Financial Terms and Ratios

financial terms and ratios
business financial terms and ratios definitions
These financial terms definitions are for the most commonly used UK financial terms
and ratios. They are based on UK Company Balance Sheet, Profit and Loss Account,
and Cashflow Statement conventions.
Certain financial terms often mean different things to different organizations

depending on their own particular accounting policies. Financial terms will have
slightly different interpretations in different countries. So as a general rule for all non-
financial business people, if in doubt, ask for an explanation from the person or
organization responsible for producing the figures and using the terms - you may be
the only one to ask, but you certainly will not be the only one wodering what it all
means. Don't be intimidated by financial terminology or confusing figures and
methodology. Always ask for clarification, and you will find that most financial
managers and accountants are very happy to explain.
The business dictionary contains many other business terms and definitions.
Sales related terms are in the glossary in the sales training section.
acid test
A stern measure of a company's ability to pay its short term debts, in that stock is
excluded from asset value. (liquid assets/current liabilities) Also referred to as the
Quick Ratio.
assets
Anything owned by the company having a monetary value; eg, 'fixed' assets like
buildings, plant and machinery, vehicles (these are not assets if rentedand not
owned) and potentially including intangibles like trade marks and brand names, and
'current' assets, such as stock, debtors and cash.
asset turnover
Measure of operational efficiency - shows how much revenue is produced per £ of

assets available to the business. (sales revenue/total assets less current liabilities)
balance sheet
The Balance Sheet is one of the three essential measurement reports for the
performance and health of a company along with the Profit and Loss Account and the
Cashflow Statement. The Balance Sheet is a 'snapshot' in time of who owns what in
the company, and what assets and debts represent the value of the company. (It can
only ever nbe a snapshot because the picture is always changing.) The Balance Sheet
is where to look for information about short-term and long-term debts, gearing (the
ratio of debt to equity), reserves, stock values (materials and finsished goods),
capital assets, cash on hand, along with the value of shareholders' funds. The term
'balance sheet' is derived from the simple purpose of detailing where the money
came from, and where it is now. The balance sheet equation is fundamentally:
(where the money came from) Capital + Liabilities = Assets (where the money is
now). Hence the term 'double entry' - for every change on one side of the balance
sheet, so there must be a corresponding change on the other side - it must always
balance. The Balance Sheet does not show how much profit the company is making
(the P&L does this), although pervious years' retained profits will add to the
company's reserves, which are shown in the balance sheet.
budget
In a financial planning context the word 'budget' (as a noun) strictly speaking means
an amount of money that is planned to spend on a particularly activity or resource,
usually over a trading year, although budgets apply to shorter and longer periods. An
overall organizational plan therefore contains the budgets within it for all the
different departments and costs held by them. The verb 'to budget' means to
calculate and set a budget, although in a looser context it also means to be careful
with money and find reductions (effectively by setting a lower budgeted level of
expenditure). The word budget is also more loosely used by many people to mean
the whole plan. In which context a budget means the same as a plan. For example in
the UK the Government's annual plan is called 'The Budget'. A 'forecast' in certain
contexts means the same as a budget - either a planned individual activity/resource
cost, or a whole business/ corporate/organizational plan. A 'forecast' more commonly
(and precisely in my view) means a prediction of performance - costs and/or
revenues, or other data such as headcount, % performance, etc., especially when the
'forecast' is made during the trading period, and normally after the plan or 'budget'
has been approved. In simple terms: budget = plan or a cost element within a plan;
forecast = updated budget or plan. The verb forms are also used, meaning the act of
calculating the budget or forecast.
capital employed
The value of all resources available to the company, typically comprising share
capital, retained profits and reserves, long-term loans and deferred taxation. Viewed
from the other side of the balance sheet, capital employed comprises fixed assets,
investments and the net investment in working capital (current assets less current
liabilities). In other words: the total long-term funds invested in or lent to the
business and used by it in carrying out its operations.
cashflow
The movement of cash in and out of a business from day-to-day direct trading and
other non-trading or indirect effects, such as capital expenditure, tax and dividend
payments.
cashflow statement
One of the three essential reporting and measurement systems for any company.
The cashflow statement provides a third perspective alongside the Profit and Loss
account and Balance Sheet. The Cashflow statement shows the movement and
availability of cash through and to the business over a given period, certainly for a
trading year, and often also monthly and cumulatively. The availability of cash in a
company that is necessary to meet payments to suppliers, staff and other creditors is
essential for any business to survive, and so the reliable forecasting and reporting of
cash movement and availability is crucial.
cost of debt ratio (average cost of debt ratio)
Despite the different variations used for this term (cost of debt, cost of debt ratio,
average cost of debt ratio, etc) the term normally and simply refers to the interest
expense over a given period as a percentage of the average outstanding debt over
the same period, ie., cost of interest divided by average outstanding debt.
cost of goods sold (COGS)
The directly attributable costs of products or services sold, (usually materials, labour,
and direct production costs). Sales less COGS = gross profit. Effetively the same as
cost of sales (COS) see below for fuller explanation.
cost of sales (COS)
Commonly arrived at via the formula: opening stock + stock purchased - closing
stock.
Cost of sales is the value, at cost, of the goods or services sold during the period in
question, usually the financial year, as shown in a Profit and Loss Account (P&L). In all
accounts, particularly the P&L (trading account) it's important that costs are
attributed reliably to the relevant revenues, or the report is distorted and potentially
meaningless. To use simply the total value of stock purchases during the period in
question would not produce the correct and relevant figure, as some product sold
was already held in stock before the period began, and some product bought during
the period remains unsold at the end of it. Some stock held before the period often
remains unsold at the end of it too. The formula is the most logical way of calculating
the value at cost of all goods sold, irrespective of when the stock was purchased. The
value of the stock attributable to the sales in the period (cost of sales) is the total of
what we started with in stock (opening stock), and what we purchased (stock
purchases), minus what stock we have left over at the end of the period (closing
stock).
current assets
Cash and anything that is expected to be converted into cash within twelve months
of the balance sheet date.
current ratio
The relationship between current assets and current liabilities, indicating the liquidity
of a business, ie its ability to meet its short-term obligations. Also referred to as the
Liquidity Ratio.
current liabilities
Money owed by the business that is generally due for payment within 12 months of
balance sheet date. Examples: creditors, bank overdraft, taxation.
depreciation
The apportionment of cost of a (usually large) capital item over an agreed period,
(based on life expectancy or obsolescence), for example, a piece of equipment
costing £10k having a life of five years might be depreciated over five years at a cost
of £2k per year. (In which case the P&L would show a depreciation cost of £2k per
year; the balance sheet would show an asset value of £8k at the end of year one,
reducing by £2k per year; and the cashflow statement would show all £10k being
used to pay for it in year one.)
dividend
A dividend is a payment made per share, to a company's shareholders by a company,

based on the profits of the year, but not necessarily all of the profits, arrived at by
the directors and voted at the company's annual general meeting. A company can
choose to pay a dividend from reserves following a loss-making year, and conversely
a company can choose to pay no dividend after a profit-making year, depending on
what is believed to be in the best interests of the company. Keeping shareholders
happy and committed to their investment is always an issue in deciding dividend
payments. Along with the increase in value of a stock or share, the annual dividend
provides the shareholder with a return on the shareholding investment.
earnings before..
There are several 'Earnings Before..' ratios and acronyms: EBT = Earnings Before
Taxes; EBIT = Earnings Before Interest and Taxes; EBIAT = Earnings Before Interest
after Taxes; EBITD = Earnings Before Interest, Taxes and Depreciation; and EBITDA =
Earnings Before Interest, Taxes, Depreciation, and Amortization. (Earnings =
operating and non-operating profits (eg interest, dividends received from other
investments). Depreciation is the non-cash charge to the balance sheet which is
made in writing off an asset over a period. Amortisation is the payment of a loan in
instalments.
fixed assets
Assets held for use by the business rather than for sale or conversion into cash, eg,
fixtures and fittings, equipment, buildings.
fixed cost
A cost which does not vary with changing sales or production volumes, eg, building
lease costs, permanent staff wages, rates, depreciation of capital items.
FOB - 'free on board'
The FOB (Free On Board) abbreviation is an import/export term relating to the point
at which responsibility for goods passes from seller (exporter) to buyer (importer). It's
in this listing because it's commonly misunderstood and also has potentially
significant financial implications. FOB meant originally (and depending on the context
stills generally means) that the seller is liable for the goods and is responsible for all
costs of transport, insurance, etc., until and including the goods being loaded at the
(nominated FOB) port. An importing buyer would typically ask for the FOB price,
(which is now now often linked to a port name, eg., FOB Hamburg or FOB Vancouver),
knowing that this price is 'free' or inclusive of all costs and liabilities of getting the
goods from the seller to the port and on board the craft or vessel. Logically FOB also
meant and still means that the seller is liable for any loss or damage up to the point
that the goods are loaded onto the vessel at the FOB port, and that thereafter the
buyer assumes responsibility for the goods and the costs of transport and the
liability. From the seller's point of view an FOB price must therefore include/recover
his costs of transport from factory or warehouse, insurance and loading, because the
seller is unable to charge these costs as extras once the FOB price has been stated.
The FOB expression originates particularly from the meaning that the buyer is free
of liability and costs of transport up to the point that the goods are loaded on board
the ship. In modern times FOB also applies to freight for export by aircraft from
airports. In recent years the term has come to be used in slightly different ways, even
to the extent that other interpretations are placed on the acronym, most commonly
'Freight On Board', which is technically incorrect. While technically incorrect also,
terms such as 'FOB Destination' have entered into common use, meaning that the
insurance liability and costs of transportation and responsibility for the goods are the
seller's until the goods are delivered to the buyer's stipulated delivery destination. If
in doubt ask exactly what the other person means by FOB because the applications
have broadened. While liability and responsibility for goods passes from seller to
buyer at the point that goods are agreed to be FOB, the FOB principle does not
correlate to payment terms, which is a matter for separate negotiation. FOB is a
mechanism for agreeing price and transport responsibility, not for agreeing payment
terms. In summary: FOB (Free On Board), used alone, originally meant that the
transportation cost and liability for exported goods was with the seller until the goods
were loaded onto the ship (at the port of exportation); nowadays FOB (Free On Board
or the distorted interpretation 'Freight On Board') has a wider usage - the principle is
the same, ie., seller has liability for goods, insurance and costs of transport until the
goods are loaded (or delivered), but the point at which goods are 'FOB' is no longer
likely to be just the port of export - it can be any place that it suits the buyer to
stipulate. So, if you are an exporter, beware of buyers stipulating 'FOB destination' -
it means the exporter is liable for the goods and pays transport costs up until delivery
to the customer.
forecast
See 'budget' above.
gearing
The ratio of debt to equity, usually the relationship between long-term borrowings
and shareholders' funds.
goodwill
Any surplus money paid to acquire a company that exceeds its net tangible assets
value.
gross profit
Sales less cost of goods or services sold. Also referred to as gross profit margin, or
gross profit, and often abbreviated to simply 'margin'. See also 'net profit'.
initial public offering (ipo)

An Initial Public Offering (IPO being the Stock Exchange and corporate acronym) is
the first sale of privately owned equity (stock or shares) in a company via the issue of
shares to the public and other investing institutions. In other words an IPO is the first
sale of stock by a private company to the public. IPOs typically involve small, young
companies raising capital to finance growth. For investors IPO's can risky as it is
difficult to predict the value of the stock (shares) when they open for trading. An IPO
is effectively 'going public' or 'taking a company public'.
letters of credit
These mechanisms are used by exporters and importers, and usually provided by the
importing company's bank to the exporter to safeguard the contractual expectations
and particularly financial exposure of the exporter of the goods or services. (Also
called 'export letters of credit, and 'import letters of credit'.)
When an exporter agrees to supply a customer in another country, the exporter

needs to know that the goods will be paid for.
The common system, which has been in use for many years, is for the customer's
bank to issue a 'letter of credit' at the request of the buyer, to the seller. The letter of
credit essentially guarantees that the bank will pay the seller's invoice (using the
customer's money of course) provided the goods or services are supplied in
accordance with the terms stipulated in the letter, which should obviously reflect the
agreement between the seller and buyer. This gives the supplier an assurance that
their invoice will be paid, beyond any other assurances or contracts made with the
customer. Letters of credit are often complex documents that require careful drafting
to protect the interests of buyer and seller. The customer's bank charges a fee to
issue a letter of credit, and the customer pays this cost.
The seller should also approve the wording of the buyer's letter of credit, and often
should seek professional advice and guarantees to this effect from their own financial
services provider.
In short, a letter of credit is a guarantee from the issuing bank's to the seller that if
compliant documents are presented by the seller to the buyer's bank, then the
buyer's bank will pay the seller the amount due. The 'compliance' of the seller's
documentation covers not only the goods or services supplied, but also the
timescales involved, method for, format of and place at which the documents are
presented. It is common for exporters to experience delays in obtaining payment
against letters of credit because they have either failed to understand the terms
within the letter of credit, failed to meet the terms, or both. It is important therefore
for sellers to understand all aspects of letters of credit and to ensure letters of credit
are properly drafted, checked, approved and their conditions met. It is also important
for sellers to use appropriate professional services to validate the authenticity of any
unknown bank issuing a letter of credit.
letters of guarantee
There are many types of letters of guarantee. These types of letters of guarantee are
concerned with providing safeguards to buyers that suppliers will meet their
obligations or vice-versa, and are issued by the supplier's or customer's bank
depending on which party seeks the guarantee. While a letter of credit essentially
guarantees payment to the exporter, a letter of guarantee provides safeguard that
other aspects of the supplier's or customer's obligations will be met. The supplier's or
customer's bank is effectively giving a direct guarantee on behalf of the supplier or
customer that the supplier's or customer's obligations will be met, and in the event of
the supplier's or customer's failure to meet obligations to the other party then the
bank undertakes the responsibility for those obligations.
Typical obligations covered by letters of guarantee are concerned with:
• Tender Guarantees (Bid Bonds) - whereby the bank assures the buyer that the
supplier will not refuse a contract if awarded.
• Performance Guarantee - This guarantees that the goods or services are
delivered in accordance with contract terms and timescales.
• Advance Payment Guarantee - This guarantees that any advance payment
received by the supplier will be used by the supplier in accordance with the terms
of contract between seller and buyer.
There are other types of letters of guarantee, including obligations concerning

customs and tax, etc, and as with letters of credit, these are complex documents
with extremely serious implications. For this reasons suppliers and customers alike
must check and obtain necessary validation of any issued letters of guarantee.
liabilities
General term for what the business owes. Liabilities are long-term loans of the type
used to finance the business and short-term debts or money owing as a result of
trading activities to date . Long term liabilities, along with Share Capital and Reserves
make up one side of the balance sheet equation showing where the money came
from. The other side of the balance sheet will show Current Liabilities along with
various Assets, showing where the money is now.
liquidity ratio
Indicates the company's ability to pay its short term debts, by measuring the
relationship between current assets (ie those which can be turned into cash) against
the short-term debt value. (current assets/current liabilities) Also referred to as the
Current Ratio.
net assets (also called total net assets)
Total assets (fixed and current) less current liabilities and long-term liabilities that
have not been capitalised (eg, short-term loans).
net current assets
Current Assets less Current Liabilities.
net present value (npv)
NPV is a significant measurement in business investment decisions. NPV is essentially

a measurement of all future cashflow (revenues minus costs, also referred to as net
benefits) that will be derived from a particular investment (whether in the form of a
project, a new product line, a proposition, or an entire business), minus the cost of
the investment. Logically if a proposition has a positive NPV then it is profitable and
is worthy of consideration. If negative then it's unprofitable and should not be
pursued. While there are many other factors besides a positive NPV which influence
investment decisions; NPV provides a consistent method of comparing propositions
and investment opportunities from a simple capital/investment/profit perspective.
There are different and complex ways to construct NPV formulae, largely due to the
interpretation of the 'discount rate' used in the calculations to enable future values to
be shown as a present value. Corporations generally develop their own rules for NPV
calculations, including discount rate. NPV is not easy to understand for non-financial
people - wikipedia seems to provide a good detailed explanation if you need one.
net profit
Net profit can mean different things so it always needs clarifying. Net strictly means
'after all deductions' (as opposed to just certain deductions used to arrive at a gross
profit or margin). Net profit normally refers to profit after deduction of all operating
expenses, notably after deduction of fixed costs or fixed overheads. This contrasts
with the term 'gross profit' which normally refers to the difference between sales and
direct cost of product or service sold (also referred to as gross margin or gross profit
margin) and certainly before the deduction of operating costs or overheads. Net
profit normally refers to the profit figure before deduction of corporation tax, in which
case the term is often extended to 'net profit before tax' or PBT.
opening/closing stock
See explanation under Cost of Sales.
p/e ratio (price per earnings)
The P/E ratio is an important indicator as to how the investing market views the
health, performance, prospects and investment risk of a public company listed on a
stock exchange (a listed company). The P/E ratio is also a highly complex concept -
it's a guide to use alongside other indicators, not an absolute measure to rely on by
itself. The P/E ratio is arrived at by dividing the stock or share price by the earnings
per share (profit after tax and interest divided by the number of ordinary shares in
issue). As earnings per share are a yearly total, the P/E ratio is also an expression of
how many years it will take for earnings to cover the stock price investment. P/E
ratios are best viewed over time so that they can be seen as a trend. A steadily
increasing P/E ratio is seen by the investors as increasingly speculative (high risk)
because it takes longer for earnings to cover the stock price. Obviously whenever the
stock price changes, so does the P/E ratio. More meaningful P/E analysis is conducted
by looking at earnings over a period of several years. P/E ratios should also be
compared over time, with other company's P/E ratios in the same market sector, and
with the market as a whole. Step by step, to calculate the P/E ratio:
1. Establish total profit after tax and interest for the past year.
2. Divide this by the number of shares issued.
3. This gives you the earnings per share.
4. Divide the price of the stock or share by the earnings per share.
5. This gives the Price/Earnings or P/E ratio.
profit and loss account (P&L)
One of the three principal business reporting and measuring tools (along with the
balance sheet and cashflow statement). The P&L is essentially a trading account for a
period, usually a year, but also can be monthly and cumulative. It shows profit
performance, which often has little to do with cash, stocks and assets (which must be
viewed from a separate perspective using balance sheet and cashflow statement).
The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a
gross profit margin (sometimes called 'contribution'), fixed overheads and or
operating expenses, and then a profit before tax figure (PBT). A fully detailed P&L can
be highly complex, but only because of all the weird and wonderful policies and
conventions that the company employs. Basically the P&L shows how well the
company has performed in its trading activities.
overhead
An expense that cannot be attributed to any one single part of the company's
activities.
quick ratio
Same as the Acid Test. The relationship between current assets readily convertible
into cash (usually current assets less stock) and current liabilities. A sterner test of
liquidity.
reserves
The accumulated and retained difference between profits and losses year on year
since the company's formation.
restricted funds
These are funds used by an organisation that are restricted or earmarked by a donor
for a specific purpose, which can be extremely specific or quite broad, eg.,
endowment or pensions investment; research (in the case of donations to a charity or
research organisation); or a particular project with agreed terms of reference and
outputs such as to meet the criteria or terms of the donation or award or grant. The
source of restricted funds can be from government, foundations and trusts, grant-
awarding bodies, philanthropic organisations, private donations, bequests from wills,
etc. The practical implication is that restricted funds are ring-fenced and must not be
used for any other than their designated purpose, which may also entail specific
reporting and timescales, with which the organisation using the funds must comply. A
glaring example of misuse of restricted funds would be when Maxwell spent Mirror
Group pension funds on Mirror Group development.
return on capital employed (ROCE)
A fundamental financial performance measure. A percentage figure representing

profit before interest against the money that is invested in the business. (profit
before interest and tax, divided by capital employed, x 100 to produce percentage
figure.)
return on investment
Another fundamental financial and business performance measure. This term means
different things to different people (often depending on perspective and what is
actually being judged) so it's important to clarify understanding if interpretation has
serious implications. Many business managers and owners use the term in a general
sense as a means of assessing the merit of an investment or business decision.
'Return' generally means profit before tax, but clarify this with the person using the
term - profit depends on various circumstances, not least the accounting conventions
used in the business. In this sense most CEO's and business owners regard ROI as the
ultimate measure of any business or any business proposition, after all it's what most
business is aimed at producing - maximum return on investment, otherise you might
as well put your money in a bank savings account. Strictly speaking Return On
Investment is defined as:
Profits derived as a proportion of and directly attributable to cost or 'book value' of

an asset, liability or activity, net of depreciation.
In simple terms this the profit made from an investment. The 'investment' could
be the value of a whole business (in which case the value is generally regarded as
the company's total assets minus intangible assets, such as goodwill, trademarks, etc
and liabilities, such as debt. N.B. A company's book value might be higher or lower
than its market value); or the investment could relate to a part of a business, a new
product, a new factory, a new piece of plant, or any activity or asset with a cost
attached to it.
The main point is that the term seeks to define the profit made from a business
investment or business decision. Bear in mind that costs and profits can be ongoing
and accumulating for several years, which needs to be taken into account when
arriving at the correct figures.
share capital
The balance sheet nominal value paid into the company by shareholders at the
time(s) shares were issued.
shareholders' funds
A measure of the shareholders' total interest in the company represented by the total
share capital plus reserves.
t/t (telegraphic transfer)
Interntional banking payment method: a telegraphic transfer payment, commonly

used/required for import/export trade, between a bank and an overseas party
enabling transfer of local or foreign currency by telegraph, cable or telex. Also called
a cable transfer. The terminology dates from times when such communications were
literally 'wired' - before wireless communications technology.
variable cost
A cost which varies with sales or operational volumes, eg materials, fuel, commission
payments.
working capital
Current assets less current liabilities, representing the required investment,

continually circulating, to finance stock, debtors, and work in progress.
The glossary above attempts to cover the main terms used in business. There are of
course many other terms and ratios not listed here. If you can't find what you're
looking for here try the excellent Campbell R. Harvey's Hypertextual Finance
Glossary, or the related book:
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Financial Terms - Glossary of Financial

