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Accounts Payable
(A/P)
Accounts Receivable
(A/R)
Accrual Basis
Acid-Test Ratio
Amortization
Asset
Asset Stripping
Asset Turnover
(ATO)
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Accounts Payable (A/P)
Money you owe to your suppliers and vendors.
Outside North America, also called Creditors. |
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Accounts Receivable (A/R)
Money your customers owe to you.
Outside North America, also called Debtors. |
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Accrual Basis
Event-based accounting which recognizes events when they appear
in the system, not at the time they are paid.
The Income/Outcome business simulation is accrual based.
See also Cash Basis. |
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Acid-Test Ratio
Ratio:
(Current Assets less Inventories) divided by Current Liabilities
This is a variant of the current ratio; it only includes items
which are quickly converted into cash. It is called "Acid-Test"
because it measures the ability to meet unexpected demands
without depending on the sale of inventory.
Also called Quick Ratio. |
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Amortization
Decreasing an amount gradually or in installments, to:
1. Write down an expenditure
2. Pay off a loan
3. Reduce the value of an intangible asset in a manner analogous
to depreciation. |
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Asset
Anything owned by the business.
On the Balance Sheet, the sum of the Assets equals the sum of
Liabilities and Equity. |
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Asset Stripping
1. (Owner's view) Buying a company when its market value is
below book value, then selling off its component assets to make
a profit.
2. (Manager's view) Selling off non-essential or under-utilized
assets of a business in order to improve short-term metrics such
as Return On Assets. |
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Asset Turnover (ATO)
Ratio:
Sales divided by Assets.
This ratio measures how asset-intensive a business is and the
efficiency of the assets employed.
Asset Turnover shows the speed with which an amount of cash,
equivalent to the money tied up in the business, comes back in
through the door in fresh sales. It isn't concerned with
profit, only with cash flow. If sales are rapid, little cash is
tied up to keep the business going; and if little cash is tied
up in the business, it is easier to expand.
Also called Asset Turns.
See also Income/Outcome Triangle for Ratio Analysis; Net Asset
Turnover;
Return On Net Assets. |
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Balance Sheet
Book Value of Assets
Book Value of Business
Book Value Per Share
Break-Even Analysis
Break-Even Point
Budget
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Balance Sheet
A summary of the Assets, Liabilities, and Equity for the
business at a certain point in time - it gives a financial
snapshot for a given moment.
It shows the Assets (what you have in the business) and balances
that amount against the total of Liabilities and Equity (which
is where the assets came from). In other words, everything you
have in the business comes from investing (Shareholder Capital),
making money (Retained Earnings), or borrowing from sources such
as banks (Loans) and suppliers (Payables).
The left side of the Company Board (and of the Income/Outcome
business simulation game board) is a Balance Sheet. |
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Book Value of Assets
Calculation:
Purchase Value of Fixed Assets less accumulated depreciation.
This is the value of fixed assets as they are listed on the
Balance Sheet.
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Book Value of Business
Calculation:
Total Assets less Intangible Assets less Liabilities.
The Net Asset Value of a company. This is the amount of cash you
would have if everything owned by the business was sold, and all
debts were paid. It is a very conservative "worst-case"
valuation of what a business would be worth if it had to close
down. |
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Book Value per Share
Calculation:
Book Value divided by Number of Shares |
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Break-Even Analysis
Analysis of the interrelationship of Sales (price and volume)
and Costs (fixed and variable). Typically done as a graphical
representation. |
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Break-Even Point
The point at which Sales are equal to total costs. It is the
combination of sales and costs that will yield a no-profit,
no-loss situation.
Also known as Break-Even Sales. |
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Budget
Expectations of sales, costs/expenses and profit for a future
fiscal period (month, quarter, year).
This is definitely a
"What do you mean by that?"
term. Many people use it to mean 'the amount of money they are
allowed to spend", meaning only "their" costs/expenses portion
of the actual budget. |
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Capital
Stock
Cash
Cash Basis
Cash Flow
Cash Flow Forecast (CFF)
Cash Flow Statement
Contribution & Contribution Margin
Cost of
Capital
Cost of Goods Sold (COGS)
Cost of Sales (COS)
Creditors
Current
Assets
Current
Debt
Current Liabilities
Current Ratio
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Capital Stock
The original investment in the company, plus any additional
investment from outside the company. |
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Cash
. . . is King!
