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a brief description of accounting
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GLOSSARY of common terms in
ACCOUNTING & FINANCEfor non-specialist students
prepared by barry pierce BA MSc ACMA
July 2012
This glossary is designed to help those studying a basic, introductory module in accounting or finance, but whose degree programme is outside the specialism. Awareness of what business accountants do, and can be asked to do, interpreting their reports and analyses are important skills for any manager or professional because of the ubiquitous role of money. Besides, developing financial awareness & common sense helps personal development because many of the pressures on organisations and the self-employed are financially motivated.However, accountants indulge in jargon and their financial statements are full of it. This leads to confusion amongst those outside the profession, especially where different terms mean the same or subtly different things. This glossary should help you navigate in this idiomatic fog. It presently contains some 350 words or phrases that I have retrospectively surveyed from lectures to BSc engineering, MSc management & MBA students. As such, it reflects my audience and my perspective and is neither objective nor comprehensive. It is hoped that future contributions can develop this glossary into a more balanced and readable reference.I would like to thank Lynda Burkinshaw BA FCA CTA PGCE for reviewing this glossary but mistakes in definition and explanation are entirely my responsibility.
barry pierce
Guide to useTerms are arranged alphabetically and where synonyms exist, the acronym ‘aka’ (‘also known as’) is given in the notes. American textbooks are in common use here so where the term is largely indigenous, (US) is shown. Where the definition is taken, in large part or complete form, from an independent source, that source is indicated by an acronym in the ‘REF’ column are as follows:
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TERM EXPLANATION REF
NOTES
ODA: Anon. (2005) Oxford Dictionary of Accounting (3rd ed). Oxford University PressCIMA: Anon. (1996) Management Accounting – Official
Terminology. Chartered Institute of Management Accountants
fd: www.thefreedictionary.comab: www.allbusiness.com/glossaries/accountingham: Liebster & Horner ( 1989) The Hamlyn Dictionary of Business Terms. Hamlyn
In digital versions, hyperlinks are indicated from a definition or note to a term explained elsewhere in the glossary
a/c abbreviation for ‘account’ or ‘accounts’
absorption costing costing system that distinguishes between direct & indirect costs and assigns the latter to cost objects based on an intervening factor linked to the volume of production
aka: full costing (US)
accountability managerial responsibility for the appropriate conduct of the economic affairs of a business & the obligation to report thereon to its owners
contemporary interpretation widens conduct beyond the economic realm and widens responsibility to stakeholders & society at large
accountancy the profession of accounting (UK)
accountant a person who practices accountancy
regulated activities require membership of a professional body
accounting the process of identifying, measuring, recording, &
ODA
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TERM EXPLANATION REF
NOTES
communicating economic transactions
accounting entity the unit for which accounting records are maintained, separate from those who own it
ODA
eg a companyaka: business entity
accounting equation formulae that represent the ‘balanced’ nature of accounting entries & statements
ODA
assets = liabilities + capital(amongst others)
accounting period time period for which financial statements are prepared, usually annual where publicly disclosed, but the frequency of accounts prepared for internal use can be monthly or less
accounting standards the principles & methods formulated by an authoritative body for the treatment of specified transactions
eg the IASB
accounts structured records of a legal entity which represents events in monetary terms
aka: ‘books’
accounts payable amounts owed by a company to suppliers which, in aggregated form, appear in the balance sheet under current liabilities
ODA
aka: trade creditors; purchase ledger
accounts receivable amounts owed to a company by its customers which, in aggregated form, appear in the balance sheet under current assets
aka: trade debtors; sales ledger
accrual a fundamental concept that revenue is recognised in the accounting period in which it is earned & related costs are matched to determine profit. An ‘accrual’ recognises an expense in the correct accounting period where a supplier’s invoice is yet to be received, but it can also refer to the advanced receipt of revenue. It is represented
accruals are one of several mechanisms which differentiate cashflow from profit
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NOTES
in the balance sheet as a current liability
acid test a stringent test of liquidity ab monetary assets ÷ current liabilities
acquisition the transfer of control of a company by the purchase or exchange of its shares
aka: takeover; merger
activity-based costing costing system that identifies the various activities performed in a firm and uses multiple cost drivers (volume and non-volume based factors) to assign overhead costs (ie indirect costs) to productsABC recognizes the causal relationship of cost drivers with activities
ab abbrev: ABCwidely adopted over the last twenty years, displacing the absorption costing method because many costs are no longer affected by the volume of production
agency theory represents the relation associated with the separation of ownership of an entity from control by its managementRoss (1973)
the provision of accounts by the agent (management) to the principal (shareholder) is regarded as a monitoring cost
AIM the ‘introductory’ market for equities in London with less onerous listing & regulatory requirements
acronym for Alternative Investment Market
allocation the attribution of a whole item of cost (or revenue) to a single unit, centre or time period
CIMA
but see ‘apportionment’
amortisation the process of spreading the original cost or re-valued amount of an intangible asset over its estimated economic life by reducing its ‘carrying value’ in the balance sheet by the amount ‘expensed’ against profit
commonly applied to brands & other intellectual property
analyst a market intermediary who appraises the performance of shares, securities, & other financial products
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NOTES
annuity a constant yearly cashflow usually associated with an accumulated fund (eg a pension) and thus involves a principal sum & compounded interest
apportionment the splitting of a whole item of cost or revenue between multiple units, centres or time periods on some arbitrary basis
but see ‘allocation’
asset turnover a measure of utilisation of a company’s non-current or total assets, expressed as a multiple
sales ÷ assets
assets economic resources that are expected to convey future benefits
eg receivables, inventories, equipment, patents, etc
attestation a legal verification of truth & correctness
audit examination of a procedure, process or policy, independent of those involved, with a view to ensuring compliance with regulation, effectiveness, or improvement
audited accounts a published set of accounts that have been independently examined by an auditor and who expresses an opinion as to its compliance with accounting standards and the fairness of its representation of economic events
the annual reports of larger organisations will contain an audit statement to provide assurance to the reader on the reliability of its financial statements
auditor an accountant who possesses the certificated training to undertake an audit
in the UK such a person must also be a member of a designated professional body (eg Institute of Chartered Accountants; Association of
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NOTES
Chartered Certified Accountants)
balance the net debit or credit which remains on an account at the end of an accounting period
represents asset, liability, equity, revenue or expense
balance sheet a statement of the financial position of an entity at a given date disclosing the assets, liabilities and accumulated funds
CIMA
in a company the accumulated funds will represent shareholders’ interests and are termed ‘equity’
balanced scorecard a multi-dimensional performance model that integrates both financial & non-financial metrics with the aims & strategy of an organisation
Kaplan & Norton (1992)
it contains four perspectives: shareholder; customer; internal business process; innovation & growth
beta a measure of the systematic risk of a share or other traded asset
a coefficient above 1.0 means that its price has been more volatile than the market index
bill colloquial name for an invoice
ODA
bond a traded form of borrowing, issued by governments or corporates that usually offers a specified (‘coupon’) rate of interest and a redemption date in the medium/long-term upon which the principal sum is repaid to the bearer
the principal sum on a UK bond is £100 (US: $1,000)bonds are issued in ‘bearer’ form and can be freely traded between investors
bondholder the bearer of the bond entitled to receive interest and/or its ‘face’ value upon maturity
book value value of an asset (or liability) shown in the balance sheet
various bases of valuation are used, as governed by accounting standards & company policies
borrowings generic term for funds
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NOTES
received which carry an obligation to be repaid in future