Terms and Definitions
Finding an integrated list of financial terms and definitions is only comprehensively possible with the aid of a
financial dictionary. This article is an attempt to create a glossary of financial terms, which is both compact,
as well as comprehensive. This financial glossary gives better, more precise, and simple to understand
meanings of financial terminology. If you want to know about some financial words, this financial glossary is
for you.
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Before beginning my glossary of financial terms and definitions, let me first define the scope of
this glossary. Finance is a broad superset of many sub topics, namely accounting, banking,
business, credit, insurance, stocks, etc. As it was impossible to replicate a whole financial
dictionary in one article, the term finance has been split up in the same categories mentioned
above. We have independent glossaries for all of the above and the links for them will be
provided at the end of this article. So, what exactly will this article contain? My article named
'Financial Terms - Glossary of Financial Terms and Definitions' mainly contains all the general
finance terms and finance words that do not fall in any one specific subset. It includes all possible
terms belonging to the categories of 'investment finance', 'corporate finance', 'mutual funds',
'financial policies', 'financial economics' and 'market instruments'. If you are looking for terms
outside the purview of finance, you can also try our 'glossary' topic page.
Financial Terms Glossary
Before I start my financial terms glossary, let me tell you about how I am going to go about this
task. This glossary of financial terms and definitions progresses in a systematic, alphabetical
progression, starting with the letter 'A' to the letter 'Z'. At the very end of the list however, are the
financial terms that begin with numbers. I hope that finding the financial term you are looking for,
will not be too tedious a task, in this really long list of financial terms and financial definitions.
Financial Glossary - Finance Terms and Financial Definitions
A|B|C|D|E|F|G|H|I|J|K|L|M|N|O|P|Q|R|S|T|U|V|W|X|Y|Z
A
Financial
Definition of the Financial Term
Terminology
A rating agency rating that is given to the best quality of debt obligation, usually
AAA given if the possibility of principal as well as interest payments default is very
low.
Asset Allocation Fund - A fund kept by investment companies to support the
AAF changes in portfolio positions, by reallocating assets according to changing
market conditions.
Average Annual Growth Rate - The arithmetic mean (average) of the growth of
AAGR investment value (portfolio value), over a period of years, to yield a particular
rate that will give growth information at first glance.
Average Annual Return - The percentile metric used to measure historical
AAR returns on an investment or portfolio and to evaluate the quality of potential
investments.
This is the liquidation value of a project. In other words, if the project were to
Abandonment
be liquidated at this very instant, at this very state of progress, the amount
Value
earned on its sale is termed as the abandonment value of the project.
Activity Based Budgeting - When the budgetary allocations are activity based,
ABB i.e. finances are allotted on the basis of activities, the budget is termed as
activity based budgets.
Activity Based Management - The management style that identifies and
ABM analyses individual activities, based on their costing, profitability and drivers, is
known as activity based management.
Asset Backed Securities - These are the securities that derive their values from
an underlying asset or pool of assets. In other words, a financial security
ABS
backed by any other form, like a lease, loan or receivables is an asset backed
security.
This is an assets result or performance, irrespective of any comparisons with
Absolute Return
other assets in the same asset class.
The Automated Customer Account Transfer Service is a central processing
ACATS system that supports the timely transfer of customer accounts, between
various participant institutions.
Adjusted Cost Base - It is the cost calculation used when calculating an asset
ACB
value for tax debt purposes.
The Accelerated Cost Recover System is the historical calculation of
ACRS depreciation for tax and accounting purposes. MACRS (Modified ACRS) is a
similar system based on the current method.
Accord and This is the full and final payment, which is incidentally less than the total
Satisfaction amount owed, made for the full settlement of an outstanding debt.
When the financial situation of a firm is made to look better or worse than it
Accounting Noise actually is, by twisting the GAAP (Generally Accepted Accounting Principles) rules,
it is known as accounting noise.
"Refers to an individual whose net worth, or joint net worth with a spouse,
exceeds $1,000,000; or whose individual income exceeded $200,000 or whose
Accredited
joint income with a spouse exceeded $300,000 in each of the 2 most recent
Investors
years and can be expected to meet that income in the current year." -
Campbell R Harvey
A discount bond that is redeemable at par, rises in its market value as it
Accrued Market
approaches maturity (keeping market interest rates constant) and this market
Discount
value rise is termed as accrued market discount.
Accumulation This is the time period where an accumulated pool of finance is generated by
Phase an investor, by building up his savings.
When all the stocks, in all the diverse sectors, move in one direction together,
Across the Board due to a trend or movement, it is termed as an across the board bull or bear
run.
Act of god bond, or catastrophe bond, is an insurance company bond that links
Act of God Bond its principal and interest to all the losses incurred by the company, because of
natural disasters.
When a bond is traded with a relatively high frequency and in relatively higher
Active Bond
volumes, the bond is known as an active bond.
Unlike the cabinet crowd (that do not take active part in the bond market), the
Active Bond
active bond crowd comprises of all those investors that actively trade in large
Crowd
volumes, in the bond market.
When securities are kept aside, to remain available as a collateral for loans or
Active Box
margins, they are termed to be in an active box.
Investing in short or long positions in an ongoing frequency, such that you are
Active Investing
never in a 'non-invested' state, is termed as active investing.
Active When investments are undertaken with the specific objectives that they should
earn higher return than the set benchmark, the investing process is termed as
Management
active management.
Active-Participant If you have participated in an employer sponsored retirement plan, you hold an
Status active-participant status. Know more on the types of retirement plans.
These are the actual, physical commodities that form the basis for futures
Actuals
trading contracts.
Adjustment The frequency of interest rate change in an adjustable rate mortgage contract
Frequency is termed as adjustment frequency.
ADR stands for American Depository Receipt and is a negotiable certificate
ADR given by a U.S. bank accounting for the number of foreign stock shares issued
on a U.S. stock exchange.
Advance directives give an individual to decide on his own critical care now, for
Advance Directive
when he may not have the power to do so.
Aggressive A mutual fund that aims to achieve the highest possible growth rates (by
Growth Fund obviously undertaking more risk) is termed as an aggressive growth fund.
When transactional decisions are made by utilizing very advanced
Algorithmic
mathematical decision making models, the policy followed is termed as
Trading
algorithmic trading.
If a spread turns out to be unprofitable even during favorable market
Alligator Spread
movements, usually due to huge commissions, it is called an alligator spread.
When two separate orders are simultaneously placed on one security, with a
Alternative Order caveat that one's execution automatically cancels the other, the orders are
termed as alternative orders.
Investment grade bonds that pay lower interest rates because the issuing
Angel Bond
companies have a high credit rating are termed as angel bonds.
Investment that grow at a particular interest and pays out amortized payments
Annuity
over a certain period after the investment period are termed as annuities.
These are municipality issued lower rate debt securities that are issued just
Arbitrage Bond before the call dates on their higher rate debt securities, to gain an interest rate
advantage.
Assessed Value These are dollar values of properties used for tax assessments.
Assignable This futures contract allows the holder to confer his or her rights on another
Contract third party.
Automated
This is an electronic, automated, funds transfer system, and is run by the
Clearing House -
National Automated Clearing House Association.
ACH
Axe is a term used to convey the interest a trader shows in a bond buying or
Axe
selling process.
[Top]
B
Finance Definition of the Financial Term
Terminology
B2B stands for business to business and is the terms used to describe two
B2B businesses trade with each other. Know more on b2b marketing and business
to business netwrok.
Baby Bond This is any bond issued with a less than $1000 par value.
Baccalaureate These are zero coupon bonds aimed at helping families save for tuition fees
Bond through added tax benefits.
Bankruptcy The high risk high interest rate financing undertaken by a company while
Financing under a Chapter 11 Bankruptcy process is termed as bankruptcy financing.
This chart is a vertical representation of price activity of a security over a
Bar Chart
period of time and is a very popular analysis toll with technical analysts.
This is an option whose payoff depends on whether the underlying stock has
Barrier Option
crossed or reached a preset barrier price.
When an option is based on a basket of commodities, currencies or securities
Basket Option i.e. the underlying commodity of not one but a basket of many, the option is
called a basket option. Know more on option trading.
This is an option that can only be exercised on a predetermined day of every
Bermuda Option
month.
Binomial Option Developed by Cox, et al., in 1979, this model provides a mathematical
Pricing Model valuation of an option at each point in time, under simplified assumptions.
September 24, 1869 was deemed a Black Friday in the pages of stock
Black Friday
market history because of a catastrophic stock market crash.
When an option contract is made with bonds as the underlying asset, the
Bond Option
contract is termed as a bond option contract.
When a company decides to allot additional shares to already existing
Bonus Share shareholders, instead of a dividend payout, it is termed as a bonus share
issue.
This is a procedure that uses market figures to calculate zero coupon yield
Bootstrapping
curves.
A bottom fisher is an investor who shops for bargain stocks i.e., the stocks
Bottom Fisher
that have seen a significant price drop in recent times.
This is the term used to refer to an increase in income taxes without any
Bracket Creep
increase in real incomes, because of inflation.
Also referred to as bucket shop, this is an unscrupulous activity aimed at
Bucketing making short term profit, by a broker confirming the execution of an order
without actually doing so in reality.
This type of bond gives investors the option to invest the coupon payments in
Bunny Bond
other bonds of same coupon and maturity.
A bull and bear spread combination strategy that uses three strike prices and
Butterfly Spread
limits both, the risk and the profit potential, is called a butterfly spread.
[Top]
C
Financial
Terminology
A calculation agent is the party that calculates the value of a derivative. In case
Calculation of a swap agreement the calculation agent calculates the amount owed. If two or
Agent more calculation agents are sharing responsibility, they are called co-calculation
agents.
Based on the Gregorian calendar, a calendar year refers to the period from
January 1 to December 31. A calendar year will be the time period used to
Calendar Year
determine an individual's or a corporation's financial information, in order to
calculate taxes.
The amount that is paid by the issuer of a callable fixed-income debt security to
Call Premium
the holder of the security, when the issuer calls the security.
Call Ratio It is a strategic investment plan wherein, various options are combined in order
Backspread to have minimum loss potential and mixed profit potential.
International bank supervisory authorities rate institutions and banks on six
CAMEL Rating
factors - Capital adequacy, Asset quality, Management quality, Earnings,
System
Liquidity and Sensitivity to market risks.
It refers to a price chart that will display the high, low, open and close price for
Candlestick
every single day over a period of time for a specific security.
Capital is a vague term that usually refers to the financial resources and assets
Capital
of a company including the likes of land and buildings and plant and machinery.
These are the fixed income products that companies issue in lieu of short-term
Capital Note debt. These are generally unsecured debts and the company's credit rating helps
in backing these notes.
These are usually held by investment banks, insurance companies and
Captive Fund institutional asset managers. These funds deal solely with the institution that has
ownership and provides them with investment services.
It is a concept that was developed as a result of the Kyoto Protocol. Carbon
Carbon Trade trading is the trading of emission rights of Green House Gases (GHG) between
nations.
Without contributing any initial funds, the general partners of private equities and
Carried Interest hedge funds receive a share of the profits as compensation. This amount is
known as the carried interest.
There are certain costs to be incurred while holding a financial instrument.
These charges usually include insurance, storage costs and other related costs.
Carrying Charge
The cost associated with holding a financial instrument is known as carrying
charge.
Any strategy adopted for investment that is seen to carry high risk is known as
Casino Finance
casino finance.
As the scientific meaning of the term catalyst, its financial usage also implies
Catalyst
something that causes or initiates a particular event to happen.
Certificate of The United States Treasury issues a short-term fixed income security known as
Indebtedness certificate of indebtedness. These certificates take no longer than one year to
mature.
It is a bond that acts as a discouraging agent for unwanted takeovers.
Chastity Bond Immediately after the takeover, the new company will be forced to pay the
bondholders, as the chastity bond matures when a takeover occurs.
It is a lease agreement that places no obligation on the lessee to purchase the
Closed End
asset at the end of the lease period. This form of lease is also called as "true
Lease
lease", "walkaway lease" or "net lease".
Cold calling is a technique used by brokers and agents to gain new business
Cold Calling
opportunities and clients by approaching potential clients randomly.
Similar to a mutual fund, a commodity pool collects contributions by investors
Commodity Pool and uses them in futures and commodity options trading. Investors make small
contributions and as a result, bear low risks.
Also known as designated exchange, it refers to any platform of trade that trades
Contract Market
in specific options or futures contracts.
It refers to the exchange of a convertible asset (like a convertible bond) into
Conversion
another type of asset at a fixed price, on or before a fixed date.
Convertible A debenture that can be converted into any other asset at some point of time is
Debenture called a convertible debenture.
Any activity or task that deals with the financial and monetary dimension of a
Corporate
company is called corporate finance. Mergers and acquisitions to procurement of
Finance
raw materials can all be included under corporate finance.
It is a tax or a levy instilled upon a company, and the amount of the tax will
Corporate Tax
depend on the levels of profit achieved by the firm.
Credit crunch refers to a financial scenario wherein investment capital becomes
Credit Crunch very difficult to obtain. The price of debt products rises up considerably as the
banks and lenders become very cautious and conservative.
Joseph Schumpeter came up with this term in his work, "Capitalism, Socialism
Creative and Democracy". He said, "Creative destruction is a process of industrial
Destruction mutation that incessantly revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly creating a new one".
It is issued by the Government and widely accepted as a medium of exchange. It
includes coins and paper notes and is circulated freely within an economy. It
Currency
forms the basis for any form of trade. Know more on currency exchange and
currency trading.
[Top]
D
Financial
Terminology
It is normally used in the insurance industry where the company defers sales costs
DAC
related to attaining a new customer over the term of insurance contract.
Down-and-In Option Mean is a type of a knock in option where the payoff is
DAIO
decided by the price of the underlying asset falling to the barrier level price.
It is a kind of a knock out barrier option that stops its existence when the price of
the underlying asset does not reach the barrier level. The investor has the
DAOO
authority to use their European call or put option on the exercised price mentioned
in the contract if the price of the underlying asset does not reach the barrier price.
Dark Cloud It is a pattern where the black candlestick follows a white candlestick in the
Cover candlestick charting. It can be a sign of a future bearish trend.
It means direct access trading where one client can trade directly with another
DAT client. It can be called as an expert in trading and exchange without any broker or
middleman or a market on Nasdaq.
Date certain is considered to be a legal binding which ascertains the date on which
Date Certain the actions specified in the contract can be reasonably accomplished or
completed.
It is a date at which the interest begins to accrue or accumulate on a fixed income
Dated Date security. If the issuance date of the the fixed income security is the same as the
dated date then the dated date is also known as the issue date.
The stock trader makes an abundant amount of trade each day and holds his
Day Stock
position for a very short time (from hours to minutes). Most of the trades are
Trader
entered and closed out within the same day.
Each bond market has its own day-count convention. It is a system which is used
Day-Count to determine the number of days between two coupon dates and is essential in
Convention calculating the accrued interest and current value if the next coupon payment is
less than a full coupon period away.
Day's to cover is also known as "Short Interest Ratio". It can be calculated as:
Days To Cover= Current Short Interest/Average Daily Share Volume. It is the
Day's to
measurement of the issued shares of a particular company that are presently
Cover
shorted and are expressed as number of days necessary to close out all the short
positions.
Discounted Cash Flow is a valuation method used to estimate the profitability of a
particular investment option. DCF analysis uses future free cash flow projections
DCF
and discounts them, using weighted average cost of capital, to get the present
value used to analyze the competence of investment.
It is a process to value the price of a stock using estimated dividends and
discounting them back to the current value. The stock is considered to be
DDM undervalued if the DDM value is higher than the current trading value of the
shares. It can be calculated as: Value of Stock = Dividend Per Share/difference of
Discount Rate and Dividend Growth Rate.
Dead Cat It means a short term or temporary recovery from a long time decline or bear
Bounce market, after which the market continues to fall.
Dead flow is the rate at which the new proposals flow to the underwriters of an
Dead Flow investment bank. These proposals include takeovers, acquisitions, mergers, public
offerings of securities (IPO), etc.
Death Cross is a crossover due the security's average long haul moving, breaking
Death Cross
above its average short term moving or level of support.
It is a type of loan given to the company by the investors in exchange for
convertible debt. The original shareholders might lose the control on the company
Death Spiral
in this case. Convertible debt is like convertible bonds that allow investors to
convert bonds into stocks at a rate lower to the current market rate.
Debit Spread means when the investor trades on the same fundamental security
Debit Spread with two options and different market prices. The lowest premium option is sold
and the higher priced option is purchased at the same time.
Debt equity ratio is the measurement of the company's financial position which is
Debt Equity calculated by dividing the total liabilities and the shareholder's equity. It estimates
Ratio or measures the proportion of debt and equity the company is using, for financing
its assets.
Debt Exchangeable for Common Stock – DECS is a debt instrument which renders
DECS a long call on the company which is issuing the stock and coupon payments
consisting of a short put option to the holder.
Debt overhang indicates a circumstance when the debt stock of a country
Debt
surpasses the future capacity of the country to repay it. Know more on debt
Overhang
collections.
[Top]
E
Financial
Terminology
E-Mini (Stock These are electronically traded futures contracts that are available in a wide
Index Futures) range of indices and are traded on the Chicago Mercantile Exchange.
Early exercise is done when an option or a security is exercised before its
Early Exercise
maturity.
'Flagged' or 'Marked' funds that are set aside for a particular period of time or
Earmarking
for a particular event or purpose are said to be earmarked funds or capital.
Legitimate income that comes from an active participation in trade or business
Earned Income is termed as earned income. Wages, salaries, tips, commissions and bonuses
come under the 'earned income' umbrella.
Earnings Setting aside a percentage of net earnings to be reinvested in the business as
Retention opposed to being used to pay out dividends is called earnings retention.
As opposite to losing the points, earning the points is a term used to describe
Earning the Points a situation where, a trader gains through a difference in buy and sell prices,
when he agrees to sell at one price now and to buy for less in the future.
This refers to the risk return trade off that every trader must face, the choice of
Eat Well Sleep
whether he wishes to eat well (high return with high risk borne) or sleep well
Well
(low risk borne, yielding lesser return).
Eat Your Own Dog When a company uses its own products (self manufactured) for day to day
Food operations, it is said to be eating its own dog food.
A smaller bubble that follows an earlier prominent bubble (a post bubble rally)
Echo Bubble
is termed as an echo bubble.
Economic This involves projecting the future state of the economy using various
Forecasting mathematical and statistical models.
When a bond has embedded option on it, they are valued using their effective
Effective Duration
duration.
Electronic
This is a business model that allows firms to transact via an electronic
Commerce – E
network. Know more on ecommerce web hosting and ecommerce websites.
Commerce
Electronic Filing - When tax returns are filed over the Internet, using online tax filing forms and
E File tax preparation software, the process is called E Filing.
A normal option is traded separately from the underlying security but an
Embedded
embedded option is traded together with it, i.e. the option and the underlying
Options
security are inseparable.
These are company sponsored retirement plans where contributions or
Employee deposits are deducted from the employee's pay and some companies match
Contribution Plan these payments with the same amount from their own pockets. Know more on
types of retirement plans.
Income that is earned through investments in stocks is termed as equity