Cash on hand, in the bank, or otherwise very readily
accessible.
Profit is like food: you need it for the business to grow and to
be healthy and strong; but you don't have to eat all the time.
But Cash is like air - you need it constantly. If you run out,
and cannot immediately get more, you die.
Profit happens on the Income Statement.
Cash happens on the Balance Sheet. |
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Cash Basis
An accounting method which tracks incomes and outlays by when
the cash comes in or goes out, not when events first appear in
the system.
See also Accrual Basis. |
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Cash Flow
The flow of money into and out of the business. Understanding
the Cash Flow of a business is as essential as understanding
Profit. The two have to be managed separately.
See also
Cash Flow Forecast;
Cash Flow Statement. |
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Cash Flow Forecast (CFF)
A projection of the cash flows, in and out, over a fiscal period
of projection, to determine net cash balances at particular
points in time. This identifies either the need for additional
cash infusions or the opportunity to use excess cash elsewhere. |
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Cash Flow Statement
Analysis of sources of cash that flowed into the business
together with how the cash was allocated, for the accounting
period.
The information is grouped by functional department, because
Cash can be freed up from anywhere (such as getting customers to
pay faster, or paying suppliers more slowly), not just from
Sales or the Finance Department.
Note: Cash Flow does not consider non-cash items such as
depreciation. |
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Contribution & Contribution Margin
Contribution
Calculation:
Total Sales less the Costs of Sales.
Contribution
Margin
Ratio:
Contribution as a percentage of Total Sales
Contribution
is what's left from the sale to contribute towards paying for
the overhead costs and expenses of the business.
This is a real
"What do you mean by that?"
with people sometimes using the two terms interchangeably. We
use "margin" to denote a percentage (of Sales).
Contribution may be the same number as Gross Profit.
Example:
·
Sales of 200 less COS of 80 equals Contribution of 120
·
Contribution of 120 divided by Sales of 200 equals Contribution
Margin of 60%. |
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Cost of Capital
A weighted average of the interest cost of debt and the
expectations of the shareholders.
Example:
·
If half the company's capital comes from borrowing at 8%, and
half from investors who are expecting a 16% return on their
investment, the Cost of Capital is deemed to be 12%. |
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Cost of Goods Sold (COGS)
The variable (or direct) costs of products sold and shipped to
customers. Typically includes raw materials and labor, and
other components on a company-by-company basis. Individual
components might include sales commission and depreciation.
Also called Cost of Sales or COS.
COGS is a variable cost because the cost reported varies with
sales volume. Conceptually, Direct Costs, Cost of Goods Sold and
Variable Cost are very similar. Check how each term is used in
your company.
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Cost of Sales (COS)
The variable (direct) costs of products and/or services provided
to customers. Typically includes raw materials and labor, and
other components on a company-by-company basis. Individual
components might include sales commission and depreciation.
Also called Cost of Goods Sold or COGS.
COS is a variable cost because the cost reported varies with
sales volume. Conceptually, Direct Costs, Cost of Sales and
Variable Cost are very similar. Check how each term is used in
your company.
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Creditors
Money you owe to your suppliers and vendors.
In North America, called Payables or Accounts Payable. |
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Current Assets
The Assets of a company that are reasonably expected to be
converted to cash or consumed within 12 months from the date of
the Balance Sheet. Current Assets include Cash, Receivables,
Inventories and Prepaid Expenses. |
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Current Debt
Liabilities that are due within 12 months of the Balance Sheet
date. Current Liabilities include Payables, Taxes Payable,
short-term loans, and the current portion of long-term debt.
Also called Current Liabilities. |
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Current Liabilities
Liabilities that are due within 12 months of the Balance Sheet
date. Current Liabilities include Payables, Taxes Payable,
short-term loans, and the current portion of long-term debt.
Also called Current Debt. |
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Current Ratio
Ratio:
Current Assets divided by Current Liabilities.