break-even point the level of sales or sales volume at which neither a profit or loss is made
abbrev: BEP = fixed cost ÷ contribution per unit
budget a plan usually expressed in financial terms
budget phasing the attribution of an annual budget over shorter periods for the purpose of control
usually monthly or 4-weekly
budget centre normally an organisational unit whose manager has responsibility over a budget
classified as a cost centre, profit centre or investment centre
budgetary control the process of comparing actual results with budget, for the purpose of feedback on past performance or forward modification of plans
usually by budget centre so as to make a designated manager responsible for action
budgetary slack intentional underestimation of revenues and/or overestimation of expenses;
ab
budgeting an approach to the short-term management of organisational performance through the formalised use of financial plans & disseminated targets
business risk generic categorisation of risks associated with the strategy & operations of a commercial enterprise
in finance, the term is often used to differentiate non-financial risk from financial risk which is induced through gearing
buyout the acquisition of a substantial shareholding of a business by its own management
ODA
call option a right but not an obligation to buy an asset at a pre-specified (exercise) price over a pre-specified future period of time or date
an important risk mitigation (or ‘hedging’) devicealso see ‘put option’
capital a generic term which requires an
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NOTES
represents the funds injected into and generated by a business
associated adjective, adverb or noun to have particular meaning
capital employed the funded asset base, represented in a balance sheet, from which operating profits are generated
total assets – current liabilities or non-current liabilities + equity
capital expenditure the cost of acquiring or improving non-current assets which is not charged against current profits but recognised as an asset and then written down (as depreciation) over its economic life
abbrev: capex
capital gain the proceeds on disposal of an asset (eg land; ordinary share) less its original cost
capital gain, together with dividend received, are the two components of shareholder return
capital market a market into which long-term securities (ie shares & bonds) are issued and in which they are traded
key source of funds for listed companies
capital retirement a reduction in the funding base of a company by repaying borrowings, redeeming securities, or repurchasing shares
capitalise expenditure that is added to non-current assets in the balance sheet rather than charged against current profits
eg: installation costs on machinery; interest costs on funding the construction of a building
cash bank notes, coins & current account balances
cash balance the net amount of cash possessed or overdrawn
appears in the current asset or liability section of the balance sheet and as the final
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NOTES
figure in the cashflow statement
cash equivalent highly liquid investments that are capable of being converted into cash without notice
ODA
cash injection a rise in the external funding of a business to facilitate growth or maintain liquidity
cashflow the movement of cash into & out of a business
ODA
receipts & payments respectively
cashflow statement a financial statement (eg in an annual report) which shows the inflows & outflows of cash & cash equivalents over the past accounting period
analysis is by operating, investing, & financing cashflows in published statements
CFO commonly used title for the board director responsible for finance & the accounts
abbrev: Chief Finance Officer
chairman’s statement a mandatory statement in an annual report of a company, the content of which is not regulated
important source of strategic context because, whilst it is likely to convey a favourable picture, the statement summates key events and is often forward-looking
charge a legal interest in the assets of a company often required by lenders & other creditors so as to provide security on a borrowingalso see ‘collateral’ & ‘security’
may be ‘fixed’ where the assets are nominated or ‘floating’ where they are generic (eg in a bank overdraft secured on accounts receivable)
collateral assets that can be offered as security to a lender of funds
commercial paper short-term, unsecured borrowing issued by renowned companies on a money market
offers no interest, but is issued below its par value
comparability an accounting principle that published financial data should be prepared on the
where standards change, past results are re-stated to
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NOTES
same basis (ie accounting standards) as other companies in order that independent analysis can be consistently based
maintain comparability
compliance activities to ensure accounting records, systems, & reports concur with regulation
fundamental role of an audit
comply or explain a principle embedded in the UK corporate governance code that quoted companies should disclose in their published report that they have complied with provisions of the code or explain any non-compliance, the merit of which can then be judged by the reader
compound interest where the interest on a sum lent or borrowed is re-invested and so accentuated the amount of interest in future periods
eg £10 at 10% interest per annum will be £1 in the first year but £1.10 in the second £(10+1)x10%
contingency theory that there is no universally applicable best practice in the design of organisational controls such as a management accounting system
Lawrence & Lorch 1967
CIMA
contingent an asset or liability that arises from past events but whose existence will be confirmed only by the occurrence of an uncertain future event
ODA
adjective or adverb
contribution incremental profit generated from sales
an important term in marginal costing that represents sales minus variable costs of sale, where fixed costs are not attributed to the cost object (eg to the product)
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NOTES
control budget the budget that is used for organisational control and to which budget centre managers are held accountable
convertible a bond that can be changed into ordinary shares at a future time at the discretion of the holder or held until maturity and repaid as if a loan
noun
corporate governance guidance or regulation applied to boards of directors on the conduct of their direction and control of company operations
governance regimes have important implications for the internal control of risk and the integrity of public reporting of accounting information
COSO framework the over-arching risk management framework recommended by US law and UK code of corporate governance
‘COSO’ stands for the ‘committee of sponsoring organisations’ of the US Treadway Commission (1987)
cost the amount of expenditure, actual or notional, incurred on, or attributable to, a specified thing or organisational activity
CIMA
cost accounting the process & techniques adopted to collect, analyse, & present internal monetary & quantitative data
cost accounts are usually integrated with financial accounts but extend the ‘database’ considerably beyond regulatory needs
cost centre a production or service location, function, activity or equipment for which costs are accumulated (eg maintenance department)
CIMA
cost classification the process of grouping expenditure according to common characteristics (eg energy)
ODA
cost driver the factor, normally the level especially
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NOTES
of resource, that causes cost to be incurred on organisational activities (eg number of purchase orders)
associated with activity-based costing where it is also the basis upon which cost of activities are attributed to cost objects
cost object the ‘destination’ to which or purpose for which costs are attributed
eg product for pricing; department for budgetary control; customer for profitability analysis
cost pool a cost centre, where it is an activity (eg procurement)
only used in activity based costing
cost of capital the return required by investors on the provision of their funds. This may be a cash cost (as in the interest on a loan) or an opportunity cost (as in equity)
this is not the cost of arranging or issuing finance. It is an annualised cost of ‘renting’ the finance
costing the process of determining the costs of products, services or activities
CIMA
use of this term normally requires qualification by an adjective
cost-plus pricing an approaching to setting the selling price of a product or service which involves applying a ‘mark-up’ to its attributed cost
coupon the interest rate specified on a bond certificate
this is the rate paid and shown in the accounts. It is not the rate of return (or yield) to the bondholder
covenant a promise that is legally enforceable
creative accounting misleadingly optimistic, though not illegal, forms of accounting. Accounting statements published on this basis are said to be ‘window-dressed’
technically compliant with laws and accounting standards and, normally, acquiesced to by the auditor
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NOTES
credit an agreed delay in the settlement of an invoice or other liability incurred.an entry on the right-hand side of an account
see ‘double entry’
credit crunch a populist phrase for the loss of liquidity in the money markets & throughout the banking system as a result of bank collapse in 2008/9 in the US, UK and, to a lesser extent, Europe
led to a withdrawal or tightened constraint on corporate lending