income. In the mutual funds context, equity incomes are incomes earned from
Equity Income
investments in high quality companies with a history of rich and reliable
dividend distributions.
A cost that is used to evaluate projects with different life spans, equivalent
Equivalent Annual
annual cost is the present value of all costs of a project divided by the annuity
Cost
factor for the project life.
Erasure This guarantee is made by accredited financial institution to lend authenticity
Guarantee and legitimacy to any changes made to bonds and securities.
Employee Stock Ownership Plans or ESOPs are the employee benefit plans
that offer the employer company's stocks to employees to keep them focused
ESOP
on their company and generate an interest in them to keep the company's
stock value appreciating.
When an estate owner transfers his stock to a company in return for preferred
Estate Freeze shares, with the aim to circumvent tax consequences, the asset management
strategy is termed as an estate freeze. Know more on estate planning.
When a bond is issued in a currency other than its home currency (currency of
Eurobond
the country from where it is issued), it is termed as a Eurobond.
When a lending bank issues a loan of large denominations, in a currency other
Eurocredit
than its national currency, it is said to be giving out Eurocredit.
These avoid all Federal Reserve Board regulations as these are the dollar
denominated deposits at foreign banks or foreign branches of American
Eurodollar
banks. These securities allow buyers to benefit, or lose, from variations in
currency exchange rates.
Unlike an American option that can be exercised anytime within its maturity
European Option
period, European options can only be exercised at the end of their lives.
These are the strategies or methods to pull out investment from a certain
Exit Strategy
project.
When an option differs from standard American or European options on things
Exotic Options
like underlying asset, payoff calculations, etc, it is termed as an exotic option.
The extrinsic value of an option is nothing but the difference between the
Extrinsic Value
actual option price and its intrinsic value.
[Top]
F
Financial
Terminology
The fair price that any asset would fetch in the market place considering that
all parties have reasonable knowledge of the asset and a reasonable period is
Fair Market Value
taken for the transaction completion, is termed as that asset's fair market
value.
Unlike a foul weather fund, a fair weather fund has the tendency to outperform
Fair Weather Fund
a bull market and under perform in a bear market.
Till the embedded index or the underlying interest rate option on a bond
Fairway Bond
remains within a particular range, a fairway bond continues accruing interest.
A group of mutual funds, covering a wide range of categories as well as
Family of Funds investment objectives, all offered by one investment or mutual fund company,
is called a family of funds.
This is the term used to describe a labor union strategy which requires an
Featherbedding
employer to hire more people than needed for a particular task.
Feeder Fund A fund which has all of its investing routed via or done by a master fund.
Fifty Percent This principle predicts a 1/2 or 2/3 of price change correction before an
Principle observed trend shows it.
This is a type of order or transaction that requires a transaction to be filled
Fill or Kill – FOK
completely or be canceled. Examples are market orders or limit orders.
Financial This involves creating new financial products by redesigning and repackaging
Engineering existing financial instruments.
This is a financial slang, used to describe excessive, sensationalist media
Financial Porn coverage of financial news, that triggers excessive buying and affects overall
finances of the investors.
A fire sale is a good time to buy a security as it occurs when the market prices
Fire Sale
for the security are at a low.
First-Time Home 'First time home buyer' is a term used to describe a buyer who's buying
Buyer residential property for the first time ever.
This annuity entails the annuitant receiving a fixed dollar payment all through
Fixed Annuity
his life, till he dies. Get your fixed annuities explained.
This yield curve signifies that an investor cannot gain any extra compensation
Flat Yield Curve for holding on to an investment as both the short and long term rates are
exactly the same.
Also known as 'floating rate debt', floaters are debt instruments with varying
Floater
coupon rates, that change according to market conditions.
Floating Rate Note Also known as floaters, these are variable interest rate notes, with interest rate
– FRN adjustments made every 6 months or so.
These are fixed income products that were purchased at discount with the
Flower Bond
objective of paying the federal estate taxes when they mature.
Force Majeure French term with literal translation as 'greater force'. It is used in contracts to
escape the liability for natural and unavoidable disasters.
A foreclosure entails the seizure and sale of property stipulated in the mortgage
Foreclosure loan contract of a debtor who has been unable to pay his principle or interest
on time. To know more on preventing foreclosures, read stop foreclosure.
A bond issued in the domestic market, in domestic currency denominations,
Foreign Bond
but by a foreign country issuer, is termed as a foreign bond.
An annual list compiled using the latest figures, of the 500 largest companies
Fortune 500
in the United States.
Free On Board – In a FOB contract, it is the seller's obligation to deliver goods on board a
FOB designated vessel.
A broker that offers a full range of services like research, advice, retirement
Full-Service
and tax planning, etc. at a higher price than other normal brokers, is called a
Broker
full service broker.
This is the market place that trades futures contracts and options on futures
Futures Exchange
contracts.
[Top]
G
Finance
Finance Definitions
Terminology
G-5 is the group of 5 most industrialized nations, i.e. France, Germany, Japan,
G-5
UK and US.
G-7 G-7 is a group of countries which include the G-5 along with Canada and Italy.
Gain Gain is the excess of income over expenses.
GATT is the acronym for General Agreement on Tariffs and Trade. GATT was
GATT the agreement on trade between countries till 1995. It is now replaced by the
WTO.
GDR is the acronym for Global Depository Receipts. It is a bank certificate which
GDR
is issued by more than one country for investing in shares of a foreign country.
GIC GIC is the acronym for Guaranteed Investment Contract.
A gilt edged bond is the bond issued by a blue-chip company and is generally
Gilt Edged Bond
assumed to have secured returns.
GIP GIP is the acronym for Gibraltar Pound.
A global bond is a bond which is issued in more than one country at the same
Global Bond
time.
Global Financial Global Financial System comprises of institutions and regulations which act on
System an international level as opposed to a regional or a national level.
A Global fund is a type of mutual fund of which at least 25% of the total portfolio
Global Fund
is comprised of foreign securities.
Golden A golden handshake is a severance package given to an employee if the
Handshake employee loses his job
A person is said to be going 'long' when he invests in a security or any other
Go Long financial product and intends to hold on to it, for a longer period of time till its
value increases and the investor can sell it off at a profit.
Going short is a futures contract which commits you to deliver or sell a product
Go Short
which is underlined in the contract.
Grey market is the sale of securities that are not officially issued to firms other
Gray Market
than the underwriting syndicate.
GTM is the acronym for 'good this month'. It is an order to buy or sell a security
GTM at a certain price. The order expires at the end of that calender month if the price
does not become available.
GTQ GTQ is the acronym for Guatemala Quetzal.
Guaranteed A guaranteed bond is a bond issued by one firm, and the payment of interest
Bond and principal on the bond is guaranteed by another firm
[Top]
H
Finance
Finance Definitions
Terminology
A hard loan is a foreign loan which is paid in the currency of a nation which
Hard Loan
has stability and economic strength.
Hedge means to invest in a low risk investment option so that the risk of
Hedge adverse price movement for a high risk asset is reduced. Know more on hedge
funds.
Heir is the person appointed to inherit the assets and liabilities of the
Heir
deceased, as specified in the will of the deceased.
Held to Maturity Held to maturity are those securities which the firm has the ability and the
Securities intent to hold until they mature.
High beta index is the index which comprises of all the high beta companies
High Beta Index
on the stock market.
HKD HKD is the acronym for Hong Kong Dollar
HLT HLT is the acronym for Highly Leveraged Transaction.</TD< tr>
HNL HNL is the acronym for Honduran Lempira.
Hobby loss is the non-deductible loss made on activities for personal pleasure
Hobby Loss
and not business activities.
Hockey Stick Hockey stick bidding is when a trader offers an extremely high price for small
Bidding portion of the goods.
A holding period refers to the expected amount of time for which an investor
Holding Period
holds on to an investment.
Hot money is the money which flows between the financial markets regularly in
Hot Money
the search of the highest short term interest rates.
Hounding Hounding analysts is when the hedge fund managers relentlessly persuade
Analysts the analysts to change the rating on a stock.
House poor are those individuals that spend a very large part of their income
House Poor
on home ownership and maintenance.
Household Household expense is the sum of the total money spent on general living
Expense expenses.
Housing bonds are those bonds which are secured by mortgage repayments on
Housing Bond
rental properties or homes.
Housing market index is the index of the 300 biggest housing builders in the
Housing Market
United States. The performance of these builders is generally used to measure
Index
the performance of the housing industry.
HUD HUD is the acronym for US department of Housing and Development.
HUF HUF is the acronym for Hungarian Forint.
Hypothecation Hypothecation is when a person places a mortgage as a collateral for a loan.
[Top]
I
Finance Terminology Finance Definitions
IB IB is the acronym for Introducing Broker

IBES IBES is the acronym for Institutional Brokers' Estimate System
Iceberg order is a large order which is divided into smaller single lots to hide
Iceberg Order
the actual order quantity.
IMF IMF is the acronym for International Monetary Fund.
An immediate payment annuity is a contract that is purchased with one
Immediate Payment
payment and has a specified payment plan which starts immediately on
Annuity
purchase.
An impact fee is a fee which is imposed on property developers by the
Impact Fee municipalities for new infrastructure that is being built or increased due to
new property development.
Implied repo rate is the rate of return which is earned by simultaneously
Implied Repo Rate selling bond futures or forward contract, and then buying an actual bond of
the same amount in the cash market by using borrowed money.
Import are the goods and services purchased by the home country from
Import
another country.
Incentive Stock Incentive stock option is the part of the total share capital of the employing
Option company which is given to the employee as a performance bonus.
Income is the money which comes in, on account of selling goods or
Income
providing services.
Income bond is a type of bond which only promises to repay the face value
Income Bond of the bond. The coupon payments on this type of bond depend on earnings
of the issuing company.
Index Amortization Index amortization note is a financial instrument whose payment schedule is
Note determined by the prevailing interest rates.
Index arbitraging is an investment strategy which aims to profit from the
differences between actual and theoretical futures prices of the same stock
Index Arbitrage index. This can be done by simultaneously buying (or selling) a stock index
future while selling (or buying) the stocks in the index. Know more on
arbitrage trading.
Index Option Index option is either the call or the put option on a financial index.
Industrial
IDRBs are a debt instrument issued on behalf of a private sector company
Development
by a municipality. The funds generated from an IRDB issue are used for
Revenue Bonds
building factories, acquiring tools etc.
(IDRB)
Inflation is the increase in the prices of goods in a country. It also represents
Inflation
the fall in the purchasing power of a currency.
Inheritance is the assets and liabilities which the legal heir inherits from the
Inheritance
deceased.
Initial Public Offering Initial public offering is when a business entity offers a share of its ownership
(IPO) to the general public for the first time.
Installment debt is the debt issued by the lender with the stipulation that a
Installment Debt certain part of the principal and interest should be returned periodically in the
form of installments.
When one entity assumes the risk of a business loss of another entity for a
Insurance periodic payment, it is known as insurance. Know more on business
insurance.
Interest rate ceiling is the maximum interest that one entity can charge
Interest Rate Ceiling
another according to the terms specified in the contract.
Internal Revenue Internal revenue service is the department of the US government which has the
Service responsibility of enforcing and collecting taxes.
International bonds are those bonds which are issued by a non domestic
International Bond
entity.
[Top]
J
Financial
Terminology
An acronym that stands for the names of four months, January, April, July and
JAJO October. These four months are very important for dividend paying companies, as
they announce dividends and also because JAJO is an option cycle as well.
JIC An acronym for 'just in case'. In finance, it can signify a strategy of keeping a high
inventory level in an attempt to safeguard against the loss of order. It is a
precautionary measure to provide safeguard against the loss of sales due to lack
of inventory. 'JIT', on the other hand is a complete opposite to this strategy, which
stands for 'just in time'. This strategy involves producing goods only when orders
for them have been received instead of keeping a high level of inventory of
products.
JMD JMD is the abbreviation or ISO currency code for Jamaican Dollar.
These are the expenses incurred in the course of finding a new job, in same or
similar line of work. Job hunting expenses are usually deductible from taxable
Job Hunting
income on fulfilling certain conditions, regardless of the fact whether one finds a
Expenses
new job. But, expenses are not deducted, if it is the first job of the individual after
completing education.
Joint and
Also known as 'joint life annuity', it is an annuity that pays a lifetime income to two
Survivor
or more beneficiaries, usually the annuitant and his or her spouse.
Annuity
A bond that is guaranteed by the issuer and another party. Generally, the bonds
Joint Bond
issued by a subsidiary company are also guaranteed by the parent company.
A property owned by more than one party, so that even at the death of one owner,
Joint Owned
the property does not pass on to the decedent's heir. Instead, the property
Property
continues to be owned by the other owners.
Joint Return A combined income tax return filing made by a married couple.
An extremely defensive tactic, where a company in order to thwart a hostile
Jonestown takeover attempt resorts to such strategies that may ruin it. The term got its
Defense peculiar name from 'Jonestown massacre' that took place in 1978. Also known as
'suicide pill', which is again an extreme version of 'poison pill'.
It is the idea that movements in a time series follow larger statistical trends and
cycles more often than being random. Joseph effect uses Hurst component in
order to determine whether a series of movements is a part of trend and cycle or
has occurred randomly. According to Joseph effect, a series of movements that
Joseph Effect
falls between 0 to 0.5 of Hurst range are larger and more random that what are
considered to be normal random movements. On the other hand, those
movements with 0.5 value are random, while those falling between 0.5 and 1 are
part of a long term trend.
Abbreviation for Japanese Yen, which is the third most traded currency in the
JPY foreign exchange market. The first two most traded currencies are U.S. Dollar and
Euro.
It stands for 'Joint Tenants In Common', which refers to a type of brokerage
account owned by two or more owners. But, none of the account holders has the
JTIC rights of survivorship so that a surviving tenant cannot claim the rights of the
deceased owner. Instead, the asset is distributed as per the stipulations made in
the written will by the deceased person. Know more on tenancy in common.
It an acronym for 'Joint Tenancy with the Right of Survivorship'. It differs from the
joint tenants in common in the sense that survivorship right is granted to the
owners of the property. In 'joint tenancy with right of ownership', each owner has
JTWROS equal share on the property and he or she has the right to sell his individual share
without the approval of the other owners. In case, one of the owner dies, the
property does not become part of a decedent's estate. Instead, it continues to be
owned by the other owners and it is divided equally among them.
Jumbo CDs are certificates of deposit with very large denominations, that can vary
from $100,000 to even $1 million or more, which are generally bought and sold by
Jumbo CD
large institutional investors. The rates paid on jumbo CD are higher than that paid
for smaller CDs and they may or may not be negotiable.
A mortgage loan of a very high amount, usually $1 billion or more, which exceeds
the conforming loan limit fixed by the Office of Federal Housing Enterprise
Jumbo Loan Oversight (OFHEO). As such, a high amount of loan carries a much higher risk
than normal loans and hence not considered as eligible to be guaranteed or
securitized and purchased by the Fannie Mae or Freddie Mac corporations.
An issue or debt, which is subordinate to issue of another firm in terms of claims
Junior (Issue)
on dividends, interest, security and principal.
A high risk bond, which is ranked below investment good by the major bond rating
agencies. Such rating is usually given to the bonds when the bond issuer is
Junk Bond undergoing financial problems, for which it may not be able to pay interest or
repay the entire loan. The bond issuer usually offers a very high interest rate on
such bonds in order to offset the high risk of default.
[Top]
K
Financial
Terminology
Kangaroos A term used for Australian stocks.