This ratio is a measure of the company's liquidity. It looks at
the ability to pay bills out of the short-term assets. |
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Days Sale Outstanding
(DSP)
Debt
Debt to Equity Ratio
Debtors
Depreciation
Direct
Cost(s)
Discounted Cash Flow (DCF)
Discounting Receivables
Discounting Sales
Dividend
Cover
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Days Sale Outstanding (DSO)
Ratio:
Accounts Receivable divided by the Average Daily Sales (Annual
Sales/365).
The ratio shows how quickly the proceeds from sales are
converted into Cash.
DSO is also known as Days Sales in Receivables (DSR) or Average
Collection Period.
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Debt
"What do you mean by that?"
"Debt" can have wildly different meanings, here are some
possibilities: 1) Total Liabilities. 2) Interest-bearing
liabilities including loans and bonds, but excluding payables
etc. 3) Long-term liabilities. Make sure you agree on the
meaning! |
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Debt to Equity Ratio
Ratio:
Debt divided by Equity.
This ratio is a measure of the company's safety, or ability to
withstand adversity.
This is a real
"What do you mean by that?"
term. What is meant by "debt" - Total liabilities?
Interest-bearing debt? Long-term debt?
See the discussion at
Leverage. |
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Debtors
Money your customers owe to you.
In North America, called Receivables or Accounts Receivable. |
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Depreciation
Non-cash expense (reported on the Income Statement) that
expresses the reduction in economic value of an asset over time.
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Direct Cost(s)
The cost of labor, materials and any direct overhead incurred in
producing the goods and services. Conceptually, Direct Costs,
Cost of Sales and Variable Cost are very similar. Check how each
term is used in your company.
See also
Indirect Cost. |
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Discounted Cash Flow (DCF)
A calculation of the future value of expected inflows and
outflows of cash.
Future cash flows need to be appropriately discounted to allow
for the fact that money that comes back in next year is worth
less than money that goes out today. |
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Discounting Receivables
Selling a Receivable Note (or invoiced sale) at a discount in
order to receive immediate cash.
Also called
Factoring |
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Discounting Sales
Reduction in the sales price of goods and services to entice
additional sales. Often based on volume, seasonality,
obsolescence, a changed competitive environment, or future
commitments by the customer. |
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Dividend cover
Ratio:
Net Income divided by Dividends
The ratio shows the ratio of Profit to Dividends paid. If this
number is greater than 1, it means the business has reinvested
some profit back into itself, the higher the number the greater
the re-investment.
Some companies occasionally pay Dividends greater than their
Earnings; this may happen if they take a temporary loss and want
to send a signal that the loss does not matter. Failing to pay
an expected dividend signals that the company has run into
unexpected difficulty, and this will hurt the price of shares.
It shrinks the size of the business to pay a dividend greater
than earnings, but a high stock price is important if the
company wants to raise more capital by issuing shares. The
company wants the most money for the fewest new shares issued. |
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Earnings
Earnings Before Interest and Taxes (EBIT)
Earnings Before Interest, Taxes, Depreciation, and Amortization
(EBITDA)
Earnings Per Share (EPS)
Equity
Eva or Economic Value Added
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Earnings
Calculation:
Sales less all costs and expenses
Net Income or Net Profit for the period. |
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Earnings before Interest and Taxes (EBIT)
Calculation:
Sales less all costs and expenses except Finance Charges and
Income Tax. |
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Earnings before Interest, Taxes, Depreciation, and Amortization
(EBITDA)
Calculation:
Sales less all cash expenses except Finance Charges and
Income Tax.
EBITDA does not include the non-cash expenses such as
depreciation and amortization. |
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Earnings Per Share (EPS)
Ratio:
Net Income divided by the number of shares issued and
outstanding.
EPS is the net benefit to the shareholder per share; it does not
say whether the earnings are paid out as dividends or retained
in the company for growth. |
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Equity
The ownership the shareholders have in the company, represented
by the Capital Stock and the Retained Earnings. Also
called Shareholders' Equity or Net Worth.
On the Balance Sheet, the sum of the Assets equals the sum of
Liabilities plus Equity. |
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EVA or Economic Value Added
A relatively complex method of evaluating profitability that
takes into account the Cost of Capital. It allows shareholder
expectations as much weight as the rate of interest on debt; the
appropriateness of this is debatable. The practical impacts are
1) to require very high levels of profit before the company is
deemed to be "adding economic value", 2) to increase the amount
of short-term thinking by managers, and 3) to improve share
prices in the short term.