credit rating an independent assessment of the ability of a company (or other entity) to repay a borrowing or line of credit
undertaken by an agency such as Standard & Poors. Commonly the highest (most favourable) rating is ‘AAA’ falling to a single ‘C’ for high risk clients or projects
creditors those to whom an organisation owes money
ODA
includes lenders, trade supplier, & government authorities for taxaka: payables
current less than one year adjective applied to assets & liabilities in the balance sheet
current ratio an indicator of working capital management. A high ratio may indicate inefficiency; a low ratio illiquidity
current assets : current liabilities
customer profitability analysis
attribution of the revenue streams & service costs to specific customers or customer groups
contemporary re-orientation in the cost object which reflects the rising importance of networks & brands
debenture a loan agreement, normally at a fixed rate of interest and redeemable in the medium & long term. It often carries a legal claim or charge over
the holder of the debenture – ie the investor – can assign its rights or sell the ‘loan’ on a capital
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NOTES
the borrower’s assets and contains covenants which restrict the borrower’s freedom of action over decisions on capital structure & dividends
market. In this way, the debenture becomes securitised and tradable
debit an entry on the left-hand side of an account
see ‘double entry’
debt an amount owed by one entity to another.a collective term to describe any forms of capital or financing other than equity
debtors those who owe money to an organisationusually these are customers who have been granted credit and are referred to as ’trade debtors’
shown in the current assets section of the balance sheetaka: ‘accounts receivable’
decision relevant data that are pertinent to the taking of a decision. In financial terms, these can be regarded as future, incremental cashflows
accounting data is often irrelevant as it may involve sunk or notional costs or be based on historic value
deferral an asset or liability recognised on a balance sheet that reflects a future income or expense
eg deferred income: liability prepayment: asset
deficit loss pseudonym often used in not-for-profit organisations
deposit money paid in part-settlement of a product to be supplied or service to be received.in banking terms, this is money lodged by a customer
depreciation the attribution of the initial cost of a tangible, non-current asset over future accounting periods to recognise the reduction in its value through use
the basis of attribution is stated as an accounting policy & the amount is charged against profits in the income statement, thus reducing the
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NOTES
carrying value in the balance sheet over time
derivative a financial instrument originally designed to hedge against the risk of future movements in the price of a specified tradable asset but whose use is often speculative.its prevailing price is, in part, derived from the price of the underlying asset to which it refers
forwards, futures, options & swaps are all examples of derivative products
direct cost a cost that can be specifically attributed to a cost object
directors’ report a section in an annual report that is required by the UK’s Companies Act 2006
compliance-based, it contains little strategic or financial insight
disclosure provision of information in the public interest, the minimum content of which is specified by law, market regulations, & financial reporting standards
discount factor a decimal, derived from the discount rate and future time period, which when multiplied by the future amount, converts it to a present value
eg discount factor for an amount to be received in two years where the rate of return is 10% is 0.826
discount rate the ‘hurdle’ rate of interest applied to appraise a potential investment.the rate will be based upon the cost of capital but is normally adjusted to reflect the specific risk characteristics of the investment or an equivalent investment in the market
commonly used in a discounted cashflow projection to determine if the net present value is positive or negative – value creative or destructive, respectively
discounted payback an technique that assesses the delay in recovering the outlay on an investment
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NOTES
using the present values of its projected cash generation
discounting the reduction of future amounts to their present value.when used in connection with invoices, this refers to the reduced amount received from a factor in advance of settlement by the customer.when used in connection with treasury bills or commercial paper, this refers to the reduced amount received on issue in relation to the face value of the bill that will be paid upon maturity
the level of discount on ‘T’ Bills determines the implied base rate in the UK economy
disposal the sale or scrapping of an asset
particularly evident in the notes to the accounts on non-current assets and in the investing section of the cashflow statement
diversification broadening in the field of operations of a business or investor
associated with the creation of a portfolio and risk reduction
divestment the sale of an asset, particularly a subsidiary business
dividend a discretionary reward to shareholders from the distributable reserves of a company
normally related to the current earnings of a business
dividend cover a measure of the maintainability of a dividend. A trend of reducing cover multiples could be a prelude to a cut
earnings ÷ dividendsor eps ÷ dps
dividend per share the total amount distributed divided by the number of shares in issuewhere dividends are declared, an interim
abbrev: dpsan important measure of the trend in shareholder reward, where
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NOTES
payment is made and a final dividend per share proposed for shareholder vote at the annual general meeting of the company
quoted companies will seek to be progressive and avoid the volatility associated with earnings
dividend yield a measure of shareholder return by relating the last year’s dividend distribution to the current share price on the capital market, expressed as a percentage
dividend per share ÷ share price x 100
double entry a method of recording transactions in a set of accounts which reflects the dual aspect of the transaction and involves more than one account
since each debit entry has a corresponding credit, the accounts as a whole should ‘balance’
drawn down occurs where a borrowing facility has been arranged where amounts may be called upon as required and over an agreed period up to the limit specified by the facility
the aggregate drawdown and not the facility represents the liability shown in a balance sheet
earnings profits after tax, that are attributable to the ordinary shareholders
aka: net income (US); the bottom line (slang)
earnings per share important measure of financial performance, whose calculation is subject to an international standard (IAS33). eps relates the profit attributable to shareholders to the equity capital base of the company and thus provides a trend of return, irrespective of growth
abbrev: epsprofits after tax ÷ no of shares in issueNOTE: the eps of different companies are not comparable
EBITDA a contemporary measure of financial performance that is a hybrid of profit & cash generation
Earnings Before Interest, Tax, Depreciation & Amortisation
efficient market hypothesis
a proposition that financial markets fairly, rapidly & rationally assimilate information into the price of
abbrev: EMH
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NOTES
a share or other traded assetequity the value of shareholders’
interest in a company: represented in the accounts as the net asset value or capital & reserves figure in the balance sheetalso represented for a listed company by its market capitalisation
equity = net asset value = total assets – total liabilities = ord’ share capital +share premium + reserves + retained profitmarket value of equity = number of shares issued x share price
exceptional items significant costs or revenues that, whilst unusual, fall within the normal operations of a business and are disclosed separately in its income statement with the intention of conveying a fair view of underlying profitability
expenditure payment of cash, or the incurrence of a liability, to obtain an asset or service.may be classed as ‘revenue expenditure’ which is charged against profit or ‘capital expenditure’ which is ‘capitalised’ as an asset
ab aka: cost; expense
expense see ‘expenditure’face value the value cited on a security
when it is issued. It does not represent the cash received at the time or the market value of the share or bond
aka: par value; nominal value
facility an agreement, usually with a bank, that grants a line of credit that can be used in future
expressed as the maximum amount of the potential borrowing
factoring the sale by a company of its accounts receivables to a third party (often a bank subsidiary) at a discount in return for prompt cash and for a fee in return for the administration of the debtors’ ledger
the factor may assume responsibility for credit default risk (a ‘without-recourse’ agreement) but will then define credit terms & limits
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NOTES
applied by the company
fair value the amount of money which it is assumed an asset or liability could be exchanged in an arms-length transaction between informed and willing parties
ODA
used in particular in acquisition accounting where the net assets of the target are brought onto the balance sheet of the predator
feedback the monitoring of actual output against plan with a view to retrospective action to correct the difference
