Glossary of Fin Terms

8/6/2019 Glossary of Fin Terms

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GLOSSARY

ACCELERATED DEPRECIATION An accounting method that recognizeshigher amounts of depreciation in the early years of a fixed asset's life andlower amounts in later years

ACCOUNT A systematic grouping that illustrates the effect of transactionsand other events an particular balance sheet or income statement items.

ACCOUNTING CHANGE A change in any of three areas:

1) Accounting principles such as a new method of depreciation2) Accounting estimates such as the useful life of an asset3) A different reporting entity, such as a merger or takeover

ACCOUNTING EQUATION An equation that states that assets equalsliabilities + shareholders' equity.

A = L + SEThe equation must always hold because assets represent the historical value ofwhat the company owns, and liabilities and equity represent the claims onthese assets. The company is responsible for the liabilities to the creditors firstand then the equity of the owners. Therefore, equity is the residual orbalancing factor in the difference between assets and liabilities. That is:

SE = A L

Seen in this way the balance sheet must always "balance" because the valueof shareholders equity will change depending on the difference between assetsand liabilities.

ACCOUNTING PERIOD The length of time covered by a business's financialstatements

ACCOUNTING RATE OF RETURN(ARR) Net income/investment. Calledaccounting rate of return by financial analysts because income is calculatedusing generally accepted accounting principles. This can be compared tovarious measures of "cash flow" rate of return whereby cash and notaccounting profit is used as the firms payoff from an investment.

ACCOUNTS PAYABLE An obligation to pay for goods or services that have

been purchased on credit from suppliers. This is a current liability in a firmsbalance sheet.

ACCOUNTS RECEIVABLE The amount owed to a company from customerswho purchased goods or services on credit.

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GLOSSARY

ACCOUNTS RECEIVABLE TURNOVER A ratio showing the average amountof time that a company holds its receivables before collecting them. Usually,companies use a related term called "Days Outstanding" (DSO).

Accounts ReceivableTurnover

= Revenue

Average AccountsReceivable

ACCRUAL ACCOUNTING The accounting method that recognizes revenuewhen it is earned, without regard to when the cash is collected, and recognizesexpenses when they are incurred, regardless of when cash is paid to meetthese obligations.

ACCRUED EXPENSE Those expenses incurred, but not yet paid, at the endof an accounting period; also called accrued liabilities.

Example: A company purchases $25,000 worth of office supplies on credit onDecember 29 and its accounting period ends on December 31. It shows the$25,000 as an accrued expense on the balance sheet for the year.

ACCUMULATED DEPRECIATION The total depreciation to date on aparticular asset

ACID TEST RATIO (Also called quick ratio) A test of a companys ability topay its current liabilities. A ratio of 1+ is considered "safe."

Acid Test Cash + Marketable Securities + Accounts

ReceivableRatio = Current Liabilities

ADDITIONAL PAID-IN CAPITAL (Also called Paid-in Capital) The excessamount over par value that shareholders pay for a company's stock. Theamount a company pays to buy back its stock from the open market (calledtreasury stock) is treated as a reduction to additional paid-in capital.

ALLOWANCE FOR BAD DEBTS A provision a company makes foruncollectible accounts receivable.

Example: Accounts receivable $150,000Less: allowance for bad debts 15,000Net receivables $135,000

Note: If there is any unusual decrease in the average percentage of acompany's receivable deemed to be uncollectible (e.g. in the case aboveit is 10%), a company may be trying to inflate its accounts receivables

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AMORTIZATION The process of allocating the portion of an intangibleasset's value (e.g. patents or goodwill) that has been consumed during thecurrent period against revenues. Similar to a companys depreciation oftangible assets.

GAAP states that the amortization of an intangible asset cannot exceed

40 years and that it must be done on a straight- line basis.

