (8) taking a loan. The level of cash flow is not necessarily a good measure of performance, and vice versa: high levels of cash flow do not necessarily mean high or even any profit; and high levels of profit do not automatically translate into high or even positive cash flow.

CHART OF ACCOUNTS System of accounting records developed by every organization to be compatible with its particular financial structure, and in agreement with the amount of detail required in its financial statements. It consists of a list of ledger account names and numbers showing classifications and sub-classifications, and serves as an index to locate a given account within the ledger. See also class of accounts. COMPREHENSIVE INCOME

Income that has been recognized after economic changes have been deducted. For example,,after a company reports a loss, the loss is deducted from the revenue. COMPOUNDING PERIOD The length of time from one interest payment to the next. PRESENT VALUE (PV)
Estimated current value of a future amount to be received or paid out, discounted (see discounting) at an appropriate rate, usually at the cost of capital rate (the current market interest rate). PV provides a common basis for comparing investment alternatives. Also called present worth. See also net present value, discounted cash flow, and future value. PRESENT VALUE FACTORS

Multipliers given in present value tables to help in computing the present value of one dollar, discounted (see discounting) at various interest rates and for various periods. PRESENT VALUE OF FUTURE AMOUNTS Sum of money that must be invested today, at a given rate of interest to grow to the desired amount on a specific future date. PRESENT VALUE METHOD
The amount calculated to represent future income due to an investor.

PRESENT VALUE OF ANNUITY

The discount amount of a dividend payment over the term of the stock or bond.
PRESENT VALUE OF ANNUITY DUE

The discount amount of a dividend payment due at a specified time. ANNUITY UNIT
When an individual starts to take payments from their retirement accounting but continues to contribute to the fund. An amount will be applied only to what is being withdrawn, and not what is being contributed at that time. PRIME COST The total of direct material costs, direct labor costs, and direct expenses. BALLOON LEASE

Arrangement in which rent is low at the beginning, higher in the middle, and low again at the end of the term.

FISCAL POLICY Government's revenue (taxation) and spending policy designed to (1) counter economic cycles in order to achieve lower unemployment, (2) achieve low or no inflation, and (3) achieve sustained but controllable economic growth. In a recession, governments stimulate the economy with deficit spending (expenditure exceeds revenue). During period of expansion, they restrain a fast growing economy with higher taxes and aim for a surplus (revenue exceeds expenditure). Fiscal policies are based on the concepts of the UK economist John Maynard Keynes (1883-1946), and work independent of monetary policy which tries to achieve the same objectives by controlling the money supply.

SPECULATION Deliberate assumption of above average (but analyzed, measured, and usually hedged) shortterm risk of financial loss, in expectation of above average gain from an anticipated change in prices. Organized speculation (as conducted through commodity and stock exchanges) adds capital and liquidity to financial markets, and helps dampen wild fluctuations in prices in normal times. In times of speculative hysteria or economic/political crises, however, speculation exacerbates price swings and may swamp usual trading activity. In terms of degree of risk assumed, speculation (short-term acquisition of assets) falls between investment (long-term acquisition of assets for income and/or capital appreciation) and gambling (wagering on random outcomes without acquisition of assets). See also arbitrage. S-CURVE A type of curve that shows the growth of a variable in terms of another variable, often expressed as units of time. For example, an S curve of the growth of company sales for a new product would show a rapid, exponential increase in sales for a period time, followed by a tapering or leveling off. The tapering occurs when the population of new customers declines. At this point growth is slow or negligible, and is sustained by existing customers who continue to buy the product. MONEY MARKET INSTRUMENTS Short-term, low risk financial instruments such as bankers' acceptance, certificates of deposit, commercial paper, or treasury bills. NAIVE FORECASTING
Estimating technique in which the last period's actuals are used as this period's forecast, without adjusting them or attempting to establish causal factors. It is used only for comparison with the forecasts generated by the better (sophisticated) techniques. PRUDENCE CONCEPT

An accounting principle that requires recording expenses and liabilities as soon as possible, but the revenues only when they are realized or assured.