as in a budgetary control system
feedforward the modelling of system resources & processes so as to compare forecast outputs against plan with a view to taking pre-emptive action to forestall difference
as in budgeting
finance the practice of manipulating & managing money.monetary capital raised for business purposes.verb: to raise monetary capital
ODA
aka: fundsaka: funding
finance lease a contract for the use of a specific non-current asset (eg equipment) which conveys the risks & rewards of ownership, but not ownership itself, to the user (the lessee)
requires recognition in the balance sheet as a non-current asset (even though it is not owned) and the associated liability represents future payments to the lessor
financial accounting the accounting process and database required to generate published periodic financial reports as regulated by law, accounting & reporting standards
financial investment an outlay of funds with a view to profit
investments may be differentiated between those that are ‘financial’ as in market securities & assets and
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NOTES
‘productive’ investments made by a company’s management in conventional business assets
financial management the management of all the processes associated with the sourcing & deployment of funds with a view to providing suitable returns to investors
financial markets formalised institutions that engage in the trading of financial products including shares, bonds, notes, paper, currencies, derivatives, etc
in the UK, the pre-eminent markets are the London Stock Exchange, the AIM, the LIFFE
financial reporting the presentation of structured analyses of accounting data.the normal connotation of the meaning of the term is the package of statements that are made publicly available and the content & format of which are regulated
the International Accounting Standards Board has issued a series of financial reporting standards (IFRS)
financial risk generally refers to risks that are associated with monetary transactions & values but has a specific meaning in relation to debt in a company’s capital structure which induces risk on shareholders (who are residual claimants on profit after interest has been paid and upon net assets in the event of liquidation)
a higher gearing represents higher financial risk
fixed cost an expenditure whose level remains unaltered irrespective of moderate changes in the volume of turnover or intensity of operationsa term explicitly used in
examples include rent, depreciation, & the costs of salaried personnel
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NOTES
marginal costingflexed budget the adjustment of sales &
variable cost elements within an original budget to reflect actual volumes of turnover or production achieved
the flexed budget becomes the ‘standard’ against which variances on resources consumed can be validly assessed
floating rate an interest rate which rises and falls in relation to the underlying base rate in the economy
most commercial lending is based upon LIBOR
flotation the launch of a company’s shares onto a capital market for the first time
aka: Initial Public Offering (IPO)
forecast a prediction and quantification of future events without a declared intent to achieve them
free cash flow the net cash generation of a business that is available for dividend distribution & capital redemptionnote that a negative FCF means that an entity requires external financing
abbrev: FCFFCF = operating cashflow – (net) investing cashflow
FTALLSH an index on the London Stock Exchange market that represents the aggregate movement in the price of all shares listed on the market, weighted by their market capitalisation
market indices provide a general benchmark against which the profile of an individual share’s price may be judged
FTSE100 an index on the London Stock Exchange market that represents the aggregate movement in the price of shares of the top 100 companies by value, weighted by their market capitalisation
the constituent companies of the index are changed annually based on their ranking by market capitalisation
full costing the complete attribution of relevant operating costs to a cost object
aka: absorption costing
funding the provision of monetary capital to facilitate
aka: financing
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NOTES
productive investment and operational liquidity
funds monetary capital, which may be sourced externally or internally
the ‘equity’ figure in the balance sheet represents the accumulated, internal funds of a business or ‘shareholders’ funds’
futures contracts that carry an obligation to buy or sell a specified asset (eg foreign currency, oil) at a specified price at or over a specified time in the future
such contracts may be bi-lateral (eg between a company & a bank) of involve blocks of the asset on a derivatives market (eg LIFFE)
GAAP abbrev: Generally Accepted Accounting Principles
usually refer to accounting & reporting standards in the US
gain a profit usually made from a rise in the market price of an asset
gearing the relative amount of debt in the total capital structure of a businessa company is said to be highly geared when its proportion of debt is significantly higher than other companies in the same industry sectordebt financing creates a geared (multiplied) effect on earnings when sales are growing but the reverse when sales are in decline. Financing growth through the use of debt offers the prospect of higher returns for shareholders but at greater risk
ODA
gearing can be calculated in number of ways, but commonly:debt ÷ (debt + equity) x 100%based on balance sheet values, but the use of market values will be more representativealternatively, the debt:equity ratio may be used
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GILTS UK government bonds, regarded as a risk-free investment issued with a range of maturities, whose yield is used as a basis for setting corporate bond rates
abbrev: Government Issued Long Term Stock
going concern a fundamental accounting concept that determines the basis upon which accounts are prepared – that the business will continue to operate for the foreseeable future. Asset valuations and liabilities recognised are thus significantly affected by this presumption
the UK Corporate Governance code requires listed companies make a declaration in their annual reports to this effect
goodwill the difference between the amount paid to take over a company and the aggregate of the fair values of its net assets caused by reputation, customer base, and similar intangible factors
CIMA
it is recognised on acquisition of a company where the amount paid in excess of its net asset value is regarded as an intangible asset and subject to annual tests of impairment
gross profit the difference between the sales & the directly-attributable costs of sale of a business, but excluding distribution, administrative, & financing expenses.a key indicator in the retail sector which shows the effect of price discounting & buying power
(sales – cost of sales) ÷ sales x 100%
harvest a strategy, often adopted for mature products & services, which curtails investment to enhance cash generation
hedge a financial transaction or position designed to mitigate risk
ODA
historic cost the valuation of assets based on their original purchase price
hurdle rate the discount rate set in an
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NOTES
investment appraisal over which the return on a project must ‘jump’ in order to be considered viable. It is normally set by applying a premium for risk on the underlying cost of capital
IASB global body which regulates principles, content, bases, & formats of published accounting reports and is subscribed to by 120 member states
International Accounting Standards Board
impairment reduction in the value of specific non-current assets shown in the accounts to reflect the recoverable value either through realisation or use in future economic activity
income US term for sales or revenue; note, net income is equivalent to profit
income smoothing the manipulation by companies of certain items in their financial statements so that they eliminate large movements in profit and are able to report a smooth trend over a number of years
ODA
this is legitimate providing the adjustment does not contravene accounting standards or audit opinion. Such adjustments are commonly made through accruals, provisions, and the carrying value of & policy on non-current assets
income statement an financial statement that discloses the revenue, operating profit, & earnings over the last accounting period
previously known in the UK as the ‘profit & loss account’
indirect cost a cost that cannot be specifically attributed to a cost object (ie an overhead expense) and, as such, is attributed indirectly by apportionment, secondary
aka: overhead
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NOTES
allocation, & ultimately absorption
intangible a non-current asset that is documentary (eg a patent), contractual (eg a licence) or notional (eg a brand or goodwill)ie does not take physical form
they may be subject to regular write down, that is ‘amortised’, just like a tangiblel asset
interest a rent for the use of money, normally paid periodically, and expressed as an annualised percentage rate on the capital sum involved
interest cover measure of the vulnerability of interest payments to a drop in profit and thus financial risk
operating profit ÷ interest
internal audit an audit that an organisation carries out on its own behalf, normally to ensure that its own internal controls are operating satisfactorily
ODA
internal control an organisational process that is designed to assure the outcome of an activity is as intended