It is the ratio of the Dollar price change in the price of an option to a 1 percent
Kappa
change in the expected price volatility, and is mostly used in regression analysis.
An agreement between a parent company and its subsidiary, whereby the parent
Keepwell company guarantees financing to the subsidiary for a definite time period. This
Agreement method helps the subsidiaries to maintain their solvency and increase their
creditworthiness in order to borrow from banks and other creditors.
A Japanese term that is used to refer to a grouping of financial and industrial
corporations, which is based on mutual cooperation and cross-shareholding. The
Keiretsu members of a keiretsu share knowledge and also own stakes in one another's
corporations in order to ensure mutual security and success. In corporate world,
keiretsu is often used for a Japanese form of corporate organization.
An indicator named after Chester W. Keltner, a grain trader and author. This is a
Keltner market analysis indicator, which is used for measuring stock movements in relation
Channel to an upper and lower moving-average band and thereby for predicting market
trend.
A retirement plan for self-employed and individuals working in unincorporated
businesses, where they can keep a specified amount of their pre-tax income. No
tax is imposed on the contributions as well as the investment earning of this
Keogh Plan
account, until withdrawals are made during retirement. Keogh plan is a federally
approved retirement program and there are several types of investment
opportunities like mutual funds, certificate of deposit, etc., that are offered.
KES It is the abbreviation or ISO code used for Kenyan Shilling.
Key rate duration is the measure of portfolio or security sensitivity. It basically
Key Rate
measures the value of a portfolio or a security's sensitivity in relation to a 1%
Duration
change in the yield for a given maturity, while holding all other maturities constant.
Kickback Kickback refers to payment of something of value, either money or favor to an
individual, in order to influence his or her action or decision in the favor of the
person paying the kickback. A kickback can be legal or illegal, but usually it is
practiced in secret. An example is the reduction in commission charges for
investors trading frequently.
An additional feature like a right, warrant or equity participation that is added to a
debt instrument in addition to usual interest payment so as to make it more
Kicker marketable and desirable to prospective investors. But, in real estate, kicker can be
an additional expense apart from usual interest payment that is required to be
payed, for getting a loan approved.
It is a slang used for referring to the act of doing grassroots research before
investing. Both investors and fund managers do some preliminary research like
Kicking the calling or visiting a company or questioning a broker or a financial and investment
Tires advisor, etc. prior to making any investment. The term got its peculiar name from
the common habit of people to kick the front tire of an automobile that they are
intending to purchase while the salesperson makes his pitch.
It is the federal tax that is imposed on investment income of individuals under 17
years old, when it exceeds an yearly threshold. Tax is levied at the guardian's rate
on the extra income above the threshold level. Kiddie tax law was originated in the
Kiddie Tax
year 1986 and was originally applicable for investment income earned by
individuals under the age of 14 years in an attempt to prevent the practice of
shifting income to children's name to take advantage of the lower tax rate.
Killer A term used for software applications, which are considered much more effective
Application than their competitors and hence the name 'killer application'.
A term used for individuals or organizations like investment bankers that help
Killer Bees publicly traded companies to thwart hostile takeover attempts with the help of some
defensive strategies.
KMF It is the abbreviation or ISO code for the currency, Comoros Franc.
Knock-In A type of barrier option which remains latent until a certain price level is reached
Option before expiration, after which it becomes a normal option.
Knock-Out An option that loses its value or worth when the price of the underlying asset or
Option currency exceeds a specified price level.
An economic theory that states that capitalist economies are vulnerable to larger
Kondratiev business cycles (or economic fluctuations) with much longer phases than common
Wave business cycles. Such large business cycles or 'supercycles' can last for 50 to 60
years. This theory was propounded by Soviet economist Nikolai Kondratiev.
KPW KPW stands for the currency for North Korea, known as North Korean Won.
KRW It is the currency abbreviation for South Korean Won.
KWD It is the abbreviation for Kuwaiti Dinar.
An abbreviation for 'Know Your Client', which is a standard form in the investment
industry. It enables the investment advisor to know important information about
KYC
their clients like financial position, risk tolerance, etc., so that advisors can decide
what type of investment can suit their clients.
KYD is the abbreviation for Cayman Islands Dollar, which is the currency of
KYD
Cayman Islands.
KZT It is the abbreviation for Kazakhstan Tenge, the currency of Kazakhstan.
[Top]
L
Financial
Terminology
An option where investors can lock-in gains on the underlying asset or security,
Ladder Option
once its price reaches a predetermined price level.
Lady Godiva It refers to a theoretical set of accounting principles which require disclosure of
Accounting all information by the corporations, including those which are usually not
Principles – LGAP reported under the generally accepted accounting principles.
A corporate merger or takeover strategy, where a third party secures the trust
Lady Macbeth
of the targeted company by posing as a white knight, but then joins the hostile
Strategy
acquirer or bidder.
Laffer curve is an invention of Arthur Laffer, an American economist, which
describes the relationship between tax rate and tax revenue. It asserts that an
increase in tax rate is not always associated with an increase in tax revenue.
According to this concept, when tax rate increases from low levels to high
Laffer Curve
levels, tax revenue also increases. But after a certain point, increase in tax rate
brings about a reduction in tax revenue. This concept assumes that after a
certain point, increase in tax rate discourages hard work and thereby reduces
tax revenue.
LAK It is the abbreviation for 'Lao kip', which is the currency of Laos.
It is the ratio of change in option price to a 1% change in option volatility.
Lambda Basically, it is the partial derivative of option price with respect to option
volatility.
Lame Duck A term used for an individual who has defaulted or gone bankrupt.
Last Trading Day The last day for trading or closing a futures contract.
Purchasing or selling securities after the trading day has been closed, but
Late-Day Trading recording them to have occurred before the closing of the market, which is
regarded as an unethical practice.
LBO stands for 'leveraged buyout', which is a method of acquiring a company
with a substantial amount of borrowed money. Usually, the acquiring company
LBO
uses its own assets as well as the assets of the acquired company as
'collateral' to secure such a large loan.
LBP An abbreviation for Lebanese Pound, the currency of Lebanon.
Leprechaun A term used for a mischievous corporate manager or executive, who is
Leader believed to possess buried treasure just like the 'elf leprechaun' of Irish folklore.
A document or letter given by a bank that guarantees that payment will be
made to the seller on time. If the buyer fails to make the payment, then the
Letter of Credit
bank that gives the letter of credit has to pay the entire or the remaining
amount for the purchase.
An acronym for London Interbank Offered Rate, which is the standard rate for
calculating rates for adjustable-rate loans. LIBOR is based on the rate of
LIBOR
interest at which borrowing and lending of unsecured funds are carried out by
banks among each other.
Lifestyle Fund An investment fund with an individual specific asset mix, as determined by the
factors like level of risk aversion, age, purpose of investment, etc.
'Loan shark' refers to the person who charges an interest rate that is much
higher than the legal rate that is charged for loan. So, loan sharking is the term
Loan Sharking
for act of charging an exorbitant or illegal interest rate on loans. Also known as
'usury'.
A plan or strategy employed for fending off a hostile takeover, whereby the
Lobster Trap company prevents anyone with more than 10% ownership from converting its
convertible securities like convertible bonds, warrants, etc into voting stocks.
Lump-Sum
A single payment for the full amount due is termed as lump-sum distribution.
Distribution
Liquid yield option note or LYON is the terms used for a zero coupon bond,
LYON
which is callable, putable as well as convertible.
[Top]
M
Financial
Terminology
This is a financial theory given by Modigliani and Miller which claims that a
M&M - Modigliani-
firm's market value depends on its future earning power and risk of
Miller Theorem
underlying assets and not on financing decisions and dividend declaration.
This is a defense against takeover attempts in which the company issues a
Macaroni Defense large number of bonds on the condition of high value redemption if the
company is ever taken over. It is also known as poison pill.
This is a specialized formula used for building up an immunization strategy
Macaulay Duration
or to measure how sensitive a bond price is to changes in the interest rates.
To save himself the trouble of buying and selling his own securities, if an
Managed Money investor hires a qualified investment professional to do so for a fee, he is
said to have managed money.
This is an investing principle that states that an investor should only buy a
Margin of Safety
security if the market price is significantly lower than its intrinsic value.
The amount of tax paid on every additional dollar is termed as the marginal
Marginal Tax Rate
tax rate.
Theoretically, earning a riskless profit with zero investment, by
Market Arbitrage simultaneously buying a security in one market and selling the same in
another is termed as a market arbitrage.
Market When a new product of a company eats away the demand of another
Cannibalization product of the same company, it is termed as market cannibalization.
The cautious, wary feeling of nervousness, gripping the investment market
Market Jitters
in times of uncertainty, is called market jitters.
This is a measure of market sentiment and is calculated by multiplying the
Market Momentum
change in market index value with the aggregate trading volumes.
Market Risk This serves as the slope of the security market line (SML) and is the
difference between the expected return on market portfolio and the risk free
Premium
rate.
This is the act of market direction prediction, using technical analysis of
Market Timing
indicators and fundamentals.
Also referred to as a trophy asset, a marquee asset is a company's most
Marquee Asset profitable asset, i.e. the asset that makes the largest contribution to the
company's bottom line.
This is a Peseta denominated foreign bond, issued in Spain by a non-
Matador Bond
Spanish company.
This is an indicator of market breadth from the difference between the
McClellan Oscillator
number of advancing and declining issues on the NYSE.
This is a short term financing that is usually payable between 3 to 5 years. It
Mini Perm is generally used to pay off income earning commercial and construction
properties.
Also known as downtick or zero minus tick, a minus tick denotes a trade that
Minus Tick
occurs at a price lower than the immediately preceding one.
Modern Portfolio This is a theory that gives out ways for optimal portfolio construction to give
Theory – MPT out maximum rewards for a given market risk level.
This is a theory that holds the thought that stock market behavior on
Monday Effect
Mondays will show the same trend followed on the previous Friday.
When large amounts of illegally earned money, eg. drug trafficking or
Money Laundering terrorist activities, is shown as money obtained from legitimate sources, it is
called money laundering.
Commercial mortgage brokers facilitate the transactions of mortgage bankers
Mortgage Broker by bringing mortgage borrowers and mortgage lenders together to make a
deal.
A production strategy where a production facility is kept functional for
Mothballing whenever a production need arises, even though production is not taking
place there, at this point of time.
Moving Average This is a technical analysis tool that tracks price movements of a security or
Chart a commodity.
This is a mutual fund that invests in municipal bonds, i.e. bonds issued to
Municipal Bond
finance the expenditures of state, municipality, county or special purpose
Fund
districts.
The cash relative to total assets ratio for a mutual fund that is published
Mutual Fund
monthly by the Investment Company Institute is called mutual fund liquidity
Liquidity Ratio
ratio.
[Top]
N
Financial
Terminology
Naked puts and naked calls are both naked option. Naked options are
Naked Option
basically, options with no underlying security positions to support them.
When the installments paid by the debtor, fail to cover the interest on the
Negative
principal, the principal balance increases and this is termed as negative
Amortization
amortization.
When money is borrowed to buy an investment asset, with the investment

Negative Gearing not making enough money to even cover the interest expenses and other
maintenance costs, it is termed as negative gearing.
Also called the covenant of equal coverage, this negative covenant stops the
Negative Pledge
corporation from pledging any assets that can lessen the security of its
Clause
lenders.
A secondary market transaction where prices of the securities traded are
Negotiated Market
negotiated between the buyers and the sellers.
A nervous Nellie is a jittery investor who is not comfortable with the risks of
Nervous Nellie
investing.
A nest egg is an accumulation of money, set aside for a specific purpose or
Nest Egg
event in the future.
Net 30 A term that suggests that the final payment is due within 30 days.
Net Asset Value - It gives the fund value, by dividing the total value of all securities in the
NAV portfolio (less any liabilities) by the number of outstanding fund shares.
The status of the trader's overall position after netting all his long positions
Net Position
and short positions in various securities is called his net position.
This is an investment rule that states that, an investment can only be
Net Present Value accepted if its net present value (NPV) is greater than 0. An NPV less than 0
Rule signifies that the investment will actually decrease shareholder's wealth
instead of increasing it.
This is an economic indicator of the price and quantity statistics of newly built
New Home Sales
home sales. Know more on home selling.
No documentation loans or mortgages require no disclosure of income and
No Doc Loan or No
assets on the loan application, but they often carry higher interest rates and
Doc Mortgage
down payments.
Noise trader risks are the risks associated with market price volatility, faced
Noise Trader Risk
by the noise trader.
Nominal Yield The percentile or basis point spread that equates the yield on the Treasury
Spread yield curve to the discount factor is known as the nominal yield spread.
When any debt is free of personal liability and the debtor's liability is limited
Non-recourse Debt
to the asset offered as collateral, the debt is called non-recourse debt.
Normal This is the opposite of Contango and happens when the price of all futures
Backwardation contracts on the commodity are price higher than all the spot contracts.
An account of a local bank in a foreign bank, in a foreign currency is termed
as a nostro account. Similarly, a vostro account in an account in a
Nostro Account
correspondent bank, on behalf of a foreign bank and is also sometimes
known as a loro account.
Not-Held Order A limit order or a market order that gives the broker the freedom to execute
the order at his discretion, at a price he considers to be the best possible
one.
This is a sentiment indicator that shows whether a trend is bullish or bearish,
Nova/Ursa Ratio
and is based on the Nova and Ursa funds of the Rydex Fund Group.
[Top]
O
Financial Terminology Definition of the Financial Term
This is a municipal bond with a face value higher than the value of the
Obligation Bond
asset who's mortgage it is used to secure.
This theory predicts a general stock price decline in the month of
October Effect
October.
This is a technical analysis tool to predict buy and sell timing. Since the
theory assumes that small, individual investors are mostly wrong, it is a
Odd Lot Theory
buy time when odd lot sales are up and a good sell time when odd lot
buys are increasing.
Omega, the third derivative of the option price and the first derivative of
Omega gamma, is a measure of option value changes with respect to changes
in the price of the underlying asset.
When a real estate asset or property is listed simultaneously with
Open Listing multiple real estate agents, it is said to be an open listing. Know more
on real estate appraisals.
Unlike a closed collateral, where one bond can only be backed by one
Open-End Indenture single collateral, an open end indenture allows one collateral to back
many different bond issues.
This term is used in technical analysis to signify a trading system
Optimization
adjustment that makes it more efficient and effective.
Quotations for a list of all options on one underlying security, when
Option Chain
bundled together, are called option chains.
When an option is dated for a date before the company actually grants
Options Backdating
it, it is called options backdating.
These signify a steady, fixed cash flow stream, at the end of each
Ordinary Annuity
period, over a fixed amount of time.
The discount on par value (difference between the redemption price
Original Issue Discount
and issue price) at the time of bond issue is termed as an original issue
Bond (OID Bond)
discount, and such a bond is called an original issue discount bond.
When options are traded in over-the-counter market, with participants
OTC Options given the freedom to choose their characteristics, the options thus
traded are called OTC Options.
Also known as 'market outperform', 'moderate buy' and 'accumulate',
Outperform the term outperform is used for a stock that is currently giving more
returns than the overall market returns.
As the principal underlying a pool of assets always exceeds the
Overcollateralization
principal on a security by 10 to 20 percent, an overcollateralization is
(OC)
done to get a better debt rating.
Also known as churning, overtrading is the excessive buying and selling
Overtrading of securities on an investor's behalf, that a broker does in order to
increase the commissions he receives.
As a result of an emotional buying push, if a company or stock is valued
more in the market, than the valuation that comes from its future
Overvalued
income earning potential or its P/E ratio, the company or stock is said to
be overvalued.
[Top]
P
Financial
Terminology
It is an order that contains many exchange or deposit items that are completed
Package Deal simultaneously or individually. It helps the traders to ensure specific prices or
times to mature for multiple assets.
These are stocks of two sister concern companies, that is, different companies
Paired Shares under the same management. There shares are sold as one unit and mostly
appear on the same certificate.
The large total market value of the assets owned by an individual that helps
achieve a high net worth is known as a paper millionaire. This is a phenomenon
Paper
that is observed when investors buy marketable securities which are later on bid
Millionaire
up to a much higher price on the open market. Although, called paper millionaire,
the individual is not safe until the shares are liquidated.
This is a Latin term which is translated as 'without partiality'. This term is used to
Pari-passu
describe two securities or obligations that have equal rights to payments.
The type of stock where an additional dividend based on predetermined
conditions, that is paid along with the normally specified rate that are to be
received by preferred dividends, is known as participating preferred stock. The
Participating additional dividends are paid only to preferred shareholders, if the common
Preferred Stock shareholders receive dividends that exceed a specified per-share amount. The
preferred stock holders also have a right to receive the stock's purchasing price
and also the pro-rata share of any remaining proceeds that the common
shareholder's receive in case of liquidation.
The shareholders receiving an earning paid out in dividends is known as payout
ratio. The payout ratio is used by the investors to determine what the company
Payout Ratio
does with their earnings. The pay out ratio is calculated as: Payout Ratio =
Dividends per Share/ Earnings per Share
The investment rating in which a security that is expected to provide returns
which are consistent with the securities provided by other companies within its
Peer Perform sector and is used by analyst is known as peer perform. This is a neutral
assessment and can predict the movement of security along with similar
companies.
The part of early IPO trading that is provided by the lead underwriter or other
members of a syndicate with a bid or offer to purchase securities. There are
Penalty Bid restrictions imposed on the bids and when used, the broker that offers shares
back to the underwriter, is assessed for penalty. Thus, penalty bid is created to
avoid and deter investors to 'flip' IPO shares soon after start of trading.
The stocks that trade at comparatively low price and market capitalization, mainly
outside the major market exchanges are known as penny stock. These are the
types of stocks that are speculative and high risk due to their lack of liquidity,
Penny Stock
large bid-ask spreads, small capitalization and limited following and disclosure.
These stocks are mostly traded over the counter through the pink sheets and
OTCBB.
The stock index in which all dividends and other cash events are paid out to
Performance shareholders is known as performance based index. The performance based
Based Index index added in any dividend amounts to the net share price before calculating the
index return, during the performance measurements over a given period of time.
The stock without a maturity date is known as perpetual preferred stock. The
Perpetual redemption privileges on such shares are always provided to the issuers of
Preferred Stock perpetual stock. The dividends are paid indefinitely on the issued perpetual
preferred stocks.
Piggyback The acquired additional warrants that are gained after the exercise of primary
Warrants warrants are known as piggyback warrants.
These are the daily publications of bid and ask prices of the over-the-counter
(OTC) stocks including the market makers trading them, compiled by the
Pink Sheets National Quotation Bureau. The companies that are quoted in the pink sheets do
not need to meet the minimum requirements or file the SEC like the companies
on a stock exchange. Pink sheets are also known as the OTC trading.
The change in a firm's product price that leads to an effect on the quantity
Pricing Power demand of that product is known as pricing power. This economic term is based
on the 'Price Elasticity of Demand'.
The advices issued by a company regarding the earnings that won't be meeting
Profit Warning
the exceptions of the analysts is known as profit warnings.
The documents related to the methods and procedures outlined by a public
company, regulated by the Securities and Exchange Commission is known as
Proxy Materials proxy materials. The shareholders and solicit votes are kept informed about the
corporate decisions like election of directors and other corporate actions with the
help of these documents.
The movement of a price when it falls from its peak is known as pullback. The fall
Pullback back is seen as a reversal of the prevailing upward trend and a signal of slight
pause in the upward momentum.
The company that concentrates on only one line of business or the stock prices
Pure Play of a company that mutually relate to the fortunes of a specific investing strategy
are known as pure play.
Puttable The option given to investors by the common stock to put the stock back into the
Common Stock company at a predetermined rate is known as puttable common stock.
[Top]
Q
Financial
Terminology
This is a Nasdaq stock symbol. It represents a particular stock that is involved

Q
in bankruptcy proceedings.
This is a Nasdaq ticker symbol for the Nasdaq 100 trust. This is an ETF
trading with the Nasdaq. The tech sector is offered broad exposure by this
security tracking the Nasdaq 100 Index. This index consists of 100 actively
QQQQ
traded and the largest non-financial stocks on the Nasdaq. QQQQ was
formerly known as the QQQ, and is also known as the 'cubes' or 'quadruple-
Qs'.
The variables (more than 100) used in a stock valuation system in seven
Quadrix major categories, to help determine the value of a stock. A weighted average
of all 100 variables is used to determine the overall score for a particular stock.
This is a type of dividend that applies the capital gains tax rates. The regular
Qualified Dividend
income tax rates are usually higher than these tax rates.
Qualified Domestic A qualified domestic institutional investor is an institutional investor that has
Institutional met certain qualifications to be able to invest in securities that are outside the
Investor (QDII) home country.
A sale, transfer or exchange of stock, qualifying for favorable tax treatment for
the employee selling the stock that are obtained through a qualified stock
option incentive plan, like the incentive stock option (ISO) plans and employee
Qualifying
stock purchase plans (ESPP) is known as qualifying disposition. The
Disposition
employee should sell the stock at least one year after receiving the stock and
two years after receiving the incentive stock option (ISO) or at the start of the
ESPP offering period to gain a qualifying disposition.
This is a measuring technique used to calculate the change occurring between
Quarter On
one financial quarter and the previous financial quarter. This helps give an
Quarter (QOQ)
idea to the investors regarding the growth of a company over each quarter.
The capturing of all the necessary company activities in a time interval, that
occurs between the beginning of the current quarter and the time in which the
Quarter To Date
data is gathered. This technique allows the company management to
(QTD)
understand the shaping up of the quarter before the end of entire quarter
period.
The quarterly filings by the public companies that include earning reports like
net income, earnings per share, earnings from continuing operations and net
Quarterly Earnings
sales, to report their performance. The quarterly earnings report are filed
Report
before the end of each quarter. January, April, July and October are the
months when companies usually file their quarterly earnings report.
Quarterly Income The limited partnership shares that exist only for the purpose of issuing
Preferred preferred securities and lending the proceeds of the sales towards the parent
Securities company are known as Quarterly Income Preferred Securities.
The level of an individual with a vested interest in a company to make
Quorum
proceedings that are accepted by the corporate charter is known as quorum.
Quote The price at which a security or commodity is traded that is mutually agreed by
the buyer and seller and at which transaction of some amount takes place.
Definition no.2: It is the current price of a bid or ask quote that is used to buy
or sell shares. The quality and the price are shown using the bid quote, at
which a current buyer is willing to purchase shares. The ask quote is used to
show the amount that current participant is willing to sell shares for. It is also
known as 'quoted price' for an asset.
[Top]
R
Financial
Terminology
R This is a Nasdaq stock symbol. It specifies that the stock has rights.
This is a theory that states that stock price changes have same distribution
Random Walk
and are independent of each other. The past trends of a stock price or market
Theory
cannot be applied in prediction of the future trend of the stock.
The typical downward movement in the price of security once the price rises
Reaction
previously is known as reaction.
The actual price of a security quoted at the moment in time is known as real
time quote. They are instantaneous without any delay, whereas, the quotes
Real Time Quote
displayed on various websites are delayed by 15 to 20 minutes. These quotes
are known as delayed quotes.
The highest price level reached by a security, commodity or index during
trading that will go down in history are known as record high. The
Record High measurement of record high starts with trading and is updated when ever the
last record high is exceeded. These are nominal values that do not account for
inflation.
The lowest price level reached by a security, commodity or index during
trading that will be mentioned in history is known as record low. The record low
Record Low
is reached during a trading day. It is recorded even if it was the closing price.
These are nominal values that do not account for inflation.
The pattern resembling a rectangle on a chart when the price of a security
Rectangle trades within a bound range where the levels of resistance and support are
parallel to each other is known as rectangle.
The security with potential problems is indicated with a red flag. It refers to a
stock with undesirable characteristics that stand out in a stock, to an analyst.
Red Flag
The method to identify red flags depends on the investment methodology
implied.
The customer cash accounts and the amounts that can be extended to
Regulation T (Reg customers by brokerage firms and dealers for purchasing securities that are
T) governed by the Federal Reserve Board regulation is known as regulation T or
Reg T.
Renounceable rights are stocks having a value and are trade-able. These are
Renounceable
issued by a corporation to shareholders to purchase more shares from the
Right
corporation's stocks at a discount.
Repackaging The purchase of all the public firm common stocks with a leverage loan into
private stocks by a private equity firm is known as repackaging. The company
is 'dressed up' by the private equity firm before making it public again via an
initial public offering.
Exchange of stocks that no longer are in for money, with stocks that are
Reprice currently at the money is known as reprice. Investors are helped by
exchanging worthless options for options that have high value.
The kind of sales restrictions on insider holdings is known as restricted stocks.
The trading of such stocks should be carried out in compliance with the special
Restricted Stock
SEC regulations. The section 1244 of the Internal Revenue Code outlines the
regulations to be followed. Know more on stock trading.
Return On The adapted version of the return on equity (ROE) where the shareholder's
Average Equity equity is changed to average shareholder's equity is known as Return On
(ROAE) Average Equity (ROAE)
The historical predictors of investment risk and volatility and the components in
Risk Measures the modern portfolio theory (MPT) statistical measures is known as risk
measures.
The increase in par value of stocks or earnings per share by reduction in the
Reverse Stock
number of a corporation's shares outstanding. The market value of the total
Split
number of shares does not change.
During the forthcoming sale of a company, the company's board of directors
should conduct the proceedings in a manner that will be able to yield the
maximum benefits for the shareholders. According to the legal precedence,
Revlon Rule
once the number of situations like cash based acquisitions and the requisite
financing available with the bidding parties are fulfilled, the highest bid should
be chosen by the board of directors.
The entitlement of stockholder's to purchase new shares issued by the
corporation at a predetermined price less than the current market price in
Rights
proportion to the number of shares already owned is known as rights. The
rights issued have a short validity period, after which they expire.
[Top]
S
Financial
Terminology
S This is a Nasdaq stock symbol. It indicates the shares of beneficial interest.