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GLOSSARY

ANNUALREPORT A detailed statement that a company prepares at the endof its reporting year; the reporting year can be either on a calendar or fiscalbasis. This report contains a company's income statement, balance sheet,statement of cash flows, statement of shareholders' equity, management'sdiscussion and analysis of operations, notes to the financial statements, and

audit opinion. The Financial Accounting Standards Board (FASB) also requiresthat companies include in their annual reports operations in differentindustries, export sales, foreign operations, major customers, and governmentcontracts.

ASSET An economic resource of a company. Assets include money, land,buildings, property, and property rights and machinery.

Tangible: Assets that can be seen or felt.Intangible: Assets that have no physical substance (e.g. patents and goodwill)

Characteristics:

1) Must provide future economic benefits that can be reasonably estimated.2) Must be controlled by its owner.3) Must be the result of a previous event or transaction (e.g. the purchase of a

new machine).

Current: Assets that have future benefits that will be realized in one year orless.

Non-current (fixed or other): Assets that have future benefits that will berealized in more than one year.

ASSET TURNOVER (Also called Total Asset Turnover) A ratio that measures

the productivity of a company's total assets. (Also called a measure of activityor efficiency).

Asset Turnover=

Revenue

AverageAssets

BALANCE SHEET A statement representing a company's financial positionat a specific date, usually at the end of an accounting period; also called a"statement of financial position."

BEGINNING INVENTORY The merchandise on hand at the beginning of anaccounting period. Beginning inventory is frequently used in calculating cost ofgoods sold on an income statement.

BOOK VALUE

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(1) The amount shown for an asset on a balance sheet. For fixed and otherassets, it is based on historic cost or the amount that was paid for the assetwhen it was purchased. For example, the "book value" of a machine is itsinitial cost less its accumulated depreciation.

(2) The amount shown as a company's stockholders' equity on a balance

sheet. Seen in this way, the book value of a company is the value of its "networth" (assets less liabilities).

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BOOK VALUE PER SHARE The assets of a company made available to itsshareholders.

Book Value per Share=

Total StockholdersEquity

Average SharesOutstanding

BREAKEVEN ANALYSIS (Also called Profit-Volume-Cost Analysis) Thecalculation of the point at which sales revenue equals total cost of production.

BreakevenVolume =

Total Fixed Cost

Price - Average VariableCost

CAPITAL Unless preceded by the term "working" (see Working Capital) thisis the amount an the balance sheet that represents The long term commitmentof funds in a company; long-term debt and shareholders' equity.

Note: If the term "share capital" is used, it refers only to the value of theshares originally purchased by the owners. This, along with accumulatedretained earnings, is part of shareholders equity.

CAPITALSTOCK The shares representing the ownership of a company.Issued capital stock that remains in the hands of stockholders is categorized as"outstanding." Stock that is repurchased by the management is called"treasury stock. "

CAPITAL STRUCTURE The proportion of debt and equity that are beingused to fund 'the companys investment in its assets. A company that usesrelatively more debt than equity is said to have a more highly "leveraged"capital structure. (See "Leverage.")

CASH FLOW The cash receipts less the cash disbursements from a givenoperation or asset for a particular period of time. There are a number ofdifferent measures of this term, depending on what cash disbursements aretaken into account for the particular time period. A clarification of thesedifferent terms is best done using a "Statement of Cash Flows," provided in a

company's annual report. Here are a few examples:

"Basic Cash Flow" Net income + depreciation (often a quick and easymethod for estimating a company's operating cash flow, particularly forcompanies that have large fixed asset investments).

"Cash Flow From Operations" Net income + depreciation and amortization+ or -- changes in non-financial working capital (a measure of cash flow now

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required to be shown in all companies annual reports in their statement ofcash flows).

"Free Cash Flow" Cash Flow From Operations less Capital Expenditures andDividends (a measure of cash flow that indicates how much cash a companyhas generated in a given accounting period after meeting its operating and

major financial requirements).

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GLOSSARY

COST OF GOODS SOLD (Also called COST OF SALES) Typically abbreviatedas COGS, this is the cost of producing, converting or buying an item that thefirm subsequently sells. When subtracted from sales revenue, it shows theamount of a firm's gross profit.