accounting systems are intended to monitor financial transactions and ensure probity
internal rate of return the annualised return over the life of a productive investment, calculated by:the discount rate which, when applied to future cashflows, generates an aggregate present value equal to the amount outlaid at the beginningie where the NPV is zero
abbrev: IRR, and is the ‘r’ inoutlay =∑ cashflowy ÷ (1 + r)y
where ‘y’ is each year over the life of the investment
inventory materials received & held in store, in progress of manufacture, or products not yet sold
traditional UK term: stock
investment any application of funds which is intended to provide a return by way of interest, dividend or capital
CIMA
productive investment is an ‘intermediate’ stage in which businesses
26
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NOTES
appreciation. use the funds provided to expand or develop and thus generate enhanced profits from which financial returns are made
investor the individual or corporate entity that provides the funds for investment
though the majority of funding in unlisted companies is from internally-generated, retained profit
invoice a document stating the amount of money due to an organisation issuing it for goods or services supplied
ODA
invoice discounting the reduced amount received from a factor in advance of settlement by the customer
factors include departments or subsidiaries of banks
IPO the launch of a company’s shares onto a capital market for the first time
abbrev: Initial Public Offering (IPO)aka: flotation
job costing a process that attributes costs to a specific customer order
common in companies that offer bespoke products or professional services
junk bonds unsecured corporate bonds that carry a high coupon and/or yield because of the perception of a high risk of default
KPI a main internal indicator of performance toward achieving a corporate goal based on monitoring a factor critical to the success of the strategy
abbrev: Key Performance Indicator
leasing a contract for the use of a tangible asset which incorporates its funding,
the accounting treatment varies according to the
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NOTES
from the vendor itself or an independent lessor, who retains ownership.finance leases tend to be for specialised assets (eg bespoke machinery) over a longer termoperating leases tend to be for general use assets (eg cars; photocopiers) for shorter periods
classification. Only finance leases are represented in a balance sheet under non-current assets & non-current liabilities, as if they were owned by the user; operating leases are simply expensed as rent
leverage US term for the relative amount of debt in the total capital structure of a business
aka: gearing
liability an obligation to make a future payment to another entity because of a past transaction
LIBOR the average rate of interest in the short-term money market at which banks in the UK lend money amongst themselves.it is normally marginally above the base rate in the UK economy, set by the discount rate on government issued treasury bills and, in itself, acts as the base rate for most variable rate commercial lending both in the UK & overseas
abbrev: London Inter-Bank Offer Rate
life cycle costing an assessment of the total cost of a physical asset from ‘cradle-to-grave’: eg a product’s development, manufacture, servicing, & disposal
important to decisions over economic use and environmental impact
LIFFE the market in London for trading derivatives on currencies, shares, commodities, & equity indices
abbrev: London International Financial Futures options Exchange
liquidity the ability of a business to meet its current debts when due, either through the
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NOTES
possession of cash or assets that can be readily converted into cash
listing the registration of a company on a capital market which enables its shares to be publicly issued and, subsequently, other of its securities to be traded (eg corporate bonds)
loan a bi-lateral contract on the provision of specified funds
loan note medium-term traded loan, in bearer form
both specify a ‘coupon’ or fixed rate on interestloan stock longer-term traded loan, in
bearer formloss an excess of cost over its
related salesmanagement accounting
the concepts and techniques used to assimilate, analyse, & internally report financial, quantitative & qualitative data for organisational planning, control & decision making
management buy-out where a management team buy the company they run from its existing shareholders
margin the profit made on the sale of products or services, usually expressed as a percentage of selling price
marginal costing a costing & decision making technique that charges only variable costs to cost objects and treats fixed costs as a lump sum to be deducted from total contribution to derive the profit or loss for the accounting periodimportant approach for examining the effect on profit of changes in sales’ volumes
ODA
aka: variable costing (US)S – VC = C = FC + PS: sales; C: contribution; P: profit; VC: variable cost; FC: fixed cost
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NOTES
market capitalisation the market value of equity in a company
market efficiency the degree to which a financial market observes the proposition of the Efficient Market Hypothesis
market value the unit price or aggregate value determined by trading activity on a market
mark-up the percentage applied to unit cost to determine the selling price of a product or serviceit may be applied to the full or variable cost
mark-up = (selling price – cost) ÷ cost x 100%
master budget the budget summary into which all subsidiary budgets are consolidated and represented by the projections of the principal financial statements
budgeted income statement
budgeted financial position at start & end of the ensuing year
cash flow budgetmatching an essential procedure in
accruals-based accounting where the costs relate to the sales recognised in the accounting period
adjusting entries are pre-payments & inventories in current assets & accruals in current liabilities
materiality a concept that governs the required accuracy of accounting data & information. The omission or mis-statement of data is significant if it could influence decisions by the readers of accounts
judgements on materiality determine an auditor’s extent of examination & willingness to contest a figure in the accounts
merger a combination of two or more companies on an equal footing that results in the creation of a new reporting entity in which the shareholders of the separate entities mutually share risk and neither gain overall control
aka: acquisition; takeoverin reality, genuine mergers are rare and the appellation is a euphemism to maintain the pretence of equality
money a medium of exchange that functions as a unit of
ODA
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NOTES
account, a store of value, and a means of deferred payment
money market a short-term wholesale exchange for financial instruments such as treasury bills, certificates of deposit, & commercial paper but also includes bullion and foreign exchange
mortgage a long-term loan secured on land or property
multi-dimensional performance models
a monitoring framework that contains many aspects or perspectives beyond that of profit and the interest of shareholders
eg Balanced Scorecard;Results-Determinants FrameworkPerformance Prism
mutually exclusive the choice of an item, action, or use which precludes alternatives
net the amount remaining after specific deductions have occurredoften involves netting off two sides of accounts
ODA
eg net asset value; net cash flow
net present value the aggregate of the present values of all the future cashflows generated over the life of a productive investment less the amount outlaid at the beginning
abbrev: NPV, and is equal to:∑ cashflowy ÷ (1 + r)y - outlaywhere ‘y’ is each year over the life of the investment & ‘r’ is the hurdle rate
net profit gross profit less the expenses in an accounting period.note that net margin is an important expression of operational profitability
aka: operating profit; trading profit profit before interest & tax; net income (US)net margin= net profit ÷ sales x 100%
non-current a greater duration than one year
adjective used to classify the longevity of assets &
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NOTES
liabilitiesnotional cost a cost used in product
evaluation, decision making, & performance measurement to represent the cost of using resources which have no conventional actual cost (or cash cost)
CIMA
eg depreciation; rent on owned property; interest on capital at sub-corporate level; transfer prices
obligation a commitment, duty, or promise that is enforceable in law
eg to repay a debt
operating cycle the average time between payment for supplies and the receipt of cash from related sales
indicates the funding needed to maintain operational liquidityaka: working capital cycle
operating lease a contract for the hire of plant or equipment where the period of use by the lessee is substantially less than the economic life of the asset and where many risks of ownership remain with the lessor
there is no recognition in the balance sheet and lease payments are simply expensed against profiteg: fleet cars; office equipment
operating profit the profit or loss made in an accounting period from the main trading activities of a business
aka: trading profit; net profit; profit before interest & tax; net income (US)
opportunity cost the economic cost of an action measured in terms of the benefit foregone (ie sacrificed) by not pursuing the best alternative.in other words, the cost of the lost opportunity