EVA was created by consultants Stern Stewart & Co. |
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Factoring
Finance
Charges
Finished Goods Inventory (FGI)
Fixed
Assets
Fixed Cost
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Factoring
Selling a receivable note (or invoiced sale) at a discount in
order to receive immediate cash.
Also called Discounting Receivables. |
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Finance Charges
Expenses associated with financing the business; includes
interest, factoring expense, foreign exchange costs, currency
hedging, etc. |
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Finished Goods Inventory (FGI)
Fully produced goods which are available for sale to customers.
Inventories are part of Current Assets. |
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Fixed Assets
Assets categorized as "permanent" and not intended to be 'turned
over" in the normal business cycle. Fixed Assets may be
tangible items such as land, buildings, equipment and furniture
with a useful business life of greater than one year; or they
may be intangible items such as Goodwill and intellectual
property. |
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Fixed Cost
A cost incurred in the general operations of the business that
is not directly attributable to the costs of producing goods and
services. These "Fixed" or "Indirect" costs will be incurred
whether or not any sales are made during the period, thus the
designation "Fixed" as opposed to "Variable". |
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Goodwill
Gross Profit & Gross Margin
Gross
Sales
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Goodwill
An Intangible Asset that arises when Assets are purchased for
more than their "book value". This "Intangible" value must be
re-evaluated on a periodic basis. |
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Gross Profit & Gross Margin
Gross Profit
Calculation:
Total Sales less the direct costs and factory o"heads.
Gross Margin
Ratio:
Gross Profit as a percentage of Total Sales
Gross Profit is the amount of profit available after deducting
from sales the direct (variable) costs of labor and materials,
and the applicable costs of the factory overheads applied to the
production of goods and services.
This is a real
"What do you mean by that?"
with people sometimes using the two terms interchangeably. We
use "margin" to denote a percentage (of Sales).
Example:
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Gross Sales
Total Sales revenue before applying any sales discounts,
allowances or returns.
See also Sales;
Net Sales. |
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Income
Income/Outcome Triangle for Ratio Analysis
Income
Statement
Intangible Asset
Intellectual Property
Inventory Turnover |
Income
Ask
"What do you mean by that?"
It could mean Sales Income (Sales Revenue at the top of the
Income Statement), or it could mean Net Income (Net Profit at
the bottom of the Income Statement). |
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Income/Outcome Triangle for ratio analysis
The visual representation of the relationships between Sales,
Net Income and Assets, overlaid on The Company BoardTM.
Created by consultants Andromeda Training, Inc. |
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Income Statement
A summary of the income and expenses for the company over the
operating period *a financial History Book for the fiscal
period (month, quarter, year).
The right side of the Company Board (and of the Income/Outcome
business simulation game board) is an Income Statement. |
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Intangible Asset
An asset which has a perceived value but without a tangible
nature. Typical examples are Goodwill and Intellectual Property.
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Intellectual Property
Copyrights, Patents, Trademarks and Service Marks.
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Inventory Turnover
Ratio:
Annual Cost of Sales divided by the average value of inventory
on hand.
This ratio is the number of times a business sells out its
inventory during the year. Also called Inventory Turns. |
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Leverage & Leverage Ratio
Liabilities
Long-Term Debt or Long-Term Liabilities
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LEVERAGE & LEVERAGE RATIO
Leverage
is how much you extend your assets by borrowing against your
investment.
Leverage ratios
incorporate any two of the following: Assets, Equity,
Liabilities.
Example:
If you
invest $60K of your money in a business, and borrow an
additional $30K from the bank, you have assets of $90K. You
can express your leverage in several ways:
Debt to Equity : 30/60 = .5
Debt Ratio (i.e. Debt to Assets): 30/90 = .33
Both these numbers are expressing the same situation, and both
can be called leverage. One person might say "We"re leveraged
50%", while another could say "We"re leveraged 33%."
Be sure to ask,
"What do you mean by that?" |
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Liabilities
The debts of the company; includes bank loans, salaries and
benefits payables, suppliers" bills, taxes due, etc.