Revenue- Cost of goodssold

Gross Profit

CURRENT ASSET Any asset shown on a firm's balance sheet that has auseful economic life of one year or less. It can also be considered an cash orany item that the company believes will become cash within the one yearperiod. This includes short-term marketable securities, accounts receivable,inventory, and prepaid expenses.

CURRENT LIABILITY A debt that is payable within one year (based on thedate shown on its balance sheet). Typical current liabilities include accountspayable, short-term notes payable, and the current portion of a firm's long-term debt.

CURRENT RATIO A measure of a company's ability to meet its short-termobligations.

Current ratio=

Current Assets

Current

Liabilities

Short-term lenders such as banks generally consider a ratio of 2.0 to be quiteadequate.

DAYS INVENTORY A measure of the number of days it takes to sell theaverage amount of inventory on hand during a particular period of time. As arule, the longer it takes to sell inventory, the greater the risk of not being ableto sell it at full value. Also, if a firms days inventory starts to increase, it mayindicate a drain on its cash flow.

Days Inventory = 365 daysInventory Turnover

Ratio

Inventory TurnoverRatio =

Cost of Goods Sold

Average Inventory onHand

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Example: If a company has an Inventory turnover of 5.25 days, its dayinventory would be 365/5.25 or 69.5.

DEBT-TO-EQUITY RATIO This is one of the common measures of the

degree of leverage used by the firm to finance its assets. Often the book valueof a company's debt and equity are used to compute this figure. A ratio higherthan 1.0 generally indicates a fairly high degree of leverage is being used.

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GLOSSARY

DEFERRED INCOME TAX LIABILITY An estimation of the amount of futuretaxes on income that has been earned and recognized for accounting purposesbut not yet recognized for tax purposes. This is shown as a long-term liabilityon the firm's balance sheet.

The reason for this item is due to the difference in the method of depreciation

of a firm's assets for financial reporting purposes and for tax purposes.Generally, companies use straight-line depreciation for their financial reportsand some type of accelerated depreciation such as the sum-of-the-years digitsfor tax purposes.

Example: Suppose a company's revenue minus all expenses except for taxes is$50,000 (let us call this "income"). Based on the two methods ofdepreciation and using a 40% tax rate, we see the following.

BookIncome*

TaxableIncome

Income $50,000 $50,000Depreciation $5,000 $7,500

Income before taxes $45,000 $42,500

Tax expense ($45,000 X40%) $18,000

Tax payable ($42,500 X40%) $17,000

Deferred income taxliability

$1,000

*This is the amount shown in the annual report.

DEPRECIATION An accounting method of spreading the cost of a fixedasset, such as plant and equipment, over its useful life. The basic conceptbehind depreciation is that the value of every asset is reduced through use orobsolescence. Through depreciation, a relationship is established between theasset's ability to generate revenue and the reduction of its value. Thisrelationship is in accordance to the "matching principle."

The three methods of depreciation are:1) Straight line

2) Sum-of-the-years' digits3) Double declining balance.

In addition to deciding on the method to use, a company must also determinethe estimated expected useful life of the asset and the assets salvage value.

The higher the rate of depreciation used, the lower the company's accountingincome that is reported in its financial statement. However, higher rates of

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depreciation could have a positive impact on a firm's cash flow by reducing itstax obligations at an earlier rather than later time in the life of the fixed assets.

DISCOUNTED CASH FLOW A method used to reduce a forecasted streamof cash flows to its present value. The amount of the reduction is based on a

company's cost of capital. This method is the basis for a company's capitalbudgeting or long-term cash allocation decisions.

DIVIDEND The distribution of a company's earnings to stockholders. Cashdividends are most common, although dividends can be issued in other formssuch as stock or property.

DIVIDEND PAYOUT RATIO The measure of the percentage of earnings paidin dividends. The ratio is usually calculated by dividing dividends per share byearnings per share.