ODA
eg: the cost of funds must be judged in terms of the returns they could earn on market securities of similar risk
option a contract that carries a right, but not an obligation, to buy or sell a specified asset at a specified price at or over a specified time in the future
can take the form of a block-traded derivativealso see ‘future’
ordinary shares partial ownership of a company that entitles the holder to a share of the distributable profits (ie
ordinary shares are undated and normally carry the right to vote on
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NOTES
earnings) and the residual net asset value in the event of its liquidation
proposals by the company’s board of directors in general meeting
outlay initial expenditure on a productive investment
out-turn a UK term for a revised forecast in a budgetary feed-forward system, commonly adopted in the public sector
over/under capitalisation
an opinion on the adequacy of funds available to a business in relation to the structure of its net assets and its strategic intentions
over-capitalisation implies inefficient use of funds; under-capitalisation, its inadequacy or illiquidity
overdraft an arrangement with a company’s bank that allows the current account to go into deficit up to a prescribed limit (eg the ‘overdraft facility’)
overhead the indirect costs of an organisation
overhead absorption the final stage in the attribution of indirect costs to a cost object (eg a product) using an estimated rate based on the relation between the budgeted overhead cost and a factor linked to the planned output over the same period
eg budget overhead cost: £1,000planned output: 100 machine hoursoverhead absorption rate =£10 per machine hour
over-trading a severe liquidity problem caused by a business over committing itself to contracts for which it has inadequate short-term funding resource
commonly caused by rapid growth in SMEs that have long cash operating cycles
par value the value cited on a security when it is issued. It may not bear any relation to the cash received at the time or the market value of the share or bond
aka: face value; nominal value
payback the period of time required a simple, but widely
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NOTES
for the cash inflows from an investment to recover the outlay
used, investment appraisal technique
payment cash outflowPBIT abbreviation for Profit Before
Interest & Tax, the principal measure of operational profitability
aka: trading profit; net profit; operating profit; net income (US)
pension a fund for an individual, accumulated by contributions during their working life, which pays an annuity & potentially a lump-sum upon retirement or the reaching of a specified age
performance progress toward achievement of predetermined goals but can also be measured by reference to performance in the past or by that of peers
perpetuity an annuity that is everlastingportfolio a set of assets, usually
financial securities, held by an investor. The constituents are chosen to reflect the risk/return preferences of the investor
preference shares shares that carry a fixed rate of dividend and have a prior claim on company profits or assets to the ordinary share holders
prepayment a cash payment in respect of a supply or service which is received in a later accounting period
present value a cash equivalent now of a future sum discounted at a required return on investment
price the exchange value of something in its market
price earnings ratio an important relation between the market price of an ordinary share and its
abbrev: PER; P/E ratio
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TERM EXPLANATION REF
NOTES
current ability to earn profit.High PERs are associated with rapidly growing companies whilst low multiples suggest maturity. PERs are perhaps best judged by comparison with peers in the same sector of the market
Calculated by:share price ÷ earnings per shareormarket capitalisation ÷ earnings
pricing the approach adopted by a business toward the setting of prices for its products or services
this may be based upon cost, prevailing prices in the market, or a competitive strategy or tactic
principal budget factor market demand or a specific resource that constrains the scale of operations of an organisation and which is evaluated first in the preparation of the organisation’s budget
proceeds receipts from sale, but the term is usually used in conjunction with an extra-ordinary event
eg IPO of shares; disposal of non-current assets
process costing a method of collecting & attributing costs where products or services result from a continuous process
eg steel rods from a furnace which is never shut-down; electricity from a turbine
productive investment a term which differentiates investment made by a company in its business as distinct from financial assets (by external investors)
profit the excess of revenue over related cost
the normal motive of business
profitability a criterion of economic performance
provision an amount set aside out of profits for an anticipated future liability, though uncertain as to amount & time.the establishment and subsequent release of
appears in the balance sheet but may be included in current or non-current liabilities or netted off a current asset (as in provisions for
35
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NOTES
provisions offer scope for creative accounting
doubtful debts and stock obsolescence)
prudence an accounting principle that requires the approach to the preparation of published accounts to be cautious, particularly in relation to the outcome of future events
the prudence concept seeks to ensure that assets & income are not overstated and liabilities & expenses are not understated
purchases the buying of a supplied product or service which is recognised in the accounts at the time it is received or undertaken
put option a right but not an obligation to sell an asset at a pre-specified (exercise) price over a pre-specified future period of time or date
quick ratio an indicator of the liquidity of a company, the level of which must be judged in relation to the context of the business being examined
aka: acid test(current assets – inventories) ÷ current liabilities
quoted companies companies whose shares are listed on a recognised exchange
ratio analysis a systematic approach to the appraisal of accounting data contained in the balance sheet & income statement to inform an assessment of profitability, efficiency, liquidity & financial risk
textbooks are overly prescriptive in the use of these ratios. insufficient attention is paid to the underlying accounting data and to the context of the company under examination
real option an approach to the financial appraisal of productive investment opportunities in a similar way to financial investment opportunities.in essence this views opportunities as buy, sell, or option decisions – ie invest, dispose, or defer a decision
a decision to invest is analogous to a call option; a decision to divest is analogous to a put option; the duration of the exercise period facilitates deferral of the decision until contextual
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NOTES
on a non-current asset or project
uncertainties clarify
realisable value the future economic benefit anticipated from an asset (eg inventories)
the prudence concept requires that assets be stated in the balance sheet at the lower of cost or net realisable value
receipt cash inflow; or a document issued to a third party to acknowledge such
reconciliation an accounting procedure undertaken to ensure that account balances or statements are supported by documentation
eg a comparison between the balance on a cash account and the bank statement & money in hand
redemption the repayment of bonds & other securities
regulatory framework company law, market & professional rules, standards & codes that govern the preparation of published accounts
reliability an accounting principle that the financial information provided by a company should have the characteristics of faithful representation, neutrality, completeness, freedom from material error, and caution
ODA
remuneration the salary & monetary rewards of employees and particularly those enjoyed by directors
the existence of a remuneration committee & its non-executive composition are regarded as an important check on excess by codes of corporate governance
rent a payment made for the use of an asset over a period of time
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NOTES
replacement cost the price at which identical goods or capital equipment could be purchased at the date of valuation
CIMA
reporting standards the approach formulated by an authoritative body (eg the IASB) for the format & content of published reports
reserves part of the equity figure in a balance sheet, reserves are created from primary share transactions, transfers from retained profit, revaluations, acquisitions, disposals, etc. Reserves as a whole are classified as distributable or non-distributable: whilst both form part of shareholders’ funds, only distributable reserves can be used for the payment of dividends
notes to the published accounts will provide an analysis of the figure in the balance sheet. The statement of changes in equity will show movements into, between & out of reserves in the past year
responsibility accounting
a performance management approach which aligns account structures and budget centres with organisational responsibilities, so that managers can be held individually accountable for the sales, costs & even net assets associated with their organisational units
retained profit/earnings
the distributable profits of a business that remain after the dividend has been declared.