The ratio of total revenue earned per share over 12 months. The total revenue
Sales per earned in a fiscal year by the weighted average of shares outstanding for the fiscal
Share year is used to calculate the sales per share. It is also known as 'revenue per
share'. Sales per Share= (Total Revenue/Sales)/ Average Shares Outstanding.
An established company that has earned a good reputation with its existing shares
Seasoned
that have stable price movements and substantial trading volume, issues securities
Issue
that are known as seasoned issue.
The public offering as a part of liquidity when shares are distributed to retail and
Secondary
institutional investors, is known as secondary liquidity. The shares are then sold off
Liquidity
to other interested buyers by these secondary parties.
The rise and fall of particular investment or asset class over a period of time
Secular caused by a market that is driven by forces that are in place over many years. The
Market strong investor sentiment drives prices higher in a secular bull market and weal
sentiment causes selling pressure in a secular bear market.
The misrepresentation of the investments by a person or company that help
Securities investors make decisions is known as securities fraud. False information, bad
Fraud advice, withholding information, etc. is used to misinterpret information in this type
of white collar crime.
The fund raised from company founder's personal assets, friends, family, etc. to
Seed Capital
start a new business is known as seed capital.
The time period given to parties that is required to satisfy the transaction's
Settlement obligations between the settlement date and the transaction date. The seller must
Period deliver the security within the settlement period and the buyer must settle all
payments within the settlement period.
The cash or other considerations that help raise funds by issue of shares is known
Share Capital as share capital. The share capital increases every time the company sells new
shares to public in return for cash.
The sale of security that is not owned by the seller or the sale that is completed by
Short Selling
the delivery of a security borrowed by the seller, is called short selling.
The stocks with a small market capitalization are known as small cap. The
Small Cap capitalization of a company that is between $300 million to $ 2 billion comes under
small cap.
The investors earmarking funds for the purpose of speculation is known as
Speculative
speculative capital. Extreme volatility and a high probability of loss is associated
Capital
with speculative capital.
The stock of a subsidiary that is exchanged for shares on a parent company in a
Split Off
type of corporate reorganization is known as split off.
A security type which can signify the ownership in a capital and claim on
Stock
corporation's assets and earnings is known as stocks.
The dividend-like payment stream that resembles the periodic cash receipts from a
Synthetic
dividend-paying stock that is created by an investor with certain financial securities
Dividend
is known as a synthetic dividend.
[Top]
T
Financial
Terminology
This is a Nasdaq stock symbol. It specifies that the stock has warrants or
T
rights.
When a corporate company makes a bid for an acquiree, it is known as
Takeover takeover. The acquiring company makes an offer for the outstanding shares of
the targeted company that are publicly traded.
Technical It is a condition in which a company or a person, that has defaulted on financial
Bankruptcy obligations, would be declared bankrupt, if the creditors move the court.
The offer of purchasing a few or all the shareholder's shares in a corporation is
Tender Offer known as a tender offer. The price offered is mostly slightly higher than the
market price.
Theoretical Dow The assumption used to calculate all index components to hit their high or low
Jones Index at the same time during the day is known as Dow Jones Index (DJIA).
The market with low number of buyers and sellers, with very few transactions is
Thin Market known as a thin market. The prices in a thin market are more volatile and
assets are less liquid. It is also known as a 'narrow market'.
The number of stocks that are trading on an uptick subtracted by the number of
Tick Index
stocks trading on a downtick is called tick index.
The risk taken by an investor in buying or selling a stock based on future price
Timing Risk predictions is known as timing risk. The potential beneficial movements missed,
are explained under timing risk, that may occur due to an error in timing.
Top-Down The analysis of macro-economic trends and then analysis of the details of the
Analysis micro components is known as top-down analysis.
The stocks of every security trading on a certain exchange is held by a mutual
Total Stock Fund fund seeking to replicate the broad market, investing in a certain country or
passing basic thresholds of size or trading volume.
The slang to describe a company that spends money that is equal to the
Trading Dollars
amount of money required in making the product developed by it.
The ready access to any financial information regarding a company, related to
Transparency its price levels, market depth and audited financial reports available to the
investors is known as transparency. Know more on business financial reporting.
The strategy to gain control using the analysis of an asset's momentum in a
Trend Trading
particular direction is known as trend trading.
The number of times an asset is replaced during one financial year is known as
turnover in the books of accounting. It is also the number of shares traded over
Turnover
a period of time, as the total shares percentage in a portfolio or of an exchange
is known as turnover.
The type of quote that gives security bid and the ask price, and the would-be
Two-Way Quote traders are informed of the current price at which they could buy or sell the
security.
[Top]
U
Financial
Terminology
The US Treasury is the department that is responsible for the revenue of the
U.S. government. However, its tasks are not limited to the same. It is also
responsible for collection of taxes, management of government funds and
US Treasury
printing of bills. This department is also responsible for overseeing all the
banks running in the United States of America. Know more on the US
economy.
UBTI UBTI is the abbreviation for Unrelated Business Taxable Income. It is the
income generated by any tax exempted entity (for example, Individual
Retirement Arrangement) through taxable activities.
UCITS stands for 'Undertakings for the Collective Investment of Transferable
UCITS Securities'. The distribution and management of unit trusts among the
European countries is taken care of, by this public limited company.
UGMA is the abbreviation for Uniform Gifts to Minors Act. This is an act that
allows minors to own property. This happens in special cases. If a person
UGMA gives out thousands of dollars through IRS to a minor, then this act allows
the minor to retain the same without the need of an attorney setting up a
special trust.
Unadjusted basis is used such that the original cost of the property is
Unadjusted Basis considered, leaving out the salvage. This basis is basically used for
depreciation purposes.
Uncommitted It is one of the most sought after credit facility. In the uncommitted facility, the
Facility institution lending the credit is under no restriction regarding the same.
It is an illegal process that is done to avoid payment of taxes. Under reporting
Under Reporting
is the deliberate showing of income less than what has been actually earned.
A company is said to be in undercapitalization when it does not have
sufficient cash to conduct its business smoothly. It is also not in a condition to
Undercapitalization
pay its creditors. When a company goes through undercapitalization, the
chances of it going bankrupt increases.
A set of securities with a common feature is called the universe of securities.
Universe of
The common feature can be the index, the market capitalization or the
Securities
industry.
An unsecured creditor is one who lends out capital without specified assets
Unsecured Creditor as collateral. This is one of the most unsecured ways of lending out the loan
as the borrower has nothing to lose if he defaults on the loan.
Upside/Downside The ratio of the volume of advancing NYSE issues to the volume of declining
Ratio NYSE issues gives the Upside/Downside Ratio.
If the listing exchange does not execute the trade in a listed stock, it is called
Upstairs Trade
upstairs trade.
Uptick volume is the volume of a security that trades at a price higher than its
Uptick Volume
usual price.
Usury is the illegal practice of lending out money at a rate higher than that
Usury
allowed by the law.
A UT or Unit Trust is an unincorporated mutual fund structure that allows
UT funds to hold assets and pass profits to the individual owners, rather than
reinvesting them back into the fund.
UTMA stands for Uniform Transfers to Minors Act. It is the act that allows
UTMA minors to accept gifts other than cash (eg. Real estate) The UTMA in short
can be considered as an extension to the UGMA.
[Top]
V
Financial
Terminology
The process of determining the value of an asset is called valuation. There are
Valuation various processes for doing the same. These process can be subjective as well as
objective.
VAMI is the abbreviation for Value Added Monthly Index. It is given by Previous
VAMI VAMI x (1 + Current Rate of Return). It is the index that is used to chart the
monthly performance of a hypothetical $1000 investment.
Value Fund is one of the three main mutual fund types. It holds the stocks that are
Value Fund
considered to be undervalued in price and are likely to pay dividends.
Value Added Tax or VAT is the tax that is payed by the consume on purchasing a
VAT product. It is a type of consumption tax, which includes value added to the product
at any stage of its production.
If a trader purchases and sells two options of the same type with the same
Vertical
expiration dates and different strike rates at the same time, then the strategy is
Spread
referred to as the Vertical Spread.
Venture The type of capital that is provided for early-stage, high-potential, growth
Capital companies is referred to as venture capital.
Viager is also known as Reverse Annuity Mortgage or Charitable Remainder
Viager Trust. When a property is sold on reverse annuity basis, the real estate agreement
made is called Viager.
Volatility Quote is a type of quoting option. It is the type of quoting when the bids
Volatility Quote and asks are not quoted according to the prices but rather on the implied
volatilities.
The graph between the strike price and implied volatility of a group of options
Volatility Smile
which have the same expiry date.
Voluntary Voluntary compliance is the assumption that considers that the tax payers will
Compliance show their incomes honestly and pay their complete taxes that they need to.
Voodoo All forms of accounting mainly target on inflating revenue or hiding expenses. In
Accounting the method of voodoo accounting, the principle of conservatism is not followed.
Voodoo The term used for Reaganomics or the policies made by President Ronald
Economics Reagan's. This term was first used by George H. W. Bush.
A VPT or Volume Price Trend indicator is a technical indicator that consists of a
cumulative volume line that shows the addition or subtraction of change in share
VPT
price trend and current volume depending upon the upward or downward trend of
the market.
Vulture capitalist is the slang for venture capitalist. It is used when an investor
Vulture
deprives the inventor of an invention for what he has created using the capital
Capitalist
from the capitalist.
When a fund buys securities in distressed investments, it is referred to as vulture
Vulture Fund fund. The distressed investments can include equities that are in or near
bankruptcy.
[Top]
W
Financial
Terminology
W It is a NASDAQ symbol that means that a particular security is a warrant.

The form send by the employer to the employee and the IRS which contains the
W2 Form annual wages and the amount of taxes withheld from the employee's paycheck is
called the W2 form.
A form filled up by the employee and submitted to the employer which exactly
W4 Form indicates the employee's tax situation. It gives the employer the correct amount of
tax that needs to be cut from the employee's paycheck.
WAI or Wealth Added Index is a metric system that attempts to measure the
wealth created or destroyed for the shareholders of a company. This was a metric
WAI
system designed by Stern Stewart & Co. which takes into account more variables
than just the profits or share growth of the company.
War bond is the type of debt security that is issued by the government for the
purpose of financing military operations during war times. The citizens of the
War Bond
country are appealed to get the same and its interest rates are lower than the
market rate.
Warrant Coverage is an agreement between a company and its shareholders in
Warrant
which the company issues warrants equal to some percentage of the dollar
Coverage
amount of the shareholders investment.
Warrant
Warrant premium is the premium paid for the rights associated with a warrant.
Premium
When two events happen such that there impacts nullify each other it is referred to
Wash as wash. For example, in terms of investment, when the profits equal the losses,
the situation is referred to as wash.
Wasting Asset A wasting asset can be defined as a derivative security that loses value with time.
When a day's market activity goes against the weekly market tide, it is referred to
Wave
as a wave.
Weak hands is often used for retail traders in the forex market, who abide by the
rule that when a pattern is broken, get out. Alternatively, it is also used for the
Weak Hands
situation when future contract holders intend not to receive delivery of the
underlying.
The stock that performs the worst in a company's portfolio is referred to as weak
Weak Sister
sister.
The difference between a company's assets and liabilities at a point of time is
Working
referred to as the working capital. This amount gives an idea of the company's
Capital
financial health at that point of time.
Workout The time span within which the discrepancies in fixed income securities are
Period adjusted.
WTO stands for the World Trade Organization. This is an international
WTO organization that handles or deals with the rules for the trades between different
nations.
[Top]
X
Financial Terminology Definition of the Financial Term
X X is the NASDAQ stock symbol for mutual fund.

XD XD is a symbol for those securities for which the trading is ex-dividend.
XDIS A security trading X distribution is signified by the symbol XDIS.
XRT For a security trading X rights, the symbol XRT is used to signify the same.
XW If a security is trading X warrant, it is signified by the symbol XW.
[Top]
Y
Financial
Terminology
In the term Yankee CD, CD stands for Certificate of Deposit. It is the certificate
Yankee CD issued in the US market by the branches of foreign banks. These certificates
usually have a face value of $100,000.
Yard is a slang word used for one billion dollars or one billion units of any
Yard
currency.
When a company attempts to takeover another, but ends up in a discussion of
Yellow Knight
merging with the other company, it is referred to as a yellow knight.
A U.S. bulletin that gives information on OTC bonds like the updated bid and ask
Yellow Sheet
prices.
The income return on an investment that is represented annually as a percentage
Yield
based on the investment cost is referred to as the yield from that investment.
The yield to call is the yield of the bond or note that holds the security until the call
Yield to Call
date. This yield remains valid if, and only if, the security is called prior to maturity.
A YOY or Year over Year is a method of evaluating two or more investments to
see their year wise performance. This method is generally applied at the same
YOY
time period every year to see if the company's performance is improving or
degrading.
[Top]
Z
Financial
Terminology
Zero Minus A Zero Minus Tick is one in which the trades occur such that the last trade is at
Tick the same value as the preceding trade and the trade preceding the previous trade
is at a lower cost.
A Zero Plus Tick is referred to the situation in which a security trade is executed
Zero Plus Tick at the same price as the preceding trade but at a higher price than the last trade
of a different price.
Zero-coupon bond is also referred to as Accrual bond. The debt security which
Zero-Coupon
does not pay any interest, but is traded at a discount, such that at the maturity of
Bond
the bond it renders profit.
Zero-Sum Game is the situation in which losses incurred by one of the participant
Zero-Sum
is exactly equal to the profit of the other participant. In other word, the wealth is
Game
just shifted from one participant to the game.
ZZZZ Best was a company owned by Barry Minkow in 1980s. It went public in
ZZZZ Best 1986 and through forgery and theft the company reached a mark of US $200
million.
For all companies who extend credit to their customers, a thorough analysis is done on the financial
statements of the credit applicant. This glossary of financial terminology will provide you a
better understanding of what the meaning of the terms are when a lender performs a financial
statement analysis.
GLOSSARY
of
FINANCIAL TERMS
Accounts Payable Amounts owed by the business for purchases made on credit. These
amounts are paid by the business after a time lag that is measured by Days
Payable Outstanding (DPO).
Accounts Receivable Amounts due to the business from customers for merchandise or services
purchased on credit. The business does not receive payment for these
amounts immediately, and the delay before payment is measured by Days
Sales Outstanding (DSO).
Accrued Expenses Expenses that the business has incurred for which it has not received, or will
not receive, an invoice, and that have not yet been paid.
Accumulated The total amount of depreciation expense recorded to date for the company's
Depreciation fixed assets. On the balance sheet, this value is subtracted from the gross
value of Property, Plant and Equipment to derive a net figure.
Acid Test Ratio See quick ratio.
Acquisition Cost The amount actually paid to purchase an asset. This includes all costs
associated with the purchase, such as installation, freight, and sales tax.
Actuals Financial statements describing the actual operations of the business.

Actuals often pertain to the "historical" period before the start of the forecast
period, but as time goes on, additional imported Actuals will generally overlap
with the forecast.
Additional Paid-in The amount paid by investors for stock over and above its par value. See
Capital also contributed capital.
After Tax Income Another term for net income.
Amortization The recognition of part of an intangible asset's cost as an expense during

each year of its useful life. Items that are amortized include goodwill, start-up
expenses and purchased patents.
Asset Anything that has future economic value. In addition to items such as cash
and equipment, assets can include intangibles such as goodwill.
Average Annual Return The expected annual return on an investment, including interest and
dividends, expressed as a percentage.
Average Cost A method of inventory valuation whereby the total cost of all units bought or
produced is divided by the number of units.
Bad Debt Expense Losses for uncollectible accounts receivable.
Balance Sheet A financial statement that lists the assets, liabilities, and equity of a company
at a certain point in time.
Benefits The total amount of indirect compensation that the business will provide to
employees for each forecast year. Benefits are either statutory, such as
payroll taxes and worker's compensation; or discretionary, such as health
insurance, life insurance, and 401(K) plans.
Book Value The value of an asset for accounting purposes. For assets where
depreciation is taken or reserves booked, this is often expressed as a net
book value. The book value of a company is the excess of assets over
liabilities, which is equivalent to total owner's equity.
Breakeven Analysis An analysis tool that models how revenue, expenses, and profit vary with
changes in sales volume. Breakeven analysis estimates the sales volume
needed to cover fixed and variable expenses.
Breakeven Point The sales level at which revenues equal expenses (fixed and variable).
Budgeting The process of determining and recording the expected financial results of a
future period, generally the next fiscal year. In some organizations budgeting
is limited to financial items that are shown on the income statement, while in
others the budgeting process produces the three major statements (Income
Statement, Balance Sheet, and Cash Flow Statement). After the target time
period begins, the budgeting process frequently includes tracking actual
financial figures against the forecast as well. There is considerable overlap
between the activities of budgeting and forecasting. Budgeting usually
involves a more detailed account structure and a finer time scale than
forecasting, which typically covers between three and seven years of higher-
level projections.
Capital Lease A long-term lease of property, plant, or equipment in which the lessee
acquires essentially all the risks and benefits associated with the ownership
of the leased item. Because it most closely resembles the financing of an
asset purchase, a capital lease is treated as a long-term debt rather than as
a rental.
Cash & Equivalents Cash plus investments of very high liquidity and safety, such as money
market funds and treasury bills. See also minimum cash balance.
Cash Flow Statement A financial report that expresses a company's performance in terms of cash
generated and used.
Chart of Accounts In an accounting system, the list of accounts to which transactions are
posted.
Common-Sized A term used to refer to a financial statement in which all items are expressed
as percentages of another item in the statement. For example, a common-
sized balance sheet might show all values as a percentage of total assets.
Common Stock Convertible preferred stock plus convertible bonds, stock options, and
Equivalents warrants.
Contra Accounts Accounts, such as Accumulated Depreciation, that offset a related account,
usually an asset. The contra account is subtracted from the related account
to arrive at the net book value.
Contributed Capital The total amount paid to the business for its common and preferred stock.
Contribution Margin The difference between revenue and the associated variable costs. This is an
important concept in breakeven analysis.
Cost Another term for expenditure. See also expenses.