Example: A company has net earnings of $200,000, pays a dividend of $50,000

and has 50,000 common shares outstanding. Earnings per share isthen $4 and dividends per share is $1. The dividend payout ratio is:

$1 = .25 or 25%4

DOUBLE DECLINING BALANCE DEPRECIATION A method of accelerateddepreciation in which 200 percent of the straight-line depreciation is applied tothe declining balance of the asset's book value.

Example: An asset is worth $1000 and has a useful life of 5 years. The straight-

line depreciation rate would call for a 20 percent reduction over the 5years. Therefore, the double declining method would use a 20 percentreduction. This increases the amount depreciated in the earlier yearsof the life of the asset, but reduces it in the later years.

Example: An asset is worth $1000, has a useful life of 5 years, and has astraight-line depreciation of 20%. Therefore, double declining balancewould use a rate of 40% (20% X 200%). The annual depreciationcharges would be calculated as follows:

Yea

r

Original

Cost

Beg. Book

Value

Double Dec.

Rate

Depreciati

on

1 $1000 $1,000.00 x 40% = $400.002 $1000 $600.00 x 40% = $240.003 $1000 $360.00 x 40% = $144.004 $1000 $216.00 x 40% = $86.405 $1000 $129.60 60 x 40% = $51.84

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The process usually continues until the depreciated expense becomesinconsequential or the asset is sold. Sometimes companies switch to thestraight-line method to complete the depreciation.

EARNINGS PER SHARE(EPS) A measure of a company's profit shown interms of each share of common stock.

EPS = Net Income - Preferred DividendAverage Common Stock

Outstanding

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EQUITY (Also called stockholders Equity or owners' Equity) The monetaryvalue that represents ownership interest in a business. The two most importantcomponents of equity are:

1) Capital stock2) Accumulated retained profit.

Two other items often listed are

1) Treasury stock2) Foreign exchange translation adjustments

Because accountants define equity as equal to assets minus liabilities, equity isalso referred to as the net worth of a company. (See "Book Value.")

EXTRAORDINARY ITEM An item in a company's financial report that is bothunusual and infrequent. Extraordinary gains and losses are reported on acompany's income statement between entries for income from discontinued

operations and the cumulative effect of a change in accounting principle.Examples of these items include:

1) Write-off of an intangible asset2) Gains on life or property insurance3) Restructuring charges4) Natural disasters such as earthquakes or floods5) Gains or losses from early retirement of debt

Note: Write-off and write-down of inventories and receivables are notconsidered extraordinary because they are related to normal businessactivities.

FINANCIAL ACCOUNTING An accounting method that records, interprets,and reports the historical cost transactions of a company. Publicly heldcompanies must follow financial accounting principles laid down by theFinancial Accounting Standards Board (FASB) and the American institute ofCertified Public Accountants (AICPA). Together, these principles are referred toas "Generally Accepted Accounting Principles (GAAP). The Securities andExchange Commission (SEC) is ultimately responsible for establishing financialreporting standards for publicly owned companies, yet it lets the FASB andAICPA set up the ground rules.

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) The Independentinstitution that establishes and disseminates generally accepted accountingprinciples and recording practices.

FINANCIAL STATEMENTS A report containing financial information about acompany. The three financial statements found in an annual report are:1. Balance sheet2. Income statement, and

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3. Statement of cash flows

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FINISHED GOODS INVENTORY The amount of goods on hand that can besold to customers. It is listed as a current asset on the balance sheet and isused to calculate cost of goods sold in the income statement. It can becontrasted to work-in-process inventory and raw material inventory.

FIRST-IN FIRST-OUT(FIFO) A method of inventory valuation based on theconcept that merchandise is sold in the order of its receipt. For example, if anelectronics store buys 100 stereos in January and 50 in February, FIFO assumesthat the units purchased in January will be sold before the units purchased inFebruary.

FIFO shows current inventory costs on the balance sheet and, by using lowerhistorical costs for costs of goods sold (assuming rising prices of products),maximizes net income on the income statement. (Remember, the lower thecost of goods sold, the higher the profit, other costs and expenses heldconstant.)