the earnings figure in the Income Statement is prior to distribution; the retained profit figure in the balance sheet is the accumulated earnings of past years less the aggregate dividend distribution
return the profit on an investment expressed as a percentage
in the case of shares, this will include any capital gain as well as the dividend received
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NOTES
return on capital employed
principal accounting measure of the profitability of operations
abbrev: RoCE, calculated as:operating profit ÷ capital employed x 100%
return on equity an accounting measure of shareholder return
earnings ÷ equity x 100%
revaluation an adjustment in the book value of an asset to reflect, for example, an increase in its market value or an impairment
land & property is commonly revalued in the balance sheet to reflect an independent market valuation with the adjustment made to a non-distributable reserve
revenue sales from the main activities of a business, recognised in the income statement at the time the transaction occurred (eg product delivered)
aka: sales; turnover; gross income (US)
revenue expenditure costs of operations charged to the income statement in the same accounting period as the revenue to which they relate
day-to-day running costs
revolving credit a loan facility that allows the company to borrow & repay debt as required, within an overall limit and for a set time period
reward the return gained on the use of assets
the level of the reward should be related to the level of risk taken
risk any variation in potential outcome from an action or event
risk exposure the level of assessed risk on an action or event expressed in gross or probability-weighted terms
risk management an organisational process that seeks to identify, assess, mitigate or transfer,
the COSO framework offers guidance on this and appropriate
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NOTES
and monitor risks associated with strategy & operations
internal controls
risk-free rate the interest rate on government borrowing in the economy which sets a platform for risk premia to be applied for commercial lending
see LIBOR; GILTS
sale & leaseback a transaction in which the owner of an asset sells it and immediately agrees the right to use the asset under a lease
a common motive is to generate cash for strategic purposes or to boost working capital
sales see revenue ake: turnover; gross income (US)
secondary trading trading in shares & securities after they have been issued and from which no cash inflow occurs to the issuer
this is analogous to a ‘used’ market in goods and dominates trading volumes
secured a borrowing or bond that entitles the lender or holder to ownership of assets of the borrower in the event of default
thus the term ‘security’
securities shares & other traded financial instruments
segmental analysis a regulated disclosure in the notes to published accounts of the financial results of major business & geographic divisions of a company
usually contains information on total sales, operating profit, and attributed capital employed
sensitivity analysis a modelling process that assesses risk by changing individual variables and examining the effect on the overall outcome
it is commonly adopted in investment appraisals where each factor in the discounted cashflow is adjusted to the point where the NPV becomes zero. In this way, the percentage variation (risk) in each variable that would erode viability of the proposal is
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NOTES
determinedservice costing the costing of internal
services, which commonly involves the inclusion of quantitative data
eg maintenance; IT support
settlement a payment which satisfies a contractual obligation
share the unit of ownership in a company
share buy-back the re-purchase by a company of its own shares on the market (or by private agreement) for cash and their subsequent cancellation or reservation for alternative use (eg to meet the needs of an employee share ownership scheme).if the shares are cancelled this results in a reduction in equity capital
now relatively common in cash generative companies that find themselves over-capitalised.buybacks result in an increase in EPS and gearing
share options a right to buy a specified quantity of a company’s shares at specified price and time
commonly used to reward senior management and incentivise them to act in the shareholders’ interest
share price the price of a share on a capital market
shareholder owner of a share in a company
shareholder wealth a largely abstract notion, the maximisation of which is regarded as being the over-arching financial aim of the management of a commercial entity
probably best represented in reality by Total Shareholder Return
shareholders’ funds the ‘equity’ figure in the balance sheet which represents the shareholders’ interest in a company
aka: capital & reserves; equity; net asset value
SME abbreviation for Small & Medium sized Enterprise
41
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NOTES
social responsibility an ethical and popular view that business has obligations to the society that grants it the right to operate. In contemporary terms, these obligations extend toward the environment and the minimisation of impact.many companies now publish an annual sustainability report which recognises a wider responsibility to society
responsibilities include those to: employees (as welfare), customers (as fitness for purpose), communities (as public investment), government (in tax contributions)
solvency the financial state of a company that is able to pay all its debts as & when they fall due
ODA
speculation engagement in a risky transaction (often a financial investment) on a chance of quick or considerable profit
fd the term is associated with whimsical decisions that are not rationally-based and are thus inconsistent with conventional finance theory
stakeholder a person, group or societal entity who can affect or is affected by the actions of a business and have thus a legitimate interest in its affairs
eg customers; suppliers; employees; communities; pressure groups; lenders; shareholders; government
stakeholder theory that management of a commercial entity should recognise & address the interests of stakeholders and treat them fairly on the basis of either ethical conduct or pragmatic business
Freeman 1984
this contradicts agency theory and its view of the paramount duty of management owed to shareholders
standard cost a predetermined unit cost of a product or service
ODA
standard hour a measure of production output (and not time) that represents the amount of work that can be achieved within an hour under normal
ODA
acts as a benchmark for judging labour or machine efficiencytotal standard hours
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TERM EXPLANATION REF
NOTES
conditions are an important measure of equivalent output where a diverse range of products are manufactured
standard costing a planning, control & accounting technique that establishes and uses pre-determined resource consumption, costs & prices to determine a benchmark against which actual costs & revenues are compared and variances analysed
suitable in repetitive operations, such as batch manufacturing
statement of changes in equity
a main financial statement that appears in published accounts, the purpose of which is to reconcile opening & closing balances in the capital & reserves section of the balance sheet and identify the nature of the movements during the intervening accounting period
statement of financial position
the title formally adopted in reporting standards issued by the IASB for the balance sheet
aka: balance sheet
stewardship traditional term for the duty of care owed by management toward the shareholders of a company in the custody of their assets and maintenance of their capital
stock UK term for inventoryUS term for ordinary shares
stockbroker an individual or firm that acts as an agent for investors, buying & selling shares & other securities on their behalf
aka: broker
stock turnover a measure of the utilisation of inventories, either as the number of times inventory is
purchases & consumption data are not usually
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NOTES
‘turned over’ or consumed in a year or in the average number of days material remains in stock
