Finance Glossary

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Finance Glossary

A

B

ACCOUNTS PAYABLE

BALANCE SHEET

ACCOUNTS PAYABLE TURNOVER RATIO

BREAK EVEN POINT

A category of balance-sheet liabilities representing funds owed by the company to suppliers and other short-term creditors.

Ratio measuring the speed with which a company pays its suppliers. It measures how many times a business can pay off its average accounts payable during the year.

ACCOUNTS RECEIVABLE

A category of balance-sheet assets representing funds owed to the company by customers and others.

ANNUAL REPORT

Comprehensive report on a company’s activities throughout the preceding year.

ASSET TURNOVER RATIO

Ratio measuring how efficiently a company can use its assets to generate sales.

ASSETS

Assets are things that a company owns that have value and can include physical property, such as plants, trucks, equipment or inventory or intangible items, like trademarks or patents. Cash and investments are also assets.

The Balance Sheet is used to establish the accumulated wealth at the end of a particular period. It is a statement of the assets, liabilities and equity of a business as a particular point in time.

The point at which total revenue equals total costs or expenses.

BUDGET

A document that translates strategic plans into measurable quantities that express the expected resources required and anticipated returns over a certain period. It functions as an action plan and presents the estimated future financial statements of the organisation.

BUSINESS PLAN

Outlines goals and details how to achieve those goals.

C CAPITAL

Any produced thing that can enhance a person’s power to perform economically useful work.

CASH FLOW STATEMENT

A financial statement that details the reasons for changes in cash (and cash equivalents) during the accounting period. More specifically, it reflects all changes in cash relating to operating activities, investments, and financing.

Finance Glossary CASH FLOW FROM FINANCING ACTIVITIES

This is where the company reports the money that it spent or received in order to finance its activities. This includes any money it borrowed, and any money it used to repay money it had previously borrowed, as well as any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public and any money it spent buying back shares of its stock from the public.

CASH FLOWS FROM INVESTING ACTIVITIES

This includes the purchase and sale of long-term fixed assets, such as property, plant and equipment.

CASH FLOWS FROM OPERATING ACTIVITIES

This adjusts the net profit figure for non cash items such as depreciation, deferred tax and changes to receivables, payables and stocks to get the real cash generated by the business.

COST OF GOODS SOLD (COGS)

On the income statement, what it costs a company to produce its goods and services. This figure includes raw materials and direct labour costs.

CURRENT ASSETS

Current assets are assets that can be expected to be converted into cash in 12 months or less, and can include things like cash and Accounts Receivables.

CURRENT LIABILITIES

Current Liabilities are money a company must pay to a creditor within 12 months and can include interest on loans and Accounts Payable.

D DEBT RATIO

Ratio measuring a company’s total liabilities as a percentage of its total liabilities. Can a company pay off its debts with its liabilities?

DEBT TO EQUITY RATIO

Ratio comparing a company’s total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors.

F FINANCIAL ACCOUNTING

Financial Accounting describes the performance of a business as a whole. It involves formally recording, summarising and reporting the transactions of a business. Prepared for a specific period of time, typically a year, a quarter, or a month.

FINANCIAL ANALYSIS

Financial Analysis is the assessment of the profitability, solvency, and liquidity of businesses.

FINANCIAL LEVERAGE RATIOS

Provide an indication of the long-term solvency of a company.

FINANCIAL PLANNING

Financial Planning is about looking ahead to what is going to happen in the future. A Financial Plan will list the materials, equipment, resources, and activities that are necessary to achieve objectives.

Finance Glossary FINANCIAL RATIOS

Calculations made from the Financial Statements which allow for comparisons between different time periods of a company and between companies / industries / markets.

FINANCIAL STATEMENTS

These are contained within the Annual Report and they have information about an organisation’s financial results, condition and cash flow. They contain the Income Statement, Balance Sheet and the Cash Flow Statement.

FIXED COSTS

Expenses that remain the same, whether or not sales rise or fall. Some examples include rent, leased furniture, and insurance.

INTERNAL RATE OF RETURN (IRR)

Internal Rate of Return (IRR) is used to evaluate the attractiveness of a project or investment.

L LIABILITIES

Money that a company owes to others.This can include things like money borrowed from a bank, rent owed, and money owed to suppliers.

LIQUIDITY

G GAAP

Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial accounting, generally known as accounting standards. GAAP standards ensure that all companies have the same methods for reporting financial information.

GROSS PROFIT MARGIN

Gross Margin is sales revenue less the cost of goods sold.

I INCOME STATEMENT

The Income Statement provides information concerning the profits or losses generated by the business. It shows sales revenue and the amount and nature and of expenses incurred.

Liquidity measures a company’s ability to meet short-term financial obligations.

LONG-TERM ASSETS

Assets that a business will use for more than 12 months and can include things like land, buildings, fixtures and fittings or vehicles.

LONG-TERM LIABILITIES

Liabilities due more than a year after the balance sheet date. These include notes and bonds payable, long-term rent, pensions and other benefits.

M MANAGEMENT ACCOUNTING Management Accounting is the financial data that management uses to take decisions and monitor performance. The information is for internal use only and helps managers to run their day-to-day businesses.

Finance Glossary

N

Q

NET INCOME

QUICK RATIO

Profit after all expenses have been paid. Calculated by Revenue – cost of goods sold – expenses.

NET PRESENT VALUE (NPV)

This is a calculation used to decide whether a purchase or investment is worthwhile. A positive net present value indicates that the projected earnings generated by a project or investment exceeds the anticipated costs.

NOTES TO THE FINANCIAL STATEMENTS Includes greater detail and additional information that’s left out of the main Financial Statements.

O OPERATING EXPENSES

Operating Expenses are the expenses that are incurred to promote, sell and deliver a company’s products and services and to manage the overall company including rent, bills, salaries, and other expenses.This is also known as SG&A (selling, general and administrative expenses).

P PROFITABILITY RATIOS

Ratios measuring the company’s success at generating profits.

Ratio measuring the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash in the short-term.

R RETURN ON ASSETS

Is a measure of how effectively a company’s assets are being used.

RETURN ON EQUITY

Measures the profits earned for each dollar invested in the company’s stock.

RETURN ON INVESTED CAPITAL (ROIC)

Ratio measuring the profitability potential of a company or a particular project.

REVENUE

The amount of money that results from selling products or services to customers.

Finance Glossary

S

W

SHAREHOLDERS’ EQUITY

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

The Shareholders’ Equity or Net Worth is the money that would be left if a company sold all of its assets and paid off all of its liabilities or obligations. This leftover money belongs to the shareholders, or the owners, of the company.

SOLVENCY

Solvency is the ability of a company to meet its long-term financial obligations.

START UP COSTS

Expenses incurred before the business is running such as equipment, starting inventory, deposits, business registration fees.

V VARIABLE COSTS

Costs that correlate with sales volumes. These include the cost of raw materials you need to make products, inventory, and freight.

VARIANCE ANALYSIS

Variance Analysis refers to the investigation of deviations in financial performance from the standards defined in forecasting.

This measures a company’s ability to borrow money.

WORKING CAPITAL

This is a ratio ascertaining whether a company’s short-term assets are readily available to pay off its short-term liabilities. Calculated by: Working Capital = Current Assets – Current Liabilities