Cost of Goods Sold Another term for cost of sales.
Cost of Sales/Services All the costs associated with the goods or services that were sold during a
(COS) specified accounting period, including materials, labor, and overhead.
Covenants A set of conditions agreed to in a formal debt agreement and designed to

protect the lender's interests. Covenants may include restrictions on
debt/equity ratio, working capital, or dividend payments. See also
management goals.
Current Assets Assets that are convertible to cash within one year in the normal course of
business. This usually includes cash, accounts receivable, inventory, and
prepaid expenses. See also non-current assets.
Current Liabilities Obligations that will come due within a year from the current date. These
usually include accounts payable, accrued expenses, and the portion of long-
term obligations due within one year. See also non-current liabilities.
Current Ratio Current assets divided by current liabilities. This ratio is a measure of a
company's ability to meet its financial obligations in a timely manner.
Days Payable The number of days a business takes to pay its accounts payable, on
Outstanding (DPO) average.
Days Sales The number of days a business takes to collect on its accounts receivable,
Outstanding (DSO) on average.
Debt A form of liability that represents money borrowed from banks or other
institutions.
Debt to Equity Ratio The ratio of total debt to owners' equity, used as a measure of leverage and
ability to repay obligations.
Debt to Tangible Equity The ratio of total debt to tangible equity, used as a measure of leverage and
Ratio solvency. Typical values for this ratio vary from one industry to another.
Lower values for the ratio represent a better financial condition.
Deferred Revenue A liability that arises when a customer pays for goods or services before
delivery is complete; for example, a one-year service contract billed in
advance. Under accrual accounting, revenue must be booked when the
obligation is fulfilled, not when cash is paid or received.
Department An entity defined for reporting purposes.
Depreciation The recognition of part of an asset's cost as an expense during each year of
its useful life. There are several acceptable methods for calculating this
expense, including straight-line depreciation and various accelerated
methods. See also double-declining balance, straight-line method, and sum
of the years' digits.
Direct Costs Expenses, such as labor, overhead, and materials, that vary in direct
proportion to units produced or services rendered.
Direct Labor Wages paid for activities directly related to production of units sold or
services delivered, considered part of cost of sales. This does not include
management and administrative salaries, which are treated as operating
expenses or overhead. Also referred to simply as labor.
Double Declining A method of recording accelerated depreciation. Also called the 200 percent
Balance (DDB) declining balance method, this system applies twice the annual straight-line
rate to the undepreciated balance of the asset's depreciable cost each year
of the asset's useful life. For example, if the asset has a depreciable value of
$1,000,000 and a useful life of five years, the double-declining balance
method would record $400,000 of depreciation the first year, $240,000 the
second year, $131,429 the third year, $114,286 the fourth year, and
$114,285 the fifth year. See also straight-line method and sum of the years'
digits.
DPO See days payable outstanding.
DSO See days sales outstanding.
Earnings Before Net income before income tax expense and interest expense. This is a
Interest and Taxes popular measure for comparing the earning power of companies, because it
(EBIT) eliminates the impact of capital structure and effective tax rates, two non-
operating factors.
Earnings Per Share Net income divided by the number of outstanding shares of common stock
(EPS) and equivalents.
EBIT See earnings before interest and taxes.
EBIT/DA See earnings before interest, taxes, depreciation, and amortization.
Economic Indicators Technical measures that analysts use to forecast events in economic
systems; for example, Gross Domestic Product and Consumer Price Index.
Economic Profit A general term for various technical measures of profit in which adjustments
are made to the traditional accounting definition of Net Income. Such
adjustments are typically made in order to better estimate the future value of
a business.
Equity Also known as net worth or owners' equity. Equity is the net value of a
company's total assets, less its total liabilities.
Expenditures All purchases made by a business, whether in cash or on credit; not

equivalent to expenses. Also known as costs.
Expenses Resources used to support the ongoing operations of a business for a

specified time period; not equivalent to expenditures or costs.
FIFO See first in, first out.
Finished Goods Inventory ready for sale.
First In, First Out A method of inventory valuation whereby the goods first purchased or
(FIFO) manufactured are considered the first ones sold. During periods of inflation,
the FIFO method shows inflated profits compared to the last in, first out
(LIFO) method.
Fiscal Year The 12-month period, not necessarily coinciding with the calendar year,
chosen to constitute a single year for external financial reporting and taxes.
Fiscal Year End The last month of a company's fiscal year.
Fixed Assets Another term for Property, Plant and Equipment. See also depreciation.
Fixed Assets to The ratio of net Property, Plant and Equipment book value to tangible equity,
Tangible Equity Ratio used as a type of efficiency ratio. Typical values for this ratio vary from one
industry to another. Higher values for the ratio represent a more capital-
intensive company, which may be good or bad depending on the industry
and how well the assets are being used to generate revenues.
Fixed Costs Expenses that are assumed not to vary with sales volume within the
expected range of sales volumes, such as rent or administrative costs. This is
an important concept in breakeven analysis and in distinguishing between
gross margin and contribution margin. See also variable costs.
Forecast Period The period of time for which a business is modeled. Depending on the
forecast start month, the first year of the forecast period may not be a
complete forecast year. See also Forecast Year.
Forecast Start Date The month and year on which the forecast period begins. See also Forecast
Year.
Forecast Year Most people choose the forecast year to coincide with either the January-
December calendar year or the fiscal year of the business, but this is not a
requirement. Depending on the forecast start month, the first year of the
forecast period may cover less than 12 months. In this case, assumption
values that are entered for the first forecast year should represent the correct
fraction of the 12-month totals.
Forecasting Financial forecasting is the process of estimating future financial

performance. The projected financial performance of a business is measured
by using pro-forma financial statements as well as other indicators such as
trend analysis, ratio analysis, and return on equity. Forecasting often takes a
higher-level viewpoint than the related activity of budgeting. In broader terms,
forecasting can also refer to estimates of broad economic activity in a
country, industry, or financial area. For instance, analysts and economists
release forecasts of where interest rates or stock market prices might go in
the future.
GAAP An acronym for Generally Accepted Accounting Principles. Accountants

follow GAAP standards, conventions, and rules in recording and summarizing
financial transactions, and in preparing financial statements. GAAP standards
are issued by the American Institute of Certified Public Accountants.
Goodwill The accounting term for amounts paid for assets over and above their fair
market value. Goodwill arises, for example, when a company purchases
another business and pays a price higher than the value of the acquired
assets alone. Goodwill theoretically represents the value of the business's
name, reputation, and customer relations, which increase the true value of
the business beyond the value of its assets alone.
Gross Margin Net Sales less cost of sales (including both fixed and variable costs), often
expressed as a percentage of sales. Also referred to as gross profit.
Gross Sales The total of amounts received (sales for cash) and amounts expected (sales
on credit) in return for products sold or services rendered during the given
time period. Gross sales reflects sales at invoice values, before sales
discounts and credit card fees.
Income Another term for net income.
Income Statement A financial report that shows a company's performance over a specified
period of time by subtracting expenses from revenue to obtain net income.
Also known as a profit and loss statement (P&L) or an earnings report.
Income Tax Expense Levies on the income of a business imposed by federal and state
governments. This expense appears on the income statement simply as
Taxes.
Intangible Asset A long-term asset that represents a financial, legal, or accounting concept
rather than a physical item. Examples of intangible assets include: Goodwill ,
the value of a patent, copyright, or trademark, the value of a franchise or
operating rights. Under accounting rules, an intangible asset must have a
useful life greater than one year, and a portion of its value must be amortized
over time as an expense. Near the end of the useful life of an intangible
asset, when its remaining life is less than one year, the asset must still be
classified as a long-term asset. See also tangible asset.
Interest Basis The interest rate, such as prime or LIBOR, that is used as a reference point
for quoting borrowing rates. For example, using the prime rate as the interest
basis, a loan might be offered at prime plus one percent. See also Prime
Rate and London Interbank Offered Rate.
Interest Expense Money paid by a business in exchange for the use of capital for a specified
time period. On the income statement, "Interest Expense (Income)" is a
single account that is the net amount of interest income and interest
expense.
Interest Income Money received by a business in exchange for the use of capital for a
specified time period. On the income statement, "Interest Expense (Income)"
is a single account that is the net amount of interest income and interest
expense.
Interest Rate The cost of borrowing money, expressed as a percentage per period of time,
usually one year.
Inventory Goods purchased or manufactured by a business and held for production or

sale. Inventory is often subdivided into raw materials, work in progress, and
finished goods. See also Inventory Targets.
Inventory Targets The numbers of months of inventory that the user requires to be in stock at a
given point in time. For Raw Materials, this amount represents the number of
months of future production. For Finished Goods, the amount represents the
number of months of future sales.
Inventory Turns The ratio of annual cost of sales to inventory, commonly used as a rough
measure of inventory management efficiency. Also known as inventory
turnover ratio or simply turns.
Investment The expenditure of cash to create additional capital. Investment can be in

income-producing vehicles such as stocks and bonds, or more risk-oriented
ventures such as the purchase of another company.
Labor Another term for direct labor. See also salaries and benefits.
Last In, First Out (LIFO) A method of inventory valuation whereby the goods most recently purchased
or manufactured are considered the first ones sold. In periods of rising prices,
the LIFO method shows a lower profit than the first in, first out (FIFO)
method.
Lease A long-term contract granting use of real estate, equipment or other fixed
assets in exchange for payment. All leases entered in the Property, Plant and
Equipment Detail are considered capital leases; operating leases should be
entered as expenses in the Expenses Detail. See also mortgage.
Leverage The relationship between debt and equity. A company is considered highly
leveraged if its levels of debt are high compared to its equity.
Liabilities Obligations used to fund the operations of a business, including bank loans,
accounts payable, and accrued expenses.
LIBOR See London Interbank Offered Rate.
LIFO See last in, first out.
Line of Credit The amount of short-term credit available to a business from banks.
Liquidity A company's ability to generate cash in a timely manner in order to meet its
obligations, often measured by the quick ratio or the current ratio.
London Interbank The interest rate used among the most creditworthy international banks for
Offered Rate (LIBOR) large loans in eurodollars. LIBOR is an important reference number, because
loans to businesses can be tied to it on a percentage basis. See also prime
rate and interest basis.
Long-Term Asset Any asset that has an economic life greater than one year. Liquid items such
as cash are considered to be current or short-term assets. Under accounting
rules, intangible assets must always be classified as long-term assets, even if
their remaining life is less than one year.
Long-Term Borrowing Liabilities that represent money borrowed from banks or other lenders to fund
the ongoing operations of a business and that will not come due within one
year.
Management Goals A set of conditions a business is striving to achieve. These may include
requirements for debt/equity ratio, working capital, or dividend payments. See
also covenants.
Market Value The price at which an asset would pass from an informed and willing seller to
an informed and willing buyer, assuming that goodwill played no role in the
transaction.
Marketable Securities Securities that can readily be converted into cash, including government
securities, bankers' acceptances, and commercial paper.
Materials The physical inputs to manufacturing, treated as part of cost of sales. Also
known as raw materials.
Miscellaneous Current An account for current assets that do not fall into the following categories:
Assets cash, marketable securities, accounts receivable, other receivables,
inventory, and prepaid expenses.
Miscellaneous Current An account for current liabilities that do not fall into any of the categories
Liabilities already defined. Examples of predefined categories are accounts payable,
accrued expenses, and short-term notes payable.
Miscellaneous An account for operating expenses that do not fall into any of the predefined
Expenses categories such as salaries, utilities, advertising, and depreciation.
Miscellaneous Non- An account for assets not including current assets, property, plant and
Current Assets equipment, intangibles, deposits, and loans made.
Miscellaneous Non- An account for non-current liabilities not including long-term debt (mortgage
Current Liabilities debt, lease debt, long-term borrowing, and shareholder loans) and deferred
taxes.
Mortgage A long-term debt instrument for the purchase of property by which the
borrower uses the property itself for collateral.
Net Book Value The acquisition cost of an asset less any accumulated depreciation. See also
book value and contra accounts.
Net Cash Provided By On a cash flow statement, net income plus non-cash transactions and the net
Operations amount of changes in operating assets and liabilities.
Net Income Total revenues minus total expenses, including taxes and depreciation, for a
specified time. Also known as profit, net profit, or net earnings.
Net Income Before Total revenues minus total expenses except the income tax expense, for a
Taxes specified time. Also known as pretax income.
Net Operating Loss The excess of business expenses over income in a given tax year.
(NOL)
Net Operating Loss The amount of Net Operating Losses accumulated over past tax years that is
(NOL) Carryforward available for offsetting taxable income in the current and future tax years.
Net Present Value A measure of a project's future value in current dollars. Future income and
(NPV) expenses are summed and then discounted using a required rate of return to
adjust for the time value of money. Net present value is, theoretically, the
best method for evaluating projects.
Net Property, Plant and Gross property, plant and equipment minus accumulated depreciation. This
Equipment number represents that portion of PP&E acquisition cost that has not yet
been recognized as an expense. It is not the same as externally determined
measures such as market value.
Net Sales Sales revenue less sales discounts and credit card fees.
Non-Current Assets Assets that are not convertible to cash within one year in the normal course
of business. Property and Goodwill are examples of non-current assets. See
also current assets.
Non-Current Liabilities Obligations that will not come due within one year of the current date. See
also current liabilities.
Non-Operating Expenses not related to the ongoing operations of a company; for example,
Expense interest expense, one-time events, and taxes.
Non-Operating Income Income not related to the ongoing operations of a company; for example,
interest income and sale of fixed assets.
Operating Expenses All expenses related to the ongoing operations of a company, including
research and development, sales and marketing, and administrative
expenses. Any costs directly attributable to producing goods or services are
not included. See also cost of sales.
Operating Income Sales revenue minus cost of sales and operating expenses. Similar to
earnings before interest and taxes, operating income is examined when the
earnings of the core business are analyzed. Also referred to as operating
profit, operating earnings, and income from operations.
Operating Lease A type of lease, normally involving equipment, classified as a rental not as a
purchase over time. An operating lease must be shown as an expense in the
Expenses Detail, unlike a capital lease, which is treated as a long-term debt.
Operating Profit Another term for operating income.
Other Assets Assets exclusive of current assets and property, plant and equipment. Other
assets can include intangibles, deposits, loans made, and miscellaneous
non-current assets.
Other Expenses Expenses due to activities outside the normal operations of the business, for
example, loss from foreign exchange and loss from investments.
Other Income Income due to activities outside the normal operations of the business, for
example, dividends from investments and gain from foreign exchange.
Other Liabilities Liabilities other than debt, line of credit, and accounts payable, for example,
deferred taxes, accrued expenses, and customer deposits.
Overhead Expenses incurred in operating a business, such as rent, executive salaries,

and insurance, that are not directly related to the manufacture of a product or
delivery of a service. A portion of overhead can be attributed to cost of sales,
usually on a percentage basis; the remainder is considered an operating
expense.
Owners' Equity Another term for equity.
Par Value The stated value of a share of stock. Par is usually a minimal value (such as
$.01) and bears no relation to the market value of the shares. See also
contributed capital.
Payables Another term for accounts payable.
Payroll The total wages, not including benefits, paid by a business during each
forecast year.
Period Expenses A term for expenses recorded in the period in which they occur regardless of
whether or not they pertain to a prior or later period. R&D and advertising
expenditures are examples of costs that benefit future periods but must be
treated as period expenses according to Generally Accepted Accounting
Principles (GAAP).
Periodicity The level of detail in terms of time at which data is forecast or reported,
specified as months, quarters, or years.
Periods Discrete intervals of time. The word period generally refers either to the
interval of the entire forecast (as in forecast period) or the granularity of data
in financial statements (as in periodicity).
Plan Period Another term for Forecast Period.
PP&E See Property, Plant & Equipment.
Precision The scale at which forecast numbers are displayed. Choices include dollars,
hundreds, thousands, and millions.
Prepaid Expenses Services, goods, and intangibles paid for prior to the period in which they
provide benefit. Prepaid expenses are accounted for as assets until their
benefit is realized.
Price List A schedule that associates prices with individual products. This list allows
you to forecast sales in units and still create projections in dollars. See also
Discount List.
Price/Earnings Ratio The market value of a company's stock divided by net income.
(P-E)
Prime Rate The interest rate that banks charge to their most creditworthy customers. The
prime rate is an important reference number, because loans to companies
are often tied to it on a percentage basis. See also London Interbank Offered
Rate and interest basis.
Pro-Forma Financial A set of financial statements and other schedules that show projected results
Statements for a future period. They are called pro-forma financial statements because
they have the form of financial statements, but are not prepared from actual
operating results. The three major financial statements are the Income
Statement, Balance Sheet, and Cash Flow Statement. For external reporting,
these statements must conform to Generally Accepted Accounting Principles
(GAAP).
Profit Another term for net income.
Profit & Loss Another term for the income statement.

Statement (P&L)
Prompt Payment Discounts that a business gives to credit customers who pay within a
Discounts specified period of time; also called sales discounts. On an income
statement, this amount is subtracted from Gross Sales to yield Net Sales.
Property, Plant and Assets used in the operations of a business that have a useful life greater
Equipment (PP&E) than one year, including land, buildings, machinery, equipment, and furniture.
Also known as fixed assets. See also depreciation.
Purchases of PP&E The acquisition cost of new property, plant and equipment assets in a given
year, minus the proceeds from the sale of existing PP&E. See also
depreciation.
Quick Ratio Current assets, excluding inventory and prepaid expenses, divided by current
liabilities. Also known as the acid test ratio. Like the current ratio, the quick
ratio is used as a measure of a company's liquidity. It helps estimate a
company's ability to meet its current obligations using assets that can easily
be converted into cash. Although typical ratios vary from one industry and
company size to another, financial authorities recommend that the Quick
Ratio should be 1.0 or greater.
Ratio A comparison of financial statement elements in the form of a quotient.

Ratios such as the price/earnings ratio, return on assets, and quick ratio are
often used for analyzing financial statements.
Raw Materials Another term for materials.
Receivables Another term for accounts receivable.
Retained Earnings Net profits kept within a business in the Owners' Equity account after stock
dividends are paid.
Retired Liabilities Debt paid off within a given period of the forecast.
Retirement of Long- The repayment of a non-current liability.

Term Debt
Return on Assets Net income for a time period divided by total assets. This ratio is often used
(ROA) to measure profitability or the efficiency with which assets are being
employed. Higher values for this ratio indicate better financial performance.
The specific value obtained for a business should be evaluated in relation to
the returns that can be obtained from alternative investments of capital.
Return on Tangible Net income for a time period divided by tangible equity. This ratio is
Equity sometimes used to measure profitability or the efficiency with which the
owners' financial investments are being employed. The value of intangible
assets such as goodwill is excluded from this ratio in order to better reflect
actual operating profitability. Higher values for this ratio indicate better
financial performance. The specific value obtained for a business should be
evaluated in relation to the returns that can be obtained from alternative
investments of capital. An alternate form of this ratio can also be computed
using pre-tax income instead of net income.
Return on Equity (ROE) Net income divided by equity. This ratio is often used as a measure of the
return on funds invested in a business.
Revenue The total income received in exchange for goods or services during a specific
accounting period. Revenue can be recorded using either the cash basis (as
received), or the accrual basis (as earned). Also referred to as sales or sales
revenue.
Salaries Compensation provided by a business to employees, excluding benefits. On

an income statement, Salaries refers only to that portion of compensation
(such as administrative and management costs) that does not vary in direct
proportion to sales. See also labor.
Sales Another term for revenue.

Salvage Value The scrap value of an asset. Acquisition cost minus salvage value yields the
total amount that an asset is depreciated over its useful life.
Shareholder Equity Another term for equity.
Short-Term Borrowing Liabilities that represent money borrowed from banks or other institutions to
fund the ongoing operations of a business that will come due within one
year.
SIC code The four-digit code prescribed by the Standard Industrial Classification
System to categorize businesses according to the types of activities they
perform.
Solvency A company's ability to satisfy its obligations to creditors when they are due. A
company is "technically insolvent" if it has enough assets to pay creditors, but
cannot liquidate them quickly enough to meet payment deadlines.
Standard Costs A target or average cost that can be used either to value inventory or as a
basis of comparison with actual costs. Standard costs can often be used to
calculate cost of sales, in which case standard cost refers to the average
amount of materials, direct labor and overhead required to produce a single
product or service unit.
Standard Costs Plus The method of calculating cost of sales that compares the amounts of
Variances materials, direct labor and overhead projected in the Cost of Sales
assumption (the standard costs) to expenses allocated to the Production
department in the Expenses, Property, Plant and Equipment, Payroll and
Benefits, and Other Assets assumptions (the variances).
Statement of Cash Another term for cash flow statement.