FIFO and LIFO are both permitted for income tax calculations, although once acompany chooses a method, it cannot change it without permission from theIRS. If a company chooses LIFO for tax purposes, it must also use LIFO in itspublished financial statements.

FIXED ASSET An item purchased for the operation of a business that hasphysical substance and a useful economic life greater than one year and is notto be sold to customers.

FIXED COST Charges that stay constant regardless of increases ordecreases in business activity. Current costs and inventory figures that are

based on older, historic costs. This leads to lower net income than would haveresulted from FIFO.

FOREIGN CURRENCY ADJUSTMENT The process of converting thefunctional currency of a foreign subsidiary company, branch, representativeoffice, or other affiliated entity into U.S. dollars for financial statementpresentation.

The "transactions effect" reflects changes in the dollar value of a foreigncurrency, denominated receivable, or current liability (e.g. incurred as a resultof importing or exporting). Gains or losses resulting from foreign exchangefluctuations are reported on the income statement.

The "translation effect" reflects changes in the value of a foreign subsidiary'sassets or liabilities. These changes are shown as adjustments to the parentcompanys equity.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP) The policies,standards, and rules followed by accountants in the preparation of financialstatements.

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GOING PUBLIC The sale of a portion of a privately held company's commonshares in the public as a means of raising equity capital. The first time acompany sells stock to the public, this issue is called an "Initial Public Offering"or IPO.

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GOODWILL The value of intangible assets, such as reputation, namerecognition, and customer relations, that give a company an advantage overcompetitors. Goodwill appears in a company's financial statements only if ithas been paid for in a business combination using the "purchase method." Inthis case, the value of the goodwill is the difference between the purchase

price of the company and the book value of its assets.The amortization of goodwill can be done over a period of not more than 40years. It is shown on the firm's financial statement but is not tax deductible.

GROSS PROFIT (Also called Gross Margin) The excess of revenue over costof goods sold. When it is expressed as a percentage of revenue it is usuallycalled gross profit margin.

INCOME STATEMENT (Also called Profit and Loss statement or "P&L) Aformal statement of the elements used in determining a companys netincome. There is no uniform method of presenting an income statement in an

annual report. However a typical statement could look like this:Revenue (also Sales, Next Sales, or Sales Revenue) - Cost of Goods Sold

GROSS PROFIT Selling, general, administrative expenses (S,G&A) Research and Development

OPERATING INCOME (Profit)+ other income Other expenses such as interest

INCOME BEFORE TAXES Provision for income taxes

INCOME FROM CONTINUING OPERATIONS+ or extraordinary items+ or cumulative effect of change in accounting principle

NET INCOME

INTERNAL RATE OF RETURN (IRR) The discount rate at which the netpresent value of all future cash flows equals zero. This rate is often used to

determine the financial desirability of a long-term investment. If the IRR isgreater than the firm's cost of capital (the opportunity cost of its money), thenthe project is considered to be economically justified.

INVENTORY Any goods available for resale at any given time. It is recordedat the lower of cost or market value and reported on the balance sheet. Thethree types of inventory in manufacturing are:1. Raw materials

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2. Work-in-process3. Finished goods

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INVENTORY TURNOVER A measure of the number of times that the averageamount of inventory on hand is sold within a given period of time.

Inventory TurnoverRatio =

Cost of Goods Sold

Average inventory on

hand

Sometimes sales revenue is used instead of cost of goods sold.

LAST-IN, FIRST-OUT(LIFO) A method of inventory valuation based on theconcept that merchandise is sold in the reverse order of its receipt orproduction. In periods of inflation, LIFO results in cost of goods figures that arebased on the most recent current costs, and inventory figures that are basedon older historic costs. This leads to lower net income than would haveresulted from FIFO.

LEVERAGE The amount of debt relative to equity used by a company tofinance the purchase of its assets. A higher leverage results in a higher returnon equity, assuming a given amount of profit. However, greater leverageincreases the interest payments of a company and increases its risk relative tothese debt obligations. Typical ways to measure leverage are:

Leverage Ratio=

Total Assets

Equity

Debt Ratio = Debt

Debt +Equity

LEVERAGED BUYOUT(LBO) The purchase of controlling interest in acompany using debt collateralized by the target company's assets to fundmost or all of the purchase price.