MATCHING PRINCIPLE Accounting: A fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship. It states that, in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period. MARGINAL COST The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low. The concept of marginal cost is critically important in resource allocation because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost. MARGINAL PROFIT The excess of marginal revenue over marginal cost. In the best-case scenario, marginal profit is equal to zero. If, at a given output level marginal revenue is equal to the marginal cost (MR = MC), the marginal profit is zero. This is the most profitable rate of output because all opportunities to make marginal profit have been exhausted. If at an output level the marginal revenue is less than the marginal cost, there will be marginal loss and total profit will be reduced. CAPITAL ADEQUACY Percentage ratio of a financial institution's primary capital to its assets (loans and investments), used as a measure of its financial strength and stability. According to the Capital Adequacy Standard set by Bank for International Settlements (BIS), banks must have a primary capital base equal at least to eight percent of their assets: a bank that lends 12 dollars for every dollar of its capital is within the prescribed limits.

CARRYING COST
1. Financial and operational expense associated with an investment. 2. Finance, insurance, security, spoilage, storage, and other such charges associated with warehousing of goods. 3. Interest and lender imposed charges such as negotiation fee, processing fee, penalties, associated with a loan. 4. Interest and other charges associated with goods or services sold on credit. Also called carrying charge or holding cost. CAPITAL BUDGETING

The determination of how much manufacturing equipment needs to be utilized by the company. CASHFLOW FORECAST
Estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year). A cash flow forecast shows if a firm needs to borrow, how much, when, and how it will repay the loan. Also called cash flow budget or cash flow projection. CAPITAL INTENSITY

Measure of a firm's efficiency in deployment of its assets, computed as a ratio of the total value of assets to sales revenue generated over a given period. Capital intensity indicates how much money is invested to produce one dollar of sales revenue. Formula: Total assets ÷ Sales revenue. MORTGAGE INSURANCE Policy that protects mortgage lenders in the event of default. Mortgage insurance is sometimes required as part of a loan agreement facilitated by government agencies. It is paid for by the borrower/mortgagor. See also mortgage redemption insurance. OPERATIONG PROFIT MARGINS
A way for a company to measure the amount of revenue that is left over after their operating costs, thus helping to also determine an appropriate pricing strategy for products that are produced and offered.

MORTGAGE

A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender's security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full. Virtually any legally owned property can be mortgaged, although real property (land and buildings) are the most common. When personal property (appliances, cars, jewelry, etc.) is mortgaged, it is called a chattel mortgage. In case of equipment, real property, and vehicles, the right of possession and use of the mortgaged item normally remains with the mortgagor but (unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take its possession (by following the prescribed procedure) at any time to protect his or her security interest. In practice, however, the courts generally do not automatically enforce this right when it involves a dwelling house, and restrict it to a few specific situations. In the event of a default, the mortgagee can appoint a receiver to manage the property (if it is a business property) or obtain a foreclosure order from a court to take possession and sell it. To be legally enforceable, the mortgage must be for a definite period, and the mortgagor must have the right of redemption on payment of the debt on or before the end of that period. Mortgages are the most common type of debt instruments for several reasons such as lower rate of interest (because the loan is secured), straight forward and standard procedures, and a reasonably long repayment period. The document by which this arrangement is effected is called a mortgage bill of sale, or just a mortgage.

POOLING OF INTEREST 1. Accounting: Item by item addition of the assets and liabilities of acquired or merged firm(s) to the balance sheet of the surviving corporation. In contrast, purchase acquisition method treats the acquisition as an investment, and puts goodwill on the balance sheet of the surviving corporation to reflect a premium (or discount) on the book value of the assets of the merged firms(s). 2. Management: Unification of ownership interests of two or more firms through exchange of voting shares IMPUTED INTERESTS Non-interest income taxed as interest income.

Cash equivalent doctrine
Taxation rule that a cash-basis taxpayer must report an income from a taxable transaction in which instead of cash a cash equivalent (such as property) is received.

INVENTORY TURNOVER Number of times a firm's investment in inventory is recouped during an accounting period. Normally a high number indicates a greater sales efficiency and a lower risk of loss through unsaleable stock. However, an inventory turnover that is out of proportion to industry norms may suggest losses due to shortages, and poor customer-service. The preferred method of computing inventory turnover is to compare the cost of sales (also called Cost Of Goods Sold or COGS) to average inventory (Cost of sales ÷ Average inventory). Another method, which compares net sales revenue to the inventory (Net sales revenue ÷ Inventory) is also used but it introduces the distortion of sales markup that is not documented in the inventory records. Also called inventory turns or stock turnover. OFF BALANCE SHEET Accounting category not shown (recorded) on a balance sheet, such as an operating lease or a deferred or contingent asset or liability which is shown only when it becomes 'actual.' See also off balance sheet financing.
INVENTORY VELOCITY

Number of hours or days that elapse between receipt of inputs and dispatch of finished product.