INTERVIEW MATERIAL ACCOUNTING & FINANCE
PREFACE
This
material is useful for all the commerce/finance students who have completed
their graduation/post graduation and want to pursue their career in the field
of accounts and finance.There is lot of difference between written examination
and oral interview, it is a big challenge to the students those who just passed
out with academic knowledge to face
technical rounds in interviews.
This
point triggered me to prepare this material for the sake of jobseekers in
accounting & finance field. My sincere thanks to my previous employer
S&P Global,MNC where I started my career and gained knowledge and great
exposure in accounting & finance.Also thanks to my spouce Mr.Siddaiah for
all his support and guidance throughout the preparation of this material.
Thanks and Regards,
D.Haleema Begum M.Com.,
Meaning of
Accounting: According
to American Accounting Association Accounting is “the process of identifying,
measuring and communicating information to permit judgment and decisions by the
users of accounts”.
Users of Accounts: Generally 2 types.
1. Internal management.
2.
External users or Outsiders- Investors, Employees, Lenders, Customers, Government
and other agencies, Public.
Sub-fields of
Accounting:
Book-keeping: It covers
procedural aspects of accounting work and embraces record keeping function.
Financial
accounting: It covers the preparation and interpretation of financial
statements.
Management
accounting:
It covers the generation of accounting information for management decisions.
Social
responsibility accounting: It covers the accounting of social costs incurred by
the enterprise.
Fundamental
Accounting equation: 9
Assets
= Capital+ Liabilities.
Capital
= Assets - Liabilities.
Accounting elements: The elements
directly related to the measurement of financial position i.e., for the
preparation of balance sheet are Assets, Liabilities and Equity. The elements
directly related to the measurements of performance in the profit & loss
account are income and expenses.
Four phases of
accounting process:
Journalisation
of transactions
Ledger
positioning and balancing
Preparation
of trail balance
Preparation
of final accounts
Book keeping: It is an
activity, related to the recording of financial data, relating to business
operations in an orderly manner. The main purpose of accounting for business is
to as certain profit or loss for the accounting period.
Accounting: It is an activity
of analasis and interpretation of the book-keeping records.
Cash Accounting System: Only cash
transactions are recorded if the system is followed.
Mercantile Accounting System: Both cash
transactions and credit transactions are recorded in this system. If cash transactions
are incurred first they are recorded first. If credit transactions are incurred
first they are recorded first. In simple to say what ever is incurred first
will be recorded first.
Discount: Discounts are two types. These are i) Trade
Discount and ii) Cash Discount
Trade Discount: It is deducted from list
price or catalogue price or tag. It is generally allowed by whole seller to
retailer. Trade Discounts are not recorded in books.
Ex: Tag Price = Rs. 100
Trade Discount
= Rs. 10
Rs. 90 This amount is recorded in the books.
Purchase A/c Dr 90
To Cash A/c 90
Cash Discount: This discount is given to debtors to make them pay
debts as early as possible.
Ex: Immediately - 5%, within 15 days – 4%, within
one month – 2% etc. Cash discount is given for early or prompt payment. Cash
discounts are recorded in books.
Purchase A/c Dr 100
To Cash
90
To Discount
10
Journal: Recording each
transaction of the business.
Ledger: It is a book
where similar transactions relating to a person or thing are recorded.
Types:
Debtors ledger
Creditor’s
ledger
General
ledger
Concepts: Concepts are
necessary assumptions and conditions upon which accounting is based.
Business entity
concept:
In accounting, business is treated as separate entity from its owners.While
recording the transactions in books, it should be noted that business and
owners are separate entities.In the transactions of business, personal
transactions of the owners should not be mixed.
For
example: - Insurance premium of the owner etc...
Going concern
concept:
Accounts are recorded and assumed that the business will continue for a long
time. It is useful for assessment of goodwill.
Consistency concept: It means that
same accounting policies are followed from one period to another.
Accrual concept: It means that
financial statements are prepared on merchantile system only.
Types of Accounts: Basically
accounts are three types,
Personal account: Accounts which
show transactions with persons are called personal account. It includes accounts
in the name of persons, firms, companies.
In
this: Debit the reciver
Credit
the giver.
For
example: - Naresh a/c, Naresh & co a/c etc…
Real account: Accounts relating
to assets is known as real accounts. A separate account is maintained for each
asset owned by the business.
In
this: Debit what comes in
Credit
what goes out
For
example: - Cash a/c, Machinary a/c etc…
Nominal account: Accounts relating
to expenses, losses, incomes and gains are known as nominal account.