LIABILITY An obligation payable in money, services, or goods. Liabilities arereported on the balance sheet and include accounts payable, accruedexpenses, and debt.

MANAGEMENTS DISCUSSION AND ANALYSIS OF OPERATIONS ASection in an annual report, required by the Securities and ExchangeCommission, that summarizes the reasons for changes in operations, liquidity,capital resources, and working capital of a company. The section is designed tohelp readers of financial statements understand the effects of changes inbusiness activity and accounting.

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MARKET TO BOOK RATIO An indicator of the degree to which themanagement of a company has been able to increase the value of shareholderinvestment. The higher the ratio, the better. At a minimum, this ratio shouldbe greater than 1.0. If not, shareholders could consider the company from afinancial standpoint to be better off "dead than alive."

Market to Book Ratio=

Market Value

Book Value

Market Value = price of a share of stockBook Value (per share) = equity/shares outstandingMARKETABLE SECURITY An equity or debt security that is easily convertedinto cash. Examples include traded stocks, commercial paper, and treasurybills. They are reported at their cost as a current asset on the balance sheet.

MATCHING CONCEPT One of the basic accounting tenets. This concept

mandates that expenses must be recorded in the same accounting period thatthe benefits, usually sales, are derived. This principle underlies the entiresystem of accrual accounting.

MATERIALITY The relative importance of an accounting error or omission ina company's financial statements. If an item is deemed to be material, it mustbe disclosed in a company's financial report.

MERGER A combination of two or more companies. This combination may beaccomplished by:

1) The exchange of stock for stock, which results in the combining of accounts(called a "tax-free pooling of interests).

2) By forming a new company to acquire the assets of the combinedcompanies (called a consolidation).

3) By a purchase, where the amount that is paid in excess of the acquiredcompany's book value (and that cannot be allocated to the acquired assets)is treated as goodwill on the books of the purchaser.

Although consolidations and statutory consolidations are technically notmergers, the terms are commonly used interchangeably.

MINORITY INTEREST An ownership interest of less than 50 percent. In

consolidated financial statements, it is shown as a line item in noncurrentliability on the balance sheet.

NET INCOME (Also called net profit, net after-tax profit, net income aftertaxes) The result of subtracting all expenses from revenue.

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NET PRESENT VALUE (NPV) The present value of the future cash to bereceived from an investment in excess of the cost of the investment. An NPVgreater than zero indicates an economically justified investment opportunity.

NOTE PAYABLE A contract to pay a creditor at a future date. Reported on

the balance sheet either as a current or noncurrent liability, depending onwhen the principal is due.

OFF-BALANCE SHEET ITEM An item not reported on financial statementsthat nevertheless has an impact on the operations of a company. Examplesinclude liabilities such as pending litigation or guarantees of futureperformance.

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ORIGINAL EQUIPMENT MANUFACTURER (OEM) The original producer ofa product as distinguished from any other element in the distribution channel.For example, JVC might have an OEM arrangement with Kodak by selling themblank video tapes which are then marketed under the Kodak label.

PAID-IN CAPITAL See Additional Paid-in Capital.

PAR VALUE The face value of a security such as common stock. The parvalue is usually some arbitrary amount established more for convenience thanfor any economic reason.(e.g. $1.00 or $.10)

PRICE-EARNINGS RATIO (P-E Ratio) A commonly used measure of acompany's investment potential. This ratio depends on investors' perceptionsof a company's potential. Factors such as risk, quality of management, growthpotential, earnings history, and industry conditions all come into play.

P-E Ratio = Price per ShareEarnings per

Share

P-E Ratios in the high teens and twenties generally indicate that investors arevery optimistic about the company's earnings potential.

PROFIT MARGIN A measure of a firm's profit-earning ability relative to itsdollar volume of sales. The type of profit margin depends on which measure ofprofit is being used.