Flows
Stockholders' Equity Another term for equity.
Straight-Line Method The simplest form of depreciation, in which an equal expense is recorded in
each year of an asset's useful life. For example, if the asset has a purchase
price of $1,200,000, a useful life of four years and a salvage value of
$200,000, straight-line depreciation would record $250,000 of depreciation
each year. See also sum of the years' digits and double-declining balance.
Sum of the Years' A method of recording accelerated depreciation. Also called the sum-of-digits
Digits (SYD) method, it allows the depreciation of an asset based on an inverted scale of
the total digits of the asset's useful life. For example, if the useful life is four
years, the years' digits (1, 2, 3, and 4) are summed to produce ten, and
4/10ths of the asset's depreciable cost is recognized as an expense the first
year, 3/10ths the second year, and so on. See also straight-line method and
double-declining balance.
Tangible Asset An asset that represents a physical object such as land, furniture, and
buildings. Under accounting rules, a tangible asset must have a useful life
greater than one year, and must be used in business operations rather than
being held for resale. The following types of assets are not considered to be
tangible assets: items held for resale, which are considered to be inventory,
cash and other liquid assets which are considered as current assets, and
abstract assets such as goodwill, which are intangible assets. See also
tangible equity.
Tangible Equity Equity less intangible assets. See the ratios of debt to tangible equity, fixed
assets to tangible equity, and return on tangible equity.
Taxes Levies on the annual income of a business imposed by federal and state
governments. On the income statement, this figure does not include property
taxes, which are considered an operating expense.
Treasury Stock Stock that has been reacquired by the company that issued it and is available
for retirement or resale. Also called reacquired stock and treasury shares.
Turns Another term for inventory turns.
Typical Collection A method used to calculate accounts receivable. This allows you to break
Pattern down receivables into categories that indicate what percentage of the total is
paid within specified lengths of time from the sales date. See also days sales
outstanding.
Typical Payment A method used to calculate accounts payable. It allows the user to break
Pattern down payables into categories that indicate what percentage of the total is
paid within specified lengths of time from the purchase date. See also days
payable outstanding.
Useful Life An estimate of the period of time over which an asset will be of use to a
company. Along with acquisition cost and salvage value, this measure is
used to calculate the amount that the asset is depreciated each year.
Variable Costs Expenditures that change in proportion to increases or decreases in sales or

production volumes. See also fixed costs.
Variance The difference between actual and targeted numbers for revenues,
expenditures, or productivity. Variances are usually described as either
favorable or unfavorable. See also standard costs.
Working Capital The net amount of current assets and current liabilities. This is equivalent to
a company's liquid assets.
Z-Score A bankruptcy predictor based on the formula derived by Dr. Edward Altman.
According to the Altman model, a Z-Score of 3.0 or higher indicates that the
company is most likely safe based on the financial data; a score below 1.8
means that the firm is probably headed for bankruptcy. In studies, the Z-
Score has been shown to have 90% accuracy of prediction of bankruptcy in
the first year of the forecast, and 80% accuracy in the second year.
Glossary of Basic Finance Terms You May Come Across
Adjustable rate mortgage (or ARM )- A home mortgage in which the rate of interest is adjusted
based on a standard rate index. Most ARMs have caps on how much the interest rate may increase.
Amortization schedule - A timetable for the gradual repayment of a mortgage loan. The
amortization term is usually expressed in months. A 30-year fixed-rate mortgage, for example, has
an amortization term of 360 months.
Annual percentage rate (APR) - A standardized method of calculating the cost of debt, stated as
a yearly rate which includes such items as interest, insurance, and certain points or credit fees.
Asset - Something worth money such as cash, stock, land, precious metals, securities, collectors
items, accounts receivable, and other property
ATM surcharge - Fee charged for a non-account holder to use bank-owned ATM.
Balloon mortgage - A loan with regular monthly payments which amortize over a stated term but
call for a final lump sum (balloon payment) at the end, or maturity date.
Blue book – Abbreviation for the Kelley Blue Book, an industry guide that car buyers and sellers
use to estimate wholesale and retail vehicle pricing
Book value - Original price at which the consumer purchased an asset.
Bridge loan - A loan that "bridges" the gap between the purchase of a new home and the sale of
the borrower's current home. The borrower's current home is used as collateral and the money is
used to close on the new home before the current home is sold.
Capital gain - Shares of stock or an asset that’s price increased from when you bought it. Can be
simply called “profit.”
Capital loss - Shares of stock or an asset that’s price decreased from when you bought it. Can be
simply called “loss.”
Certificate of Deposit (CD) - Deposit account at banks with accrued interest that is paid up to 5
years.
Clear title - A title that is free of liens or legal questions as to ownership of a piece of property.
Closing costs - Expenses incurred by buyers and sellers in transferring ownership of a property.
Closing costs normally include an origination fee, an attorney's fee, taxes, escrow payments, and
charges for title insurance.
Cloud on title - Any fact or condition that could affect the title. Will usually affect the sale of
property, most notably, real estate.
Commission - A fee paid to a salesperson or broker for buying or selling an asset or security.
Contract - Form in writing that states and establishes a future option or trade for an asset or
security.
Current assets - Assets or securities that can be converted to money within 1 year.
Current liabilities - Liabilities or debts that must be paid within 1 year.
Dealer holdback - Usually a 2 to 3 percent of allowance off a manufacturer's suggested retail

price, that manufacturers provide to dealers. Therefore, a buyer could obtain a car below invoice
price and the dealer would still make a profit
Dealer incentives - Programs offered by manufacturers to increase the sales of slow-selling

models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.
Dealer preparation, or dealer prep or preparation charges - An additional charge that dealers try
to make car buyers pay. It usually represents pure profit for the dealers, who have already been
paid by the manufacturer for the cost of preparing the car for sale.
Debt-to-income ratio A person’s individual measurement that compares the total of money that
you make to the total of money that you have to repay to your lenders. For the majority of
individuals, this figure starts to make sense when they are attempting to seek out the funds to buy
a house because it’s necessary to define mortgage availability.
Default - Failure to pay payments or interest on a current loan, lease, or bond. Not a good thing.
Destination charge - The fee charged for transporting the vehicle to the dealer from the
manufacturer or port of entry.
Discount - A price below the actual selling or buying price of a bond. Also known as a premium.
Dividends - A distribution of profits to a companies shareholders.
Down payment - The amount of a property's purchase price that the buyer pays in cash and does
not finance with a loan.
Equity - The value of a property minus the owner's outstanding loan balance.
Extended warranty or service contract - A contract that covers certain car repairs or problems
after the manufacturer's or dealer's warranty expires. Extended warranties are sold by car
manufacturers, dealers and independent companies. Usually must be purchased by the end of the
first year of ownership.
Federal Deposit Insurance Corporation (FDIC) - Federal institution that protects limited bank
deposits bank, except mutual funds. Bank deposits are usually insured up to $100,000.
Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and
Urban Development (HUD) that insures residential mortgage loans made by private lenders. The
FHA sets standards for construction and underwriting but does not lend money.
Fiscal year - 12 month accounting period when a company determines it earnings and profits. Not
a calendar year.
Foreclosure - The legal process by which a homeowner in default on a mortgage loses their house.
Different than short sales.(See short sale)
Fixed-rate mortgage - A mortgage in which the interest rate does not change during the entire
term of the loan, usually 15 years or 30 years.
Gap insurance – Insurance that covers the difference between what the car is worth and what you
owe on the car. It comes into play if the car is stolen or totaled (damaged to the point that repair
would cost more than the car is worth) while you are still making payments.
Garnishment (wage garnishment) - An amount withheld from your pay and given to another
party, usually a collections agency employed by a creditor.
Hard inquiry - Requests that result from a person applying for credit, such as a mortgage, a car
loan, a credit card or a rental application. They are included in the formula for determining a
person's credit score. Slightly affects credit score, versus a soft inquiry (see soft inquiry).
Income - A capital gain such as a dividend, interest, or other currency gain such as wages or
salary.
Interest rate – The cost of credit—the amount charged (expressed in per-year terms) on a loan.
The rate varies according to the type of loan and your credit history.
Joint account - A bank account owned by two or more persons who share equally in the rights and
liabilities of the account.
Joint return - A tax return filed by a married couple using the Married Filing Jointly status that
combines the income and deductions of both spouses on the same tax return.
Judgment - A decision from a judge on a civil action or lawsuit; usually an amount of money a
person is required to pay to satisfy a debt or as a penalty.
Jumbo mortgage - A home loan that exceeds the limits set by Fannie Mae and Freddie Mac
($359,650 this year). These mortgages will carry a higher interest rate than a smaller, conventional
mortgage.
Kelley Blue Book - The best-known of the car pricing guides. The company was founded by Les
Kelley, a California used-car dealer. The first edition, in 1926, included values for such cars as a
1926 Packard sedan limousine with balloon tires ($3,825), and a 1921 Nash touring car with clock
($50). Today's editions have listings for more than 10,000 cars, vans and trucks, nationwide.
Late payment fee -Charge for not making payments on a loan on time.
Lessee - The person who is leasing property; the consumer
Lessor - The person who grants a lease; a car dealer’s financial company or a bank
Line of credit - A loan with a specified maximum amount given during a specified period of time.
Usually given by banks and financial institutions to credit worthy customers to overcome liquidity
problems.
Loan application fee - A sum charged by a lender for accepting a document in which a prospective
borrower details his or her financial situation to qualify for a loan. Only commonplace for bad credit
loans usually.
Loan consolidation – The transferring of multiple loans into a single loan, usually done to lower
the effective interest rate or lengthen the term of the loan.
Loan origination - An origination fee is charged by the lender to process all the paperwork and
time involved in obtaining a mortgage.
Lock or lock-in - Rate programs offered by companies that allow borrowers to lock in the current
interest rate on a mortgage for a specified period of time, while also letting them "float" the rate
down if market conditions improve before closing.
Maturity - The date on which the principal balance of a loan becomes due and payable. Marks the
date a balloon mortgage payment is due
Mileage charge - Extra charges the lessee must pay if their car is driven over the allowance,
usually 12,000 to 15,000 miles per year.
Minimum payment - The minimum amount a cardholder can pay to keep the account from going
into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's
ability to pay. Most card issuers require a minimum payment of 2 percent of the outstanding
balance.
MSRP - Stands for Manufacturer's Suggested Retail Price. It represents the manufacturer's
recommended selling price for a vehicle and each of its options. Can be negotiated down.
Net Income – Good stuff; the profit you make after taxes.
Notice of default - A step in the foreclosure process in which the lender formally tells a court that
the borrower is in arrear, and the borrower gets a notice.
Open-end credit - A line of credit that may be used up to a set limit. Also called a charge account
or revolving credit.
Open-end lease - In auto buying terms, under an open-end lease, the lessee must pay any
difference between the residual value of the car as stated in the lease and the fair market value of
the car, if lower, at the end of the lease. The lessor pays for the appraisal that sets the value..
Because the lessee is taking on the risk of having to come up with this extra payment, the
payments are lower than for a closed-end lease.
Origination fee - A fee paid to a lender for processing a loan application.
Periodic rate - The interest rate described in relation to a specific amount of time. The monthly
periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit
per day.
Portfolio - Compiled assets and securities and investor holds.
Pre-approval - A credit card offer with "pre-approved" means that a potential customer has passed
a preliminary credit-information screening. Companies frequently flood customers with "pre-
approved" junk mail, while an a formal credit check may many times void approval.
Prepaid interest - Interest that a borrower pays before it is due, usually to save taxes.
Prepayment penalty - A lender's charge to the borrower for paying off the loan before the end of
the term. Whenever applying for a car or home loan, verify this condition. On paper.
Prime Rate - An interest rate standard charged by banks and lenders.
Principal - An amount invested.
Rate lock - A lender guaranteeing a specific interest rate for a specified amount of time.
Real rate of return - The percentage of return on an investment over one year, after adjustments
for inflation or deflation
Risk - The chance that an original investment might lose value
Second mortgage - A mortgage on property that has a lien position behind the first mortgage. In
effect, a second mortgage is “borrowing against the house” to free up equity for other needs.
Secondary mortgage market - The buying and selling of existing mortgages.
Secured credit card - A card is one in which the financial institution issues a card with a maximum
that is equal to a deposit that the cardholder puts down. In effect, it’s a prepaid credit card. These
cards are a good choice for people trying to establish or rebuild credit.
Short sale - A short sale, in real estate terms, is a sale of a house in which the sale price is less
than what the owner still owes on the mortgage. Lenders commonly do this in today’s market, as
they’d rather take a small loss than go through the lengthy and costly foreclosure process in getting
some of their money back.
Soft inquiry – A item on a person's credit report that indicates that someone has asked for a copy
of his or her report, usually prospective creditors who want to send out an offer such as a pre-
approved credit card. Soft inquiries do not affect your credit score.
Sticker price - This shows the base price and manufacturer's installed options with the
manufacturer's suggested retail price (MSRP). Can be negotiated down towards the invoice price, or
the price the dealer paid for the car.
Subprime mortgage - A mortgage granted to those with a less-than-perfect credit report. Lenders
charge a higher interest rate to compensate for potential losses from customers who may run into
trouble or default. Many subprime mortgages are in default today.
Transfer tax - State or local tax levied when title passes from one owner to another.
Taxpayer ID Number -Your Social Security Number or other Tax Identification Number
Trade-in value - The amount that a dealership will credit you for your old vehicle you provide as
partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the
wholesale value of the vehicle.
Underwriter - A company or person undertaking the responsibility for issuing a mortgage. Not
necessarily the “lender.”
Underinsured driver – part of auto insurance policies that covers injuries to you caused by a
driver without enough insurance to pay for your medical expenses. Some states include damages to
your car in this coverage.
VA mortgage - Veterans Administration-backed loan . Requires very low or no down payments and
has less stringent requirements for qualification. Members of the U.S. armed forces are eligible for
the loans under certain qualifying conditions.
Variable interest rate - Percentage a borrower pays for the use of money, usually expressed as
an annual percentage, and which fluctuates in tandem with a rate index.
Vehicle Identification Number, or VIN - A number assigned to the vehicle by the manufacturer.
Each number is unique and appears on the vehicle's registration and title.
Verification of employment - Confirmation that a loan applicant is telling the truth about where
he or she works and how much he or she makes.
Walk-away lease - The most common type of car lease, also known as a closed-end lease. The
lessee may return the car at the end of the lease term, pay any end-of-lease costs, such as the
disposition fee, and the lease agreement is over. In a closed-end lease, the lender assumes the risk
of predicting the value of the vehicle (its residual value) at the end of the lease's term. Closed-end
lease payments are somewhat higher than open-end lease payments.
Zero balance - What shows on a credit card customer's bill when the outstanding balance has been
paid and no new charges have been incurred during the billing cycle.
Zero-down-payment mortgage - A mortgage in which the buyer does not make a down payment
and borrows the entire purchase price. Hard to find nowadays for most borrowers
• Absorption: the sharing out of the costs of a cost center amongst the products
which use the cost center.
• Account: a record in a double entry system that is kept for each (or each class) of
asset, liability, revenue and expense.
• Accounting equation: an expression of the equivalence, in total, of assets =
liabilities + equity.
• Accounting period: that time period, typically one year, to which financial
statements are related.
• Accounting policies: the specific accounting bases selected and followed by a
business enterprise (e.g. straight line or reducing balance depreciation).
• Accounting rate of return: a ratio sometimes used in investment appraisal but
based on profits not cash flows.
• Accounting standards: Prescribed methods of accounting by the accounting
standards or financial reporting standards regulation body in your jurisdiction.
• Accruals: (that which has accrued, accumulated, grown) expenses which have
been consumed or enjoyed but which have not been paid for at the accounting
date.
• Accruals convention: the convention that revenues and costs are matched with
one the other and dealt with in the Profit and Loss (P&L) Account of the period to
which they relate irrespective of the period of receipt or payment.
• Accumulated depreciation: that part of the original cost of a fixed asset which
has been regarded as a depreciation expense in successive Profit and Loss (P&L)
Accounts: cost less accumulated depreciation = net book value.
• Acid test: The ratio of current assets (excluding stock) to current liabilities.
• Acquisitions: operations of a reporting entity that are acquired in a period.
Separate disclosure of turnover, profits, etc must be made.
• Activity based costing: cost attribution to cost units on the basis of benefit
received Irons indirect activities. The idea is that overhead costs are driven by
activities (e.g. setting up a machine) not products.
• Allocation: the charging of discrete, identifiable costs to cost centers or cost units.
A cost is allocated when it is unique to a particular cost center.
• Amortization: another word for depreciation: commonly used for depreciation of
the capital cost of acquiring leasehold property.
• Apportionment: the division of costs among two or more cost centers in
proportion to estimated benefit on some sensible basis. Apportionment is for
shared costs.
• Assets: resources of value owned by a business entity.
• Assets utilization ratio: a ratio which purports to measure the intensity of use of
business assets. Calculated as sales over net operating assets. Can be expressed as
sales as a percentage of net operating assets.
• Asset value: a term which expresses the money amount of assets less liabilities of
a company attributable to one ordinary share.
• Avoidable costs: the specific costs of an activity or sector of a business which
would be avoided if that activity or sector did not exist.
• Auditing: the independent examination of, and expression of an opinion on, the
financial statements of an enterprise by an appointed auditor in pursuance of that
appointment and in compliance with any relevant statutory obligation.
• AVCO (average cost): a method of valuing fungible assets (notably stock) at
average (simple or weighted) input prices.
• Bad debts: debts known to be irrecoverable and therefore treated as losses by
inclusion in the Profit and Loss (P&L) Account as an expense.
• Balance Sheet: a financial statement showing the financial position of a business
entity in terms of assets, liabilities and capital at a specified date.
• Bankruptcy: a legal status imposed by a court. Usually a trustee is appointed to
receive and realize the assets of the bankrupt and to distribute the proceeds to his
creditors according to the law.
• Benefits in kind: things or services supplied by a company to its directors and
others in addition to cash remuneration. A good example is the provision of and
free use of a motor car. The value of benefits in kind are taxable.
• Bond: a formal written document that provides evidence of a loan. Bond has
mainly American usage. Its UK equivalent is debenture.
• Bonus issue: a free issue of new shares to existing shareholders. No payment is
made for the shares. Its main effect is to divide the substance of the company
(assets less liabilities) into a larger number of shares.
• Book value: the amount at which an asset is carried on the accounting records and
Balance Sheet. The usual book value for fixed assets is cost less accumulated
depreciation. Alternative words include written down value, net book value and
carrying value. Book value rarely if ever corresponds to saleable value.
• Breakeven chart: a chart which illustrates costs, revenues, profit and loss at
various levels of activity within a relevant range.
• Breakeven point: the level of activity (e.g. level of sales) at which the business
makes neither a profit nor a loss i.e. where total revenues exactly equal total costs.
• Budget: a formal quantitative expression of management’s plans or expectations.
Master budgets are the forecast or planned Profit and Loss Account and Balance
Sheet. Subsidiary budgets include those for sales, output, purchases, labor, cash
etc.
• Capital: an imprecise term meaning the whole quantity of assets less liabilities
owned by a person or a business.
• Capital allowances: deductions from profit for fixed asset purchases. In effect
capital allowances is a standard system of depreciation used instead of
depreciation for tax purposes only.
• Capital budgeting: the process of planning or appraising possible fixed asset
acquisitions.
• Capital employed: a term describing the total net assets employed in a business.
Various definitions are used, so beware when talking at cross purposes.
• Capital expenditure: expenditure on fixed assets.
• Cash: strictly coins and notes but used also to mean all forms of ready money
including bank balances.
• Cash discount: a reduction in the amount payable by a debtor to induce prompt
payment (equivalent to settlement discount).
• Cash flow: a vague term (compare cash flow difficulties) used for the difference
between total cash in and total cash out in a period.
• Cash flow forecast: a document detailing expected or planned cash receipts and
outgoings for a future period.
• Cash flow statement: a formal financial statement showing a summary of cash
inflows and outflows under certain required headings.
• Committed costs: those fixed costs which cannot be eliminated or even cut back
without having a major effect on the enterprise’s activities (e.g. rent).
• Common stock: the U.S equivalent of ordinary shares.
• Conservatism: (also known as prudence) the convention whereby revenue and
profits are not anticipated, but provision is made for all known liabilities
(expenses and losses) whether the amount of these is known with certainty or is a
best estimate. Essentially – future profit, wait until it happens – future loss, count
it
• Consideration: the amount to be paid for anything sold including businesses.
May be cash, shares or other securities.
• Consistency: convention that there is consistency of accounting treatment of like
items within each year and from year to year.
• Consolidation: the aggregation of the financial statements of the separate
companies of a group as if they were a single entity.
• Contribution: a term used in marginal costing – the difference between sale price
and associated variable costs.
• Controllable costs (also known as managed costs): costs, chargeable to a budget
or cost centre, which can be influenced by the actions of the persons in whom
control is vested.
• Conversion cost: the cost of bringing a product or service into its present location
or condition. May include a share of production overheads.
• Convertible loan stock: loans where, at the option of the lender, the loan can be
converted into ordinary shares at specified times and specified rates of
conversion.
• Cost behavior: the change in a cost when the level of output changes.
• Cost center: a location, function, or item of equipment in respect of which costs
may be ascertained and related to cost units.
• Cost convention: the accounting convention whereby Balance Sheet assets are
mostly valued at input cost or by reference to input cost.
• Cost-volume-profit (CVP) analysis: the study of the relationships between
variable costs, total fixed costs, levels of output and price and mix of units sold
and profit, often analyzed in a financial modeling exercise.
• Credit: commonly used to refer to a benefit or gain also the practice of selling
goods and expecting payment at a later date.
• Credit control: those measures and procedures adopted by a firm to ensure that
its credit customers pay their accounts.
• Creditors: those persons, firms or organizations to whom the enterprise owes
money.
• Creditors payment or settlement period: a ratio (usually creditors/ inputs on
credit in a year x 365) which measures how long it takes the firm to pay its
creditors.
• Cumulative preference shares: preference shares where the rights to dividends
omitted in a given year accumulate. These dividends must be paid before a
dividend can be paid on the ordinary shares.
• Current assets: cash + those assets (stock, debtors, prepayments, bank accounts)
which the management intend to convert into cash or consume in the normal
course of business within one year or within the operating cycle.
• Current cost accounting (CCA): a system of accounting which recognizes the
fluctuating value of money by measuring current value by applying specific
indices and other devices to historical costs. A valid method which is complex
and difficult to understand intuitively.
• Current liabilities: debts or obligations that will be paid within one year of the
accounting date. Another term used to describe the same is Creditors: amount
falling due within one year.
• Current ratio: the ratio of current assets to current liabilities.
• Cut-off: the difficulties encountered by accountants in ensuring all items of
income and expense are correctly ascribed to the right annual profit statement.
• Debenture: a document which creates or acknowledges a debt. Commonly used
for the debt itself.
• Debt: a sum due by a debtor to his creditor. Commonly used also as a generic
term for borrowings.
• Debtors: those who owe money.
• Debtors payment (settlement) period: a calculation of the average time taken by
credit customers to pay for their goods. Calculated by Debtors/credit sales in a
year x 365.
• Depletion method: a method of depreciation applicable to wasting assets such as
mines and quarries. The amount of depreciation in a year is a function of the
quantity extracted in the year compared to the total resource.
• Depreciation: a measure of the wearing out, consumption or other loss of value
whether arising from use, passage of time or obsolescence through technology
and market changes. Depreciation should be allocated to accounting period so as
charge a fair proportion to each accounting period during the expected useful life
of the asset.
• Direct costs: those costs comprising direct materials, direct labor and direct
expenses which can be traced directly to specific jobs, products or services.
• Discontinued operations: operations of the reporting entity that are sold or
terminated in a period. Turnover and results must be separately disclosed.
• Discount: a monetary deduction or reduction. Settlement discount (also known as
cash discount) is given for early settlement of debts. Debentures can be redeemed
at a discount. Trade discount is a simple reduction in price given to favored
customers for reasons such as status or bulk purchase.
• Discounted cash flow: an evaluation of the future cash flows generated by a
capital investment project, by discounting them to their present value.
• Dividend: a distribution of earnings to its shareholders by a company.
• Dividend cover: a measure of the extent to which the dividend paid by a
company covered by its earnings (profits).
• Dividend yield: a measure of the revenue earning capacity of an ordinary share to
its holder. It is calculated by dividend per share as a percentage of the quoted
share price.
• Drawings: cash or goods withdrawn from the business by a proprietor for his
private use.
• Earnings: another word for profits, particularly for company profits.
• Earnings per share: an investor ratio, calculated as after tax profits from
ordinary activities / number of shares.
• Economic Order Quantity (EOQ): that purchasing order size which takes into
account the optimum combination of stockholding costs and ordering costs.
• Equity convention: the convention that a business can be viewed as a unit that is
a separate entity and apart from its owners and from other firms.
• Equity: the ordinary shares or risk capital of an enterprise.
• Exceptional items: material items which derive from events or transactions that
fall within the ordinary activities of the reporting entity and which need to be
disclosed by virtue of their size or incidence if the financial statements are to give
a true and fair view. Examples are profits or losses on termination of an operation,
costs of a fundamental reorganization and profits and losses on disposal of fixed
assets.
• Expense: a cost which will be in the Profit and Loss (P&L) Account of a year.
• Exposure draft: a document issue on a specific accounting topic for discussion.
• Extraordinary items: material items possessing a high degree of abnormality
which arise from events or transactions that fall outside the ordinary activities of
the reporting entity and which are not expected to recur. They should be disclosed
but are very rare indeed.
• Factoring: the sale of debtors to a factoring company to improve cash flow.
Factoring is a method of obtaining finance tailored to the amount of business done
but factoring companies also offer services such as credit worthiness checks, sales
and debtor recording, and debt collection.
• FIFO: first in first out – a method of recording and valuation of fungible assets,
especially stocks, which values items on the assumption that the oldest stock is
used first. FIFO stocks are valued at most recent input prices.
• Finance lease: a leasing contract which transfers substantially all the risks and
rewards of ownership of an asset to the lessee. In effect the lessee is really buying
the assets with the aid of a loan and the lease installments are really payments of
interest and repayments of capital. They are accounted for as such in accordance
with the accounting convention of substance over form.
• Financial statements: Balance Sheets, Profit and Loss Account, Income and
Expenditure Accounts, Cash Flow Statements and other documents which
formally convey information of a financial nature to interested parties concerning
an enterprise. In companies, the financial statements are subject to audit opinion.
• Fixed assets: business assets which have a useful life extending over more than
one year. Examples are land and buildings, plant and machinery, vehicles.
• Fixed cost: a cost which in the short term, remains the same at different levels of
activity. An example is rent.
• Flexible budget: a budget which is flexed to recognize the difference in behavior
of fixed and variable costs in relation to levels of output. Total budgeted costs
changed to accord with changed levels of activity.
• Floating charge: an arrangement whereby a lender to a company has a floating
charge over the assets generally of the company gives the lender priority of
repayment from the proceeds of sale of the assets in the event of insolvency.
Banks frequently take a floating charge when lending.
• Format: a specific layout for a financial statement. Several alternatives are often
prescribed by the prevailing governing authority or law of the country in which
the enterprise operates or reports its financial performance.
• Funds flow statement: a financial statement which links Balance Sheets at the
beginning and end of a period with the Profit and Loss (P&L) Account for that
period. Now replaced by the cash flow statement.
• Fungible assets: assets which are substantially indistinguishable from each other.
Used for stocks which can then be valued on FIFO or AVCO principles. LIFO is
also possible but often not usually for tax reasons.
• Gearing: also known as leverage, the relationship between debt and equity in the
financing structure of a company.
• Gilt-edged securities: securities and investments which offer a negligible risk of
default. Principally government securities.
• Goal congruence: the situation in which each individual, in satisfying his or her
own interests, is also making the best possible contribution to the objectives of the
enterprise.
• Going concern: the accounting convention which assumes that the enterprise will
continue in operational existence for the foreseeable future. This means in
particular that the Profit and Loss (P&L) Account and Balance Sheet (BS) assume
no intention or necessity to liquidate or curtail significantly the scale of operation.
• Goodwill: an intangible asset which appears on the Balance Sheet of some
businesses. It is valued at (or below) the difference between the price paid for a
whole business and the fair value of the net assets acquired.
• Gross: usually means before or without deductions. For example Gross Salary or
Gross Profit.
• Gross profit: sales revenue less cost of sales but before deduction of overhead
expenses. In a manufacturing company it is sales revenue less cost of sales but
before deduction of non-manufacturing overheads.
• Gross margin: (or gross profit ratio), gross profit expressed as a percentage of
sales.
• Group: a set of interrelated companies usually consisting of a holding company
and its subsidiary and sub-subsidiary companies.
• Group accounts: the financial statements of a group wherein the separate
financial statements of the member companies of a group are combined into
consolidated financial statements.
• HIFO: highest in highest out, a pricing policy where costs are collected for a job
on the basis that the cost of materials and components is the highest recent input
price.
• Historical cost: the accounting convention whereby goods, resources and services
are recorded at cost. Cost is defined as the exchange or transaction price. Under
this Convention, realizable values are generally ignored. Inflation is also ignored.
The almost universal adoption of this convention makes accounting harder to
understand and lessens the credibility of financial statements.
• Hurdle: a criteria that a proposed capital investment must pass before it is
accepted. It may be a certain interest rate, a positive NPV or a maximum payback
period.
• Income and expenditure account: the equivalent to Profit and Loss (P&L)
Accounts in nonprofit organizations such as clubs, societies and charities.
• Indirect costs: costs which cannot be traced to particular products. An example is
rent or management salaries. They are usually shared by more than one product
and are called overheads.
• Insolvency: the state of being unable to pay debts as they fall due. Also used to
describe the activities of practitioners in the fields of bankruptcy, receivership and
liquidations.
• Intangible assets: assets which have long term value but no physical identity.
Examples are goodwill, patents, trade marks and brands.
• Interim dividend: a dividend paid during a financial year, generally after the
issue of un-audited profit figures half way through the year.
• Internal rate of return: the rate of discount which will just discount the future
cash flows of a proposed capital investment back to the initial outlay.
• Inventory: a detailed list of things. Used by accountants as another word for
stock.
• Investment appraisal: the use of accounting and mathematical methods to
determine the likely returns for a proposed investment or capital project.
• Key factor: a factor of production which is in limited supply and therefore
constrains production.
• Labor hour rate: a method of absorption where the costs of a cost