available in published accounts so ‘cost of sales’ is used as an approximation
strategy a coherent suite of plans which seek to achieve a declared organisational objective
strategic management accounting
a range of concepts and techniques which provide information to senior management on the strategic position of a business in its environment, its competitiveness, and its options for the future.the concepts, variously, tend to use non-financial data, external data, multiple perspectives, & informed guesswork
abbrev: SMA, contrasts with conventional management accounting which is largely concerned with operations, the present, & internal performance
substance over form a principle according to which transactions are accounted for on the basis of their intended purpose in reality rather than the strictly legal form they take. This is UK practice
important to inhibiting the opportunity for creative accounting and hidden financingUS GAAP accepts the legal form and is thus more vulnerable to fraudulent accounting (as in Enron)
sunk cost a cost already incurred and unalterable that has no relevance to current decisions
ham
eg installation costs of plant; design costs on a failed tender
surplus the excess of revenue over expenditure
a term commonly in not-for-profit organisations
systematic risk the extent of total risk that is inherent in the market and
eg the volatility in a share’s price that is
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NOTES
cannot be avoided through diversification
due to movements in the market index as a whole
tangible adjective used to describe non-current assets that take physical form (eg machinery)
as opposed to intangibles such as goodwill, brands, & patents
target costing the setting of unit cost targets based upon an anticipated market price that customers would be willing to pay and the planning & subsequent monitoring of the emerging unit cost down to the target level
tax a legal levy imposed by the state to raise revenue to fund government expenditure, commonly applied to sales, remuneration, profits, & capital gains
the knowledge of tax required for basic corporate finance is limited to corporation tax on profits and the tax relief on debt funding
term an indicator of the duration of time over which a business activity extends or until a financial security matures (ie is redeemed or repaid)
requires a prefix: eg short-term (< 1 year); medium-term (2-5 years); long-term (> 5 years) approx
throughput accounting a short-term decision making approach which seeks to increase profit by optimising the mix of products through a process based on the return generated on a ‘bottleneck’.it assumes that contemporary manufacturing facilities are a fixed cost and the only variable aspects are purchases & sales
throughput = sales – purchasesprofit = throughput – fixed costs
time value of money the concept, used as a basis for discounted cashflow calculations, that cash received earlier is worth more than the same nominal
ODA
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TERM EXPLANATION REF
NOTES
amount received later because it can earn interest in the intervening period
total shareholder return
the actual return enjoyed by a shareholder over an annual period based on market prices & the dividend received
(closing share price - opening share price + dividend per share) ÷ opening share price x 100%
trade credit granted by suppliers on their invoices and represents a short-term, and much-abused, source of funding for businesses
accounts payable figure in the balance sheet
trading profit a term for operating profit commonly adopted by retailers & traders
aka: operating profit; PBIT; net income (US)
trading volumes the number of shares bought & sold on a capital market
transactions an external or internal eventtreasury bill issued, at a discount to its
par value, by treasuries or central banks to raise funds in the short-term for governments. It is repaid in full on the date designated on the bill
abbrev: T-billforms the base interest rate in an economy (aka: ‘repo rate’)
true & fair view an audit opinion on a published annual report that accounts have been prepared in accordance with the regulatory framework and faithfully represent the state of financial affairs at the balance sheet date & of financial performance over the reporting period
fair representation (US)
turnover the total sales for the accounting period.in more general terms, it refers to the amount of times a specified classification of assets is utilised in a year
aka: revenue; gross income (US)
eg inventory; non-current assets
unrealised a profit that results from the holding of an asset and, hence, not yet ‘realised’ as a
aka: paper gain
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TERM EXPLANATION REF
NOTES
cash inflowvalue has a wide range of
meanings, even when definitions are confined to economics. ‘exchange values’ commonly form the basis for many accounting entries as these are market prices but examine the adjective linked to the word ‘value’ to determine the basis on which a monetary amount has been determined
there is a particular connotation that is important in finance – and that is ‘shareholder value’. This normally pertains to the market price of an ordinary share. Under agency theory, management should aim to create (add to) such value
value chain analysis a strategic appraisal of the whole sequence of suppliers & customers involved in the products or services of an organisation with a view to identifying the sections where value is created
it is often undertaken to understand the relative competitive position of a business or as a prelude to its repositioning
value analysis a systematic inter-disciplinary study of factors affecting the cost of a product or service, in order to maintain its purpose, quality & reliability, but more economically
CIMA
value engineering an activity that helps (re)design products at the lowest cost whilst meeting customer needs and required standards of quality & reliability
CIMA
variable cost a cost which varies with the level of activity
CIMA
aka: marginal cost
variable costing US term for marginal costingvariance the difference between the
standard or budgeted levels of cost or sales and the actual costs or sales achieved
venture capital risky finance for SMEs with high growth potential which usually involves a package
if the management perform well, the existing owners
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TERM EXPLANATION REF
NOTES
of unsecured loans & equity. The equity often takes the form of a core number of shares which don’t convey control of the company plus share options, the exercise of which will depend on the subsequent financial performance of this business
retain control but if growth in earnings is inadequate, the venture capitalist takes control. For this reason venture capital is commonly used in management buy-outs
viability in a commercial sense, this is the ability of a business or project to be self-sustainable
its connotes a combination of profitability & liquidity
watchdog a government or independent agency that monitors commercial companies for illegal or unethical practice
eg Office of Fair Trading; Greenpeace; ‘Which?’ magazine
whistle-blowing where an employee with inside knowledge of wrong-doing by their employer, notifies external authorities (eg auditors or regulators)
corporate governance & ethics codes of professional bodies encourage this practice despite the fear of retribution (ie loss of job)
white-collar crime fraud or other illegal conduct by an administrative or professional member of staff
working capital the funding available for conducting the day-to-day operations of a business and represented as the net current assets in the balance sheet
current assets – current liabilities
work-in-progress the amount of partly-completed work in a manufacturing operation or construction/client project
it is valued in current assets at the lower of accumulated cost or net realisable value where a loss against contract price is evident
yield a measure of the current return on the market value of an investment
eg earnings yield = eps ÷ share price
dividend yield = dps ÷
48
TERM EXPLANATION REF
NOTES
share priceyield to redemption = IRR
on interest & repayment cashflows on a bond
49
TERM EXPLANATION REF
NOTES