GLOSSARY OF FINANCIAL TERMS

Accounts receivable

Money owed to a company by customers who purchased goods or services on credit.

Accrual basis accounting

An accounting method in which income is reported when earned and expenses when incurred. See Cash basis accounting.

Amortization

The gradual reduction of an obligation, for example a loan, through regular payments over a specified period of time.

Asset

Any item that has economic value, i.e. which can be converted to cash.

Bad debt

 Accounts Receivable that appear uncollectible and will be deducted from net income, or written off.

Balance sheet

A statement of a company’s financial position at a particular point in time, summarizing the company’s assets, liabilities, and owner’s equity.

Barter

The exchange of goods or services without using money.

Break-even analysis

A calculation of the sales volume required to cover costs. Sales above this level are profitable, and below this level are unprofitable.

Capitalization

The total amount of a company’s long-term debt, stock and retained earnings.

Cash basis accounting

An accounting method that reports income when received and expenses when cash is paid. See Accrual basis accounting.

Cash flow

The difference between a company’s cash receipts and cash disbursements in a particular period.

Collateral

Assets pledged as security for a loan, which can be claimed by the lender if the borrower defaults.

Cost of goods sold

The direct costs of a given product, for example wholesale cost of the clothing sold by a retailer in a particular period.

Credit rating

An assessment of a company’s ability to repay its obligations, based on a detailed assessment of its financial history.

Current assets

Assets such as cash, accounts receivable, inventories, and marketable investments that can be converted to cash in less than one year.

Current liabilities

Obligations such as salaries, accounts payable, loans, and other debts that are due within one year.

Debenture

Unsecured debt backed only by the integrity of the borrower, i.e. without the use of collateral. The terms of a debenture are documented by an indenture.

Depreciation

The amount by which the cost of an asset is allocated over time; it is used in part to prepare financial statements and calculate tax liabilities.

Disbursement

A payment towards the discharge of an obligation, such as accounts payable or a loan.

Extraordinary item

A one-time event that significantly affect’s a company’s finances, such as the purchase or sale of a major asset.

First in, first out (FIFO)

An accounting method for cost of goods sold that uses the oldest items in inventory first. See Last in first out (LIFO).

Fiscal year

A period of any consecutive 12 months used for accounting purposes. A fiscal year may or may not correspond to a calendar year.

Fixed expenses

Business expenses that don’t vary depending on production or sales levels; examples might include rent, property taxes, insurance, or interest expenses. See  Variable expenses.

Gross profit

Sales minus the cost of goods sold.

Last in, first out (LIFO)

An inventory accounting method that ties the cost of goods sold to the cost of the most recent purchases. See  First in first out (FIFO).

Liabilities

In accounting, the debts your business owes; may include accounts payable, taxes owed, long-term loans, etc.

Lien

A legal claim against an asset used to secure a loan; a lien generally must be paid when the property is sold.

Liquid assets

An asset that can easily and inexpensively be turned into cash, such as cash itself, money market funds, treasury bills, or bank deposits.

Modified accelerated cost recovery system (MACRS)

The rate at which the value of a fixed asset is depreciated for tax purposes.

Net income

Total income minus expenses; generally translates to a company’s profit.

Operating expenses

Expenses associated with running a business, which may not be directly applicable to current products or services being sold; examples might include sales and marketing, research and development, or administrative costs.

Operating profit/loss

A company’s profit or loss before taking into account deductions of interest payments and income taxes; also called earnings before interest and taxes, or EBIT.

Principal

The amount of a loan borrowed, or the part of the loan that remains unpaid, on which interested is owed.

Pro forma

A type of financial statement that has assumptions or hypothetical conditions built into the data; often used for projected  balance sheets  or income statements.

Profit

The positive difference between revenue minus cost.

Quick ratio

A financial ratio that measures a company’s liquidity, it is calculated by dividing current assets less inventories by current liabilities. The optimal quick ratio is 1 or higher. Also called the acid test ratio.

Receivables financing

A form of financing in which a company sells its accounts receivable at a discount to a third party (see  factoring), or uses them as collateral against a loan.

Retained earnings

Earnings that are not paid out as dividends but are instead reinvested into the business or used to pay off debt.

Return on investment

The income that a particular investment provides.

Sales projection

An estimate of the amount of sales over a specific period of time.

Turnover

The number of times a given asset is replaced during an accounting period; often used to measure inventory or  accounts receivable

Variable expenses

Business costs that fluctuate from period to period based on sales volume; might include material or labor needed to manufacture a product. See fixed expenses.

Working capital

Current assets minus current liabilities; it is used to measure the assets a company needs to carry on its work.