centre are shared out amongst products on the basis of the number of hours of
direct labor used on each product.
• Leverage: another word for gearing.
• LIFO: Last in first out – a valuation method for fungible items where the newest
items are assumed to be used first. Means stocks will be valued at old prices. Not
used in certain jurisdictions such as the U.K for tax reasons.
• Limiting or key factor: a factor of production which is in limited supply and
therefore constrains output.
• Liquidation: the procedure whereby a company is wound up, its assets realized
and the proceeds divided up amongst the creditors and shareholders.
• Liquidity: the ease with which funds can be raised by the sale of assets.
• Liquidity ratios: ratios which purport to indicate the liquidity of a business. They
include the current ratio and the acid test ratio.
• Listed companies: companies whose shares are traded on the stock exchange.
• Machine hour rate: a method of absorption of the costs of a cost center where
the costs are shared out among the products which use the centre in proportion to
the use of machine hours by the relevant products.
• Management accounting: the provision and interpretation of information which
assists management in planning, controlling, decision making, and appraising
performance.
• Management by exception: control and management of costs and revenues by
concentrating on those instances where significant variances by actual from
budgets have occurred.
• Manufacturing accounts: financial statements which measure and demonstrate
the total costs of manufacturing in a period. They are followed by Trading and
Profit and Loss (P&L) Accounts.
• Marginal costing: a system of cost analysis which distinguishes fixed costs from
variable costs.
• Marginal cost: the additional cost incurred by the production of one extra unit.
• Margin of safety: the excess of budgeted activity over breakeven activity.
Usually expressed as a percentage of budgeted activity.
• Mark-up: gross profit expressed as a percentage of cost of goods sold.
• Matching convention: the idea that revenues and costs are accrued, matched with
one another as far as possible so far as their relationship can be established or
justifiably assumed, and dealt with in the Profit and Loss (P&L) Account of the
period in which they relate. An example is the matching of sales of a product with
the development costs of that product. The appropriate periods would be when the
sales occur.
• Master budgets: the overall budgets of an enterprise comprising cash budget,
forecast Profit and Loss (P&L) Account and forecast Balance Sheet (BS). They
are made up from subsidiary budgets.
• Materiality: the accounting convention that recognizes that accounting is a
summarizing process. Some items and transactions are large (i.e. material) enough
to merit separate disclosure rather than inclusion with others in a lump sum.
Examples are an exceptionally large bad debt or an exceptionally large loss on
sale of a fixed asset.
• Minority interest: the interests in the assets of a Group relating to shares in group
companies not held by the holding company or other members of the group.
• Modified accounts: financial statements which are shortened versions of full
accounts. Small and medium sized companies can file these with the Registrar of
Companies instead of full accounts.
• Money measurement: the convention that requires that all assets, liabilities,
revenues and expenses shall be expressed in money terms.
• Net: usually means after deductions. For example net current assets current assets
less current liabilities and net cash flow means cash inflows less cash outflows.
Contrast gross.
• Net book value: the valuation on the Balance Sheet of an asset. Also known as
the carrying value or written down value.
• Net present value: the value obtained by discounting all cash inflows and
outflows attributable to a proposed capital investment project by a selected
discount rate.
• Net realizable value: the actual or estimated selling price of an asset less all
further costs to completion (e.g. Cost of a repair if it needs to be repaired before
sale) and all costs to be incurred before and on sale (e.g. commission).
• NIFO: Next in first out – a pricing policy where costs are collected on the basis
that the cost of materials and components is the next input price.
• Nominal value: the face value of a share or debenture as stated in the official
documents. Will not usually be the same as the issue price which may be at a
premium and which will almost never correspond to actual value.
• Objectivity: the convention of using reliable and verifiable facts (e.g. the input
cost of an asset) rather than estimates of ‘value’ even if the latter is more realistic.
• Operating cycle: the period of time it takes a firm to buy inputs, make or market
a product and sell to and collect the cash from a customer.
• Opportunity cost: the value of a benefit sacrificed in favor of an alternative
course of action.
• Ordinary shares: the equity capital of a company.
• Outsourcing: the use of services (such as administration or computing) from
separate outside firms instead of using the enterprise’s own employees.
• Overheads: Indirect cost.
• Overtrading: a paradoxical situation when a company does so much business
that stocks and debtors rise leading to working capital and liquidity difficulties.
• Par value: the nominal sum imprinted on a share certificate and which spears on
the Balance Sheet (BS) of a company as share capital. It has no significance as a
value.
• Payback: the number of years which will elapse before the total incoming cash
receipts of a proposed project are forecast to exceed the initial outlays.
• Periodicity: the convention that financial statements are produced at regular
intervals usually at least annually.
• Preference shares: shares in which holders are entitled to a fixed rate of dividend
(if one is declared) in priority to the ordinary shareholders in a winding up
situation.
• Planning variance: a variance arising because the budgeted cost is now seen as
out of date. Examples are wage or price rises.
• Prepayments: expenditure already made on goods or services but where the
benefit will be felt after the Balance Sheet (BS) date. Examples are rent or rates or
insurances paid in advance.
• Price earnings ratio: an investor ratio calculated as – share / earnings per share.
• Prime cost: the direct costs of production.
• Private company: any company that is not a public company.
• Profitability index: in investment appraisal, the net present value of cash
inflows / the initial out lays.
• Profit and Loss (P&L) Account: a financial statement which measures and
reports the profit earned over a period of time.
• Pro Rata: in proportion to.
• Prospectus: an official document being in advertisement offering shares for sale
to the public.
• Provision: a charge in the Profit and Loss (P&L) Account of a business for an
expense which arose in the past but which will only give rise to a payment in the
future. To be a provision the amount payable must be uncertain as to amount or as
to payability or both. An example is possible damages awardable by a court in a
future action over a past incident (e.g. a libel).
• Prudence (or conservatism): the convention whereby revenue and profits are not
anticipated, but provision is made for all known liabilities (expenses and losses)
whether the amount of these is known with certainty or is a best estimate.
Essentially future profit, wait until it happens – future loss, count it now.
• Quick ratio: also known as acid test ratio, current assets (except stock) / current
liabilities.
• Quoted company: also known as a listed company, a company whose shares are
traded on the stock exchange.
• Realizable value: the amount that an asset can be sold for.
• Realization: to sell an asset and hence turn it into cash.
• Realization convention: the concept that a profit is accounted (or when a good is
sold and not when the cash is received.
• Receiver: an insolvency practitioner who is appointed by a debenture holder with
a fixed or floating charge when a company defaults.
• Redemption: repayment of shares, debentures or loans.
• Redemption yield: the yield given by an investment expressed as a percentage
and taking into account both income and capital gain or loss.
• Reducing balance: a method of depreciation whereby the asset is expensed to the
Profit and Loss (P&L) Account over its useful life by applying a fixed percentage
to the written down value.
• Relevant costs: costs that will only be incurred if a proposed course of action is
actually taken. The only ones relevant to an actual decision.
• Relevant range: the range of activity which is likely. Within it variable costs are
expected to be linearly variable with output and fixed costs are expected to be
unchanged.
• Reporting: the process whereby a company or other institution seeks to inform
shareholders and other interested parties of the results and position of the entity
by means of financial statements.
• Reserves: a technical term indicating that a company has total assets which
exceed in amount the sum of liabilities and share capital. This excess arises from
retained profits or from revaluations of assets.
• Resource accounting and budgeting: the use of normal accruals accounting and
Balance Sheets in federal / government departments and agencies.
• Retained profits: also known as retentions, the excess of profits over dividends.
• Return on capital employed: a profitability ratio being income expressed as a
percentage of the capital which produced the income.
• Return on sales: the ratio of profit to sales expressed as a percentage.
• Returns: the income flowing from the ownership of assets. May include capital
gains.
• Revenue: amounts charged to customers for goods or services rendered.
• Revenue expenditure: expenditure that benefits only the current period and
which will therefore be charged in the Profit and Loss (P&L) Account.
• Rights issue: an invitation to existing shareholders to subscribe cash for new
shares in the company in proportion to their holdings.
• Salvage value: also known as residual value, the amount estimated to be
recoverable from the sale of a fixed asset at the end of its useful life.
• Secured liabilities: liabilities secured by a fixed or floating charge or by other
operation of law such as hire purchase commitments.
• Securities: financial assets such as shares, debentures and loan stocks.
• Segmental reporting: the practice of breaking down turnover, profits and capital
employed into sections to show the separate contributions of each to the overall
picture. Segments can be distinct products, geographical areas, or classes of
customers, etc.

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cost of sales (COS)

A dividend is a payment made per share, to a company's shareholders by a company,

FOB - 'free on board'

See 'budget' above.

initial public offering (ipo)

When an exporter agrees to supply a customer in another country, the exporter

Typical obligations covered by letters of guarantee are concerned with:

There are other types of letters of guarantee, including obligations concerning

net assets (also called total net assets)

net current assets

Current Assets less Current Liabilities.

net present value (npv)

NPV is a significant measurement in business investment decisions. NPV is essentially

See explanation under Cost of Sales.

p/e ratio (price per earnings)

profit and loss account (P&L)

return on capital employed (ROCE)

A fundamental financial performance measure. A percentage figure representing

Profits derived as a proportion of and directly attributable to cost or 'book value' of

t/t (telegraphic transfer)

Interntional banking payment method: a telegraphic transfer payment, commonly

Current assets less current liabilities, representing the required investment,

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Financial Terms - Glossary of Financial

Financial Terms Glossary

Financial Glossary - Finance Terms and Financial Definitions

Income that is earned through investments in stocks is termed as equity

IB IB is the acronym for Introducing Broker

Kangaroos A term used for Australian stocks.

When money is borrowed to buy an investment asset, with the investment

This is a Nasdaq stock symbol. It represents a particular stock that is involved

S This is a Nasdaq stock symbol. It indicates the shares of beneficial interest.

W It is a NASDAQ symbol that means that a particular security is a warrant.

X X is the NASDAQ stock symbol for mutual fund.

Actuals Financial statements describing the actual operations of the business.

After Tax Income Another term for net income.

Amortization The recognition of part of an intangible asset's cost as an expense during

Bad Debt Expense Losses for uncollectible accounts receivable.

Cost Another term for expenditure. See also expenses.

Covenants A set of conditions agreed to in a formal debt agreement and designed to

Department An entity defined for reporting purposes.

DPO See days payable outstanding.

DSO See days sales outstanding.

EBIT See earnings before interest and taxes.

EBIT/DA See earnings before interest, taxes, depreciation, and amortization.

Expenditures All purchases made by a business, whether in cash or on credit; not

Expenses Resources used to support the ongoing operations of a business for a

FIFO See first in, first out.

Finished Goods Inventory ready for sale.

Fiscal Year End The last month of a company's fiscal year.