Liabilities are usually sorted into current or short-term
(falling due within one year) and long-term (payment period is
greater than one year). |
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Long-term Debt or Long-Term Liabilities
Liabilities which have a payment period exceeding one year;
includes bank loans, bonds, etc. |
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Margin
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Margin
Gross Margin:
Gross Profit as a percentage of Sales
Operating Margin:
Operating Profit as a percentage of Sales
Return on Sales:
Net Profit as a percentage of Sales
This number describes what income is left over after expenses
are deducted from sales.
"What do you mean by that?"
We use "margin" to denote a percentage (of Sales).
People will think of profit margin at different points on the
Income Statement. Production might look at Gross Margin while
operations might look at Operating Margin; the Finance
Department looks at Return on Sales. |
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Net Asset
Net Asset Balance Sheet
Net
Asset Value
Net Assets
Net Income & Return on Sales
Net Present Value (NPV)
Net Profit & Return on Sales
Net Sales
Net Worth
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Net Asset
"What do you mean by that?"
This term can describe wildly different situations; here are
some possibilities.
1) Total Assets less non interest-bearing liabilities (i.e. Net
Assets).
2) Total Assets less Current Liabilities.
3) Total Assets less Total Liabilities (i.e. Equity or Net
Worth).
And all of these terms are different from Net Asset Value.
Make sure you agree on the meaning! |
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Net Asset Balance Sheet
A Balance Sheet balancing the Total Assets less non-interest
bearing liabilities against the combined total of
Interest-Bearing Liabilities and Equity.
This version of the Balance Sheet has advantages for measuring
management performance, and is prevalent outside North America.
See also
Total Asset Balance Sheet.
"What do you mean by that?"
Any term which uses the phrase "net asset" or "net assets" must
be examined closely. See
Net Asset;
Net Assets. |
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Net Asset Value
Calculation:
Total Assets less Intangible Assets less Liabilities.
The value of assets if the worst things happen and the company
closes operations.
Be sure to ask
"What do you mean by that?"
Any term which uses the phrase "net asset" or "net assets" must
be examined closely. See
Net Asset;
Net Assets. |
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Net Assets
Calculation:
Total Assets less Non-Interest Bearing Liabilities
Net Assets are that portion of Total Assets funded by Corporate
HQ long-term financing and share capital. |
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Net Income & Return on sales
Net Income
The Profit left for the owners, after all costs, expenses,
interest and taxes have been paid. Also called Net Profit.
Return On
SALES
Ratio:
Net Income as a percentage of Sales
Net Income (or Net Profit) is the Profit left for the owners,
after all costs, expenses, interest and taxes have been paid.
Example:
·
Sales of 200 less COS (80) less Operating expense (70) less
interest expense (20) and income tax (10) leaves Net Income of
20.
·
Net Income of 20 divided by Sales of 200 equals Return on Sales
of 10%. |
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Net Present Value (NPV)
NPV is used to determine when, if ever, a capital investment
will generate a profit, and how much that will be in today's
terms. The Net cash flows are considered in today's terms (i.e.
Present Value), because the money that comes in next year will
be worth less than the money that goes out this year.
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NET PROFIT & RETURN ON SALES
Net Profit
Calculation:
Sales less Costs of Sales less Operating Expense less Interest
Expense less Income Tax
Return on sales
Ratio:
Net Profit as a percentage of Sale
Net Profit (or Net Income) is the Profit left for the owners,
after all costs, expenses, interest and taxes have been paid.
Also called Net Income
Example:
·
Sales of 200 less COS (80) less Operating expense (70) less
interest expense (20) and income tax (10) leaves Net Profit of
20.
·
Net Profit of 20 divided by Sales of 200 equals Return on Sales
of 10%. |
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Net Sales
Calculation:
Gross Sales at list price less any discounts, sales returns and
allowances, but before subtracting the Cost of Sales and
Operating Costs.
Revenues from the sale of goods and services which are part of
the company's regular operations.
Net Sales is the number used in Financial Statements if the line
item just says 'sales."
"What do you mean by that?"
The term "sales" generally refers to Net Sales. The term
"total sales" could refer to Gross Sales or Net Sales.
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Net Worth
The ownership the shareholders have in the company, represented
by the Capital Stock and the Retained Earnings. Also
called Shareholders' Equity. |
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