Gross Profit Margin = Gross ProfitRevenue

Operating ProfitMargin =

OperatingProfit

Revenue

Net Profit Margin = Net ProfitRevenue

Generally, the higher the gross profit margin, the greater the chances of a firmhaving a high operating and net profit margin. 40% is typical of manufacturers,25% is typical of supermarkets and low-and retailers, 45% is typical of high-end retailers, 80% is typical of software companies. Manufacturers typicallyend up with around a 5% net profit margin, while successful softwarecompanies (such as Microsoft) have net margins over 20%.

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QUALITY OF EARNINGS An assessment of the extent to which a company'snet profit is sustainable in the future. Financial ratios such as earnings pershare, current ratio, and inventory ratio are all used by analysts to make thisassessment. Qualitative measures, such as management strength and thefirm's stated strategic plan, are also used.

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REALIZED GAIN OR LOSS The difference between the book value of anasset and the amount received from its sale. Realized gains or losses arereported on the income statement. Occasionally a company can report arealized loss even when there has been no sale. For example, when a long-term investment permanently declines in value, the value of the investment

should be written down an the balance sheet, and the amount of the decline invalue should be reported as a realized loss on the income statement. (Forexample, in the late 1980s AT&T wrote off a huge portion of its fixed assetinvestment in copper wire and analog switches (old telecommunicationstechnology).

RETAINED EARNINGS (Also called accumulated retained earnings or profit,or reinvested earnings, income, or profit.) These are the total earnings of acompany, less dividends, since its inception. This is a major portion of acompany's equity shown on its balance sheet.

RUN RATE A term often used in budget analysis in reference to projectedcosts based on past expenditures. The benchmark used for past expendituresvaries among companies. Some firms simply use the previous month. Othersmay take the average of previous months (e.g. past 3 months, 6 months etc.).For example, if the previous three months expenditures are 10, 12 and 12,then the run rate is 11.33.

RETURN ON INVESTMENT(ROI) A measure of the productivity of a firmsassets. There are three commonly used versions of this measure.

Return on Assets (ROA) = Net Profit

Average TotalAssets

Return on Equity (ROB) = Net ProfitAverage Equity

Return on Capital Employed(ROCE) =

Net Profit

Average Debt +Equity

REVENUE (Also called sales and sales revenue) Gross income received by acompany before any deductions for expenses, discounts, returns, etc.

SUM-OF-THE-YEARS' DIGITS (SYD) METHOD OF DEPRECIATION Amethod of accelerated depreciated depreciation that assigns the numbers(1,2,3,. .n) where n is the estimated useful life of an asset.Thus:

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SYD = n(n + 1)2

The annual depreciation charges are then calculated by

(Cost of the asset - Salvage

Value) x

Remaining Useful

LifeSYD

Example: An asset costs $1000, has an estimated useful life of five years, anda salvage value of $100. The SYD is calculated as

5(5 + 1) =15

2

The calculation of depreciation would then be as follows:

Year

Cost-Salvage

Remaining UsefulLife/SYD

Depreciation

1 $900 X 5/15 = $3002 $900 X 4/15 = $2403 $900 X 3/15 = $1804 $900 X 2/15 = $1205 $900 X 1/15 = $60

$900

TREASURY STOCK Shares of common stock that have been issued to thegeneral public but have been repurchased by the company. It serves to reducea companys total equity.

TURNOVER RATIO A measure of activity of any asset such as inventory,receivables, fixed assets or total assets.

WORKING CAPITAL A measure of a company's ability to service its short-term financial obligations. It is defined as current assets minus currentliabilities.

WRITE-DOWN A reduction in the book value of an asset. For example, if aportion of a company's inventory were to become obsolete, the total value ofthe inventory would have to be written down.

WRITE-OFF The reduction of the entire value of an asset as either anexpense or a loss. For example, if a company's uninsured warehouse is

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destroyed in a fire, the warehouse would have to be written off as a loss orexpense.

Glossary of Fin Terms

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