In
this: Debit expenses and loses
Credit
incomes and gains
For
example: - Wages a/c, Salaries a/c, commission recived a/c, etc.
Accounting
conventions:
The term convention denotes customs or traditions which guide the accountant
while preparing the accounting statements.
Convention of
consistency:
Accounting rules, practices should not change from one year to another.
For
example: - If Depreciation on fixed assets is provided on straight line method.
It should be done year after year.
Convention of Full
disclosure:
All accounting statements should be honestly prepared and full disclosure of
all important information should be made. All information which is important to
assets, creditors, investors should be disclosued in account statements.
Trail Balance: A trail balance
is a list of all the balances standing on the ledger accounts and cash book of
a concern at any given date.The purpose of the trail balance is to establish
accuracy of the books of accounts.
Trading a/c: The first step of
the preparation of final account is the preparation of trading account. It is
prepared to know the gross margin or trading results of the business.
Profit or loss a/c: It is prepared to
know the net profit. The expenditure recording in this a/c is indirect nature.
Balance sheet: It is a statement
prepared with a view to measure the exact financial position of the firm or
business on a fixed date.
Outstanding
Expenses:
These expenses are related to the current year but they are not yet paid before
the last date of the financial year. Expenditure
incurred but the payment for which is not yet paid and will be shown in the
balance sheet liabilities side, debited to profit and loss account
Prepaid Expenses: There are several
items of expenses which are paid in advance in the normal course of business
operations. Prepaid expenses are to be deducted from such
expenses in the debit side of profit and loss account. Shown as an asset in the
assets side of Balance Sheet. The amount paid for the expenditure relating to
the future years.
Income and
expenditure a/c:
In this only the current period incomes and expenditures are taken into
consideration while preparing this a/c.
Royalty: It is a
periodical payment based on the output or sales for use of a certain asset.
For
example: - Mines, Copyrights, Patent.
Hire purchase: It is an
agreement between two parties. The buyer acquires possession of the goods
immediately and agrees to pay the total hire purchase price in instalments.
Hire
purchase price = Cash price + Interest.
Lease: A contractual
arrangement whereby the lessor grants the lessee the right to use an asset in
return for periodic lease rental payments.
Double entry: Every transaction
consists of two aspects
1.
The receving aspect
2.
The giving aspect
The
recording of two aspect effort of each transaction is called ‘double entry’.
The
principle of double entry is, for every debit there must be an equal and a
corresponding credit and vice versa.
BRS: When the cash
book and the passbook are compared, some times we found that the balances are
not matching. BRS is preparaed to reconcile these differences.
Cash: The purchasing power in hand is called cash.
Cash Expenses: Cash is paid for expenses incurred. Ex: Salaries,
Wages paid etc.
Non-cash Expenses: it is expenditure, there is
no cash involvement.
Expenses are incurred but – cash is not paid (that
is cash is not going out of the business)
Ex: depreciation writing off, goodwill, patents,
writing off preliminary expenses, discount on issue of shares and debentures,
loss on revaluation of assets and liabilities etc., in this cases income is
reduced since tax saving is effected.
Preliminary expenditure: is expenditure
incurred for setting or undertaking.
Ex: i) for drafting legal documents (MOA and AOA) –
Legal Documents
ii) Fees for registration of the company
iii) Underwriting Commission
iv) Brokerage and Charges for drafting, printing,
typing and advertising the prospectus.
Deferred Revenue Expenses: The benefit of
the expenditure will be differing to the future periods for which the
expenditure is charges. Differed revenue expenditure is known as asset in
balance sheet.
Ex: Preliminary expenses, Advertisement expenses
Deferred Revenue Income: which is income
differed to the future periods. That means it is not related to one period but
related to more than one period.
Ex: Pension Fund Scheme
Amalgamation: Involves merger of two existing companies or a
company takeover the company.
Absorption: A company takes over another company. Amalgamation
includes absorption. When a company
purchases the business of another existing company that is called absorbtion.
Mergers: A merger refers to
a combination of two or more companies into one company.
Reconstruction: It means reorganization of
company’s financial structure.
Capital Transactions: The transactions
which provide benefits to the business unit for more than one year is known as “capital
Transactions”.
Revenue
Transactions:
The transactions which provide benefits to a business unit for one accounting
period only are known as “Revenue Transactions”.
Deffered Revenue
Expenditure: The expenditure which is of revenue nature
but its benefit will be for a very long period is called deffered revenue
expenditure.
Ex:
Advertisement expences
A
part of such expenditure is shown in P&L a/c and remaining amount is shown
on the assests side of B/S.
Capital Receipts: The receipts which
rise not from the regular course of business are called “Capital receipts”.
Revenue Receipts: Amount receives on revenue items. All recurring incomes which a business
earns during normal cource of its activities. Amount
received by sale of goods or services show the trading and profit and loss
account credit side
Ex:
Sale of good, Discount Received, Commission Received.
Reserve Capital: Reserve
Capital is called up only at the time of liquidation if assets held are not
sufficient to meet the liabilities.b It refers to that portion of uncalled
share capital which shall not be able to call up except for the purpose of
company being wound up.
Fixed Assets: Fixed assets,
also called noncurrent assets, are assets that are expected to produce benefits
for more than one year. These assets may be tangible or intangible.
Tangible fixed
assets
include items such as land, buildings, plant, machinery, etc… Intangible fixed
assets include items such as patents, copyrights, trademarks, and goodwill.
Current Assets: Assets which
normally get converted into cash during the operating cycle of the firm. Ex:
Cash, inventory, receivables.
Liquid Assets: These assets also known as circulating,
fluctuating, or current assets. These assets can be converted in to cash as
early as possible.
Fictitious assets: Fictitious assets are those assets, which do not have physical form.
They do not have any real value.They are not represented by anything tangible or concrete.
Ex:
Goodwill, deffered revenue expenditure, etc…
Contingent Assets: It is an existence
whose value, ownership and existence will depend on occurance or non-occurance
of specific act.
Fixed Liabilities: These are those
liabilities which are payable only on the termination of the business such as
capital which is liability to the owner.
Longterm
Liabilities:
These liabilities which are not payable with in the next accounting period but
will be payable with in next 5 to 10 years are called longterm liabilities. Ex:
Debentures.
Current
Liabilities:
These liabilities which are payable out of current assets with in the
accounting period. Ex: Creditors, bills payable, etc…
Contingent
Liabilities:
A contingent liability is one, which is not an actual liability but which will
become an actual one on the happening of some event which is uncertain. These
are staded on balance sheet by way of a note.
Ex:
Claims against company, Liability of a case pending in the court.
Bad Debts: Some of the
debtors do not pay their debts. Such debt if unrecoverable is called bad debt.
Bad debt is a business expense and it is debited to P&L account.
Capital
Gains/losses: Gains/losses arising from the sale of assets.
Fixed Cost: These are the
costs which remains constant at all levels of production. They do not tend to
increase or decrease with the changes in volume of production.
Variable Cost: These costs tend
to vary with the volume of output. Any increase in the volume of production
results in an increase in the variable cost and vice-versa.
Semi-Variable Cost: These costs are
partly fixed and partly variable in relation to output.
Replacement Cost: It is the cost of replacing
an existing employee.
Opportunity Cost: The actual or assumed rate
for capitalization of the differential earnings expected to be earned by an
employee.
Sunk Cost
A cost that has been incurred and cannot be
reversed. Also referred to as "stranded cost."
A worn-out piece of equipment bought several years
ago is a sunk cost because the cost of buying it cannot be reversed.
Irrelevant Cost
A managerial accounting term that represents a
cost, either positive or negative, that does not relate to a situation
requiring management's decision.
As with relevant costs, irrelevant costs may be
irrelevant for some situations but relevant for others. Examples of
irrelevant costs are fixed overheads, notional costs, sunk costs and book
values.
Relevant Cost
A managerial accounting term that is used to
describe costs that are specific to management's decisions. The concept of
relevant costs eliminates unnecessary data that could complicate the
decision-making process.
Relevant costs are decision specific, meaning that
a relevant cost may be important in one situation but irrelevant in another.
Examples of when management uses relevant costs can be seen when it
is determining whether to sell or keep a business unit, make or buy an
item, or accept a special order.
Absorption Costing: It is the practice
of charging all costs, both variable and fixed to operations, processess or
products. This differs from marginal costing where fixed costs are excluded.
Operating Costing: It is used in the
case of concerns rendering services like transport. Ex: Supply of water, retail
trade, etc...
Costing: Cost accounting is
the recording classifying the expenditure for the determination of the costs of
products.For thepurpuses of control of the costs.
Rectification of
Errors:
Errors that occur while preparing accounting statements are rectified by
replacing it by the correct one.
Errors
like: Errors of posting, Errors of accounting etc…
Variance Analasys: The deviations
between standard costs, profits or sales and actual costs. Profits or sales are
known as variances.
Types of variances
1:
Material Variances
2:
Labour Variances
3:
Cost Variances
4:
Sales or ProfitVariances
General Reserves: These reserves
which are not created for any specific purpose and are available for any future
contingency or expansion of the business. General Reserve is
a Reserve which is created to meet any future unknown liability. It can be
utilized as dividend.
SpecificReserves: These reserves
which are created for a specific purpose and can be utilized only for that
purpose.
Ex: Dividend Equilisation Reserve
Debenture Redemption Reserve
Provisions: There are many
risks and uncertainities in business. In order to protect from risks and
uncertainities, it is necessary to provisions and reserves in every business.
Reserve: Reserves are amounts
appropriated out of profits which are not intended to meet any liability,
contingency, commitment in the value of assets known to exist at the date of
the B/S.
Creation of the reserve is to increase the
workingcapital in the business and strengthen its financial position. Some
times it is invested to purchase out side securities then it is called reserve
fund.
Types:
1: Capital Reserve: Profits in the
nature of capital or a profit in the form of capital nature.Capital reserve is
the amount received on capital items .It is created out of capital profits like premium on
the issue of shares, profits and sale of assets, etc…This reserve is not
available to distribute as dividend among shareholders. Ex: Share Premium,
Share Forfeiture.
2: Revenue Reserve: Any Reserve which is available for
distribution as dividend to the shareholders is called Revenue Reserve.
Capital Profits: Capital profits are profits
realized on sale of fixed assets or on discount of investments. They may be
distributed by way of dividend.
Revenue Profits: Revenue profits are the
profits earned by the company through its ordinary activities
Provisions V/S Reserves:
Provisions are created for some specific object and it
must be utilised for that object for which it is created.
Reserve is created for any future liability or loss.
Provision is made because of legal necessity but
creating a Reserve is a matter of financial strength.
Provision must be charged to profit and loss a/c
before calculating the net profit or loss but Reserve can be made only when
there is profit.
Provisions reduce the net profit and are not invested
in outside securities Reserve amount can invested in outside securities.
Goodwill: It is the value of reputation of a firm in respect of the
profits expected in future over and above the normal profits earned by other
similar firms belonging to the same industry.
Factors affecting goodwill: Profitability of
Business, Brand Equity, Product of Service Quality, Customer Acceptance,
Business Location and Access etc.
VALUATION OF GOODWILL Methods:
Average profits method
Super profits method
Capitalisatioin method
Average Method: In this method which takes
into account the average profits for the past few years and the value of
goodwill is calculating as some years purchase of this amount.
Super Profit Method: The excess of actual
profits over the normal profit is known as super profit. A business unit may
posses some advantages which enable it to earn extra profits over and above the
amount that would be normally earned, if the same capital is employed elsewhere
in a business of same risk class.
Annuity Method: Under this method goodwill
is calculated by taking the average super profit as the value of an annuity
over a certain number of years. An annuity is a series of equal periodic
payments occurring at equal intervals of time. In other words goodwill is
calculated by finding the present value of an annuity discounted at a given
rate of interest which is usually the normal rate of return.
Depreciation: It is a perminant
continuing and gradual shrinkage in the book value of a fixed asset.
Methods:
1. Fixed Instalment method or Stright line method
Dep. = Cost price – Scrap value/Estimated life of
asset.
2. Diminishing Balance method: Under this metod, depreciation is calculated at a certain percentage
each year on the balance of the asset, which is bought forward from the
previous year.
3. Annuity method: Under this method
amount spent on the purchase of an asset is regarded as an investment which is
assumed to earn interest at a certain rate. Every year the asset a/c is debited
with the amount of interest and credited with the amount of depreciation.
EOQ: The quantity of material to be ordered at one time
is known EOQ. It is fixed where minimum cost of ordering and carryiny stock.
Key Factor: The factor which sets a limit to the
activity is known as key factor which influence budgets.
Key Factor = Contribution/Profitability
Profitability =Contribution/Key Factor
Sinking Fund: It is created to
have ready money after a particular period either for the replacement of an
asset or for the repayment of a liability. Every year some amount is charged
from the P&L a/c and is invested in outside securities with the idea, that
at the end of the stipulated period, money will be equal to the amount of an
asset.
Revaluation Account: It records the
effect of revaluation of assets and liabilities. It is prepared to determine
the net profit or loss on revaluation. It is prepared at the time of
reconsititution of partnership or retirement or death of partner.
Realisation Account: It records the realisation
of various assets and payments of various liabilities. It is prepared to
determine the net P&L on realisation.
Leverage: - It arises from
the presence of fixed cost in a firm capitalstructure.
Generally
leverage refers to a relationship between two interrelated variables.
These
leverages are classified into three types.
Operating
leverage
Financial
Leverage.
Combined
leverage or total leverage.
Operating Leverage: It arises from
fixed operating costs (fixed costs other than the financing costs) such as
depreciation, shares, advertising expenditures and property taxes.
When
a firm has fixed operatingcosts, a change in 1% in sales results in a change of
more than 1% in EBIT
%change
in EBIT
% change in sales
The
operaying leverage at any level of sales is called degree.
Degree
of operatingLeverage= Contribution/EBIT
Significance: It tells the
impact of changes in sales on operating income.
If
operating leverage is high it automatically means that the break- even point
would also be reached at a highlevel of sales.
Financial Leverage: It arises from the use of fixed financing
costs such as interest. When a firm has fixed cost financing. A change in 1% in
E.B.I.T results in a change of more than 1% in earnings per share.
F.L
=% change in EPS / % change in EBIT
Degree
of Financial leverage= EBIT/ Profit before Tax (EBT)
Significance: It is double edged
sword. A high F.L means high fixed financial costs and high financial risks.
Combined Leverage: It is useful for
to know about the overall risk or total risk of the firm. i.e, operating risk
as well as financial risk.
C.L=
O.L*F.L
=
%Change in EPS / % Change in Sales
Degree
of C.L =Contribution / EBT
A
high O.L and a high F.L combination is very risky. A high O.L and a low F.L
indiacate that the management is careful since the higher amount of risk
involved in high operating leverage has been sought to be balanced by low F.L
A
more preferable situation would be to have a low O.L and a F.L.
Working Capital: There are two
types of working capital: gross working capital and net working capital. Gross
working capital is the total of current assets. Net working capital is the
difference between the total of current assets and the total of current
liabilities.
Working Capital
Cycle:
It
refers to the length of time between the firms paying cash for materials,
etc.., entering into the production process/ stock and the inflow of cash from
debtors (sales)
Cash Raw
meterials WIP Stock
Labour
overhead
Debtors
Capital Budgeting: Process of
analyzing, appraising, and selection of investment on long term projects
whose returns are expected to extend beyond one year is known as capital
budgeting.
Methods of Capital
Budgeting:
Traditional
Methods
Payback
period method
Average
rate of return (ARR)
Discounted
Cash Flow Methods or Sophisticated methods
Net
present value (NPV)
Internal
rate of return (IRR)
Profitability
index
Pay back period: Required time to
reach actual investment is known as payback period.
=
Investment / Cash flow
ARR: It means the
average annual yield on the project.
=
avg. income / avg. investment
Or
=
(Sum of income / no. of years) / (Total investment + Scrap value) / 2)
NPV: The best method
for the evaluation of an investment proposal is the NPV or discounted cash flow
technique. This metod takes into account the time value of money.
The
sum of the present values of all the cash inflows less the sum of the present
value of all the cash outflows associated with the proposal.
NPV
= Sum of present value of future cash flows – Investment
IRR: It is that rate at
which the sum total of cash inflows aftrer discounting equals to the discounted
cash outflows. The internal rate of return of a project is the discount rate
which makes net present value of the project equal to zero.
Profitability
Index: One of the methods comparing such proposals is to workout what is known
as the ‘Desirability Factor’ or ‘Profitability Index’.
In
general terms a project is acceptable if its profitability index value is
greater than 1.
Derivatives: A derivative is a
security whose price ultimately depends on that of another asset.
Derivative
means a contact of an agreement.
Types of
Derivatives:
1.
Forward Contracts
2.
Futures
3.
Options
4.
Swaps.
1. Forward
Contracts:
- It is a private contract between two parties.
An
agreement between two parties to exchange an asset for a price that is
specified todays. These are settled at end of contract.
2. Future
contracts:
- It is an Agreement to buy or sell an asset it is at a certain time in the
future for a certain price. Futures will be traded in exchanges only.These is
settled daily.
Futures
are four types:
a. Commodity
Futures:
Wheat, Soyo, Tea, Corn etc..,.
b. Financial
Futures:
Treasury bills, Debentures, Equity Shares, bonds, etc..,
c. Currency
Futures:
Major convertible Currencies like Dollars, Founds, Yens, and Euros.
d. Index Futures: Underline assets
are famous stock market indicies. NewYork Stock Exchange.
3. Options: An option gives its Owner the
right to buy or sell an Underlying asset on or before a given date at a fixed
price.
There
can be as may different option contracts as the number of items to buy or sell
they are,
Stock
options, Commodity options, Foreign exchange options and interest rate options
are traded on and off organized exchanges across the globe.
Options
belong to a broader class of assets called Contingent claims.
The
option to buy is a call option.The option to sell is a PutOption.
The
option holder is the buyer of the option and the option writer is the seller of
the option.
The
fixed price at which the option holder can buy or sell the underlying asset is
called the exercise price or Striking price.
A
European option can be excercised only on the expiration date where as an
American option can be excercised on or before the expiration date.
Options
traded on an exchange are called exchange traded option and options not traded
on an exchange are called over-the-counter optios.
When
stock price (S1) <= Exercise price (E1) the call is said to be out of money
and is worthless.
When
S1>E1 the call is said to be in the money and its value is S1-E1.
4. Swaps: Swaps are private agreements between two
companies to exchange casflows in the future according to a prearranged
formula.
So
this can be regarded as portfolios of forward contracts.
Types of swaps:
1:
Interest rate Swaps
2:
Currency Swaps.
1. Interest rate
Swaps: The most common type of interest rate swap is
‘Plain Venilla ‘.
Normal
life of swap is 2 to 15 Years.
It
is a transaction involving an exchange of one stream of interest obligations
for another. Typically, it results in an exchange of ficed rate interest
payments for floating rate interest payments.
2. Currency Swaps: - Another type of
Swap is known as Currency as Currency Swap. This involves exchanging principal
amount and fixed rates interest payments on a loan in one currency for
principal and fixed rate interest payments on an approximately equalant loan in
another currency. Like interest rate swaps currency swars can be motivated by comparative
advantage.
Warrants: Options generally
have lives of upto one year. The majority of options traded on exchanges have
maximum maturity of nine months. Longer dated options are called warrants and
are generally traded over- the- counter.
American
Depository Receipts (ADR): It is a dollar denominated negotiable instruments or
certificate. It represents non-US companies publicly traded equity. It was
devised into late 1920’s. To help American investors to invest in overseas
securities and to assist non –US companies wishing to have their stock traded
in the American markets. These are listed in American stock market or
exchanges.
Global DepositoryReceipts
(GDR):
GDR’s are essentially those instruments which posseses the certain number of
underline shares in the custodial domestic bank of the company i.e., GDR is a
negotiable instrument in the form of depository receipt or certificate created
by the overseas depository bank out side India and issued to non-resident
investors against the issue of ordinary share or foreign currency convertible
bonds of the issuing company. GDR’s are entitled to dividends and voting rights
since the date of its issue.
Capital
account and Current account: The capital account of international purchase or
sale of assets. The assets include any form which wealth may be held. Money
held as cash or in the form of bank deposits, shares, debentures, debt
instruments, real estate, land, antiques, etc…
The
current account records all income related flows. These flows could arise on account
of trade in goods and services and transfer payment among countries. A net
outflow after taking all entries in current account is a current account
deficit. Govt. expenditure and tax revenues do not fall in the current account.
Dividend Yield: It gives the
relationship between the current price of a stock and the dividend paid by its
issuing company during the last 12 months. It is caliculated by aggregating
past year’s dividend and dividing it by the current stock price.
Historically,
a higher dividend yield has been considered to be desirable among investors. A
high dividend yield is considered to be evidence that a stock is under priced,
where as a low dividend yield is considered evidence that a stock is over
priced.
Bridge Financing: It refers to loans
taken by a company normally from commercial banks for a short period, pending
disbursement of loans sanctioned by financial institutions. Generally, the rate
of interest on bridge finance is higher as compared with term loans.
Shares and Mutual Funds
Company: Sec.3 (1) of the
Companys act, 1956 defines a ‘company’.
Company means a company formed and registered under this Act or existing
company”.
Public
Company: A corporate body other than a private company. In the public company,
there is no upperlimit on the number of share holders and no restriction on
transfer of shares.
Private Company: A corporate entity
in which limits the number of its members to 200. Does not invite public to
subscribe to its capital and restricts the member’s right to transfer shares.
Liquidity: A firm’s liquidity refers to its ability to
meet its obligations in the short run.
An asset’s liquidity refers to how quickly it can he sold at a
reasonable price.
Cost of Capital:
The minimum rate of the firm must earn on its investments in order to satisfy
the expectations of investors who provide the funds to the firm.
Capital Structure: The composition
of a firm’s financing consisting of equity, preference, and debt.
Beta: Market Risk – Systematic Risk
Stand Demat: Industry Risk – Unsystematic Risk
Annual Report: The report issued
annually by a company to its shareholders. It primarily contains financial
statements. In addition, it represents the management’s view of the operations
of the previous year and the prospects for future.
Proxy: The authorization
given by one person to another to vote on his behalf in the shareholders
meeting.
Joint Venture: It is a temporary
partenership and comes to an end after the compleation of a particular venture.
No limit in its.
Insolvency: In case a debtor
is not in a position to pay his debts in full, a petition can be filled by the
debtor himself or by any creditors to get the debtor declared as an insolvent.
Long
Term Debt: The debt which is payable after one year is known as long term debt.
Short
Term Debt: The debt which is payable with in one year is known as short term
debt.
Amortisation: This term is used
in two senses 1. Repayment of loan over a period of time 2.Write-off of an
expenditure (like issue cost of shares) over a period of time.
Arbitrage: A simultaneous
purchase and sale of security or currency in different markets to derive
benefit from price differential.
Stock: The Stock of a
company when fully paid they may be converted into stock.
Share
Premium: Excess of issue price over the face value is called as share premium.
Equity Capital: It represents
ownership capital, as equity shareholders collectively own the company. They
enjoy the rewards and bear the risks of ownership. They will have the voting
rights.
Authorized Capital: The amount of
capital that a company can potentially issue, as per its memorandum, represents
the authorized capital.
Issued Capital: The amount offered
by the company to the investors.
Subscribed capital: The part of issued
capital which has been subscribed to by the investors
Paid-up Capital: The actual amount
paid up by the investors.
Typically
the issued, subscribed, paid-up capitals are the same.
Par Value: The par value of
an equity share is the value stated in the memorandum and written on the share
scrip. The par value of equity share is generally Rs.10 or Rs.100.
Issued price: It is the price at which the equity share is
issued often, the issue price is higher than the Par Value
Book Value: The book value of an equity share is
=
Paid – up equity Capital + Reserve and Surplus / No. Of outstanding shares
equity
Market Value (M.V): The Market Value
of an equity share is the price at which it is traded in the market.
Preference Capital: It represents a
hybrid form of financing it par takes some characteristics of equity and some
attributes of debentures. It resembles equity in the following ways
Preference
dividend is payable only out of distributable profits.
Preference
dividend is not an obligatory payment.
Preference
dividend is not a tax –deductible payment.
Preference
capital is similar to debentures in several ways.
The
dividend rate of Preference Capital is fixed.
Preference
Capital is redeemable in nature.
Preference
Shareholders do not normally enjoy the right to vote.
Debenture: Debenture is a
document bearing the company common seal. Which creates or acknowledges a debt?
It need not be secured (It may be secured or It may not be secured). It does
not carry any voting rights, but it carries interest.Debenture holders
are creditors of company.
Stock Split: The dividing of a company’s existing
stock into multiple stocks. When the Par
Value of share is reduced and the number of share is increased.
Calls-in-Arrears: It means that
amount which is not yet been paid by share holders till the last day for the
payment.
Calls-in-advance: When a shareholder
pays with an instalment in respect of call yet to make the amount so received
is known as calls-in-advance. Calls-in-advance can be accepted by a company
when it is authorized by the articles.
Forfeiture of
share:
It means the cancellation or allotment of unpaid shareholders.
Forfeiture
and reissue of shares allotted on pro – rata basis in case of over
subscription.
Prospectus: Inviting of the
public for subscribing on shares or debentures of the company. It is issued by
the public companies.
The
amount must be subscribed with in 120 days from the date of prospects.
Simple Interest: It is the interest
paid only on the principal amount borrowed. No interest is paid on the interest
accured during the term of the loan.
Compound Interest: It means that, the
interest will include interest caliculated on interest.
Time
Value of Money: Money has time value. A rupee today is more valuable than a
rupee a year hence. The relation between value of a rupee today and value of a
rupee in future is known as “Time Value of Money”.
NAV: Net Asset Value
of the fund is the cumulative market value of the fund net of its liabilities.
NAV per unit is simply the net value of assets divided by the number of units
out standing. Buying and Selling into funds is done on the basis of NAV related
prices. The NAV of a mutual fund are required to be published in news papers.
The NAV of an open end scheme should be disclosed ona daily basis and the NAV
of a closed end scheme should be disclosed atleast on a weekly basis.
Financial markets: The financial
markets can broadly be divided into money and capital market.
Money Market: Money market is a
market for debt securities that pay off in the short term usually less than one
year, for example the market for 90-days treasury bills. This market
encompasses the trading and issuance of short term non equity debt instruments
including treasury bills, commercial papers, banker’s acceptance, certificates
of deposits, etc.
Capital Market: Capital market is
a market for long-term debt and equity shares. In this market, the capital
funds comprising of both equity and debt are issued and traded. This also
includes private placement sources of debt and equity as well as organized
markets like stock exchanges. Capital market can be further divided into
primary and secondary markets.
Primary Market: It provides the
channel for sale of new securities. Primary Market provides opportunity to
issuers of securities; Government as well as corporate, to raise resources to
meet their requirements of investment and/or discharge some obligation.
They
may issue the securities at face value, or at a discount/premium and these
securities may take a variety of forms such as equity, debt etc. They may issue
the securities in domestic market and/or international market.
Secondary Market: It refers to a
market where securities are traded after being initially offered to the public
in the primary market and/or listed on the stock exchange. Majority of the
trading is done in the secondary market. It comprises of equity markets and the
debt markets.
Difference between the primary market and the
secondary market: In the primary market, securities are offered to public for
subscription for the purpose of raising capital or fund. Secondary market is an
equity trading avenue in which already existing/pre- issued securities are
traded amongst investors. Secondary market could be either auction or dealer
market. While stock exchange is the part of an auction market, Over-the-Counter
(OTC) is a part of the dealer market.
SEBI and its role: The SEBI is the
regulatory authority established under Section 3 of SEBI Act 1992 to protect
the interests of the investors in securities and to promote the development of,
and to regulate, the securities market and for matters connected therewith and
incidental thereto.
Portfolio: A portfolio is a
combination of investment assets mixed and matched for the purpose of
investor’s goal.
Portfolio Management: Classification
of assets get aims at minimizing the total risk while taking the maximum
returns is called portfolio management. It refers to diversification of assets
which means not keeping all eggs in the same basket.
Market
Capitalisation:
The market value of a quoted company, which is caliculated by multiplying its
current share price (market price) by the number of shares in issue, is called
as market capitalization.
Sensex
An abbreviation of the Bombay Exchange Sensitive
Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE). It is
composed of 30 of the largest and most actively-traded stocks on the BSE.
Initially compiled in 1986, the Sensex is the oldest stock index in India.
The index is calculated based on a free-float
capitalization method when weighting the effect of a company on the index. This
is a variation of the market cap method, but instead of using a company's
outstanding shares it uses its float, or shares that are readily
available for trading. The free-float method, therefore, does not include
restricted stocks, such as those held by company insiders that can't be
readily sold.
Book Building
Process:
It is basically a process used in IPOs for efficient price discovery. It is a
mechanism where, during the period for which the IPO is open, bids are
collected from investors at various prices, which are above or equal to the
floor price. The offer price is determined after the bid closing date.
Cut off Price: In Book building
issue, the issuer is required to indicate either the price band or a floor
price in the red herring prospectus. The actual discovered issue price can be
any price in the price band or any price above the floor price. This issue
price is called “Cut off price”. This is decided by the issuer and LM after considering
the book and investors’ appetite for the stock. SEBI (DIP) guidelines permit
only retail individual investors to have an option of applying at cut off
price.
Bluechip
Stock: Stock of a recognized, well established and financially
sound company.
Penny
Stock: Penny stocks are any stock that trades at very low
prices, but subject to extremely high risk.
Debentures: Companies raise
substantial amount of longterm funds through the issue of debentures. The
amount to be raised by way of loan from the public is divided into small units
called debentures. Debenture may be defined as written instrument acknowledging
a debt issued under the seal of company containing provisions regarding the
payment of interest, repayment of principal sum, and charge on the assets of
the company etc…
Debt Securitization: It is a mode of financing,
where in securities are issued on the basis of package of assets (called
pooled). This involves the following process of activities:
v
Organizing function
v
Pooling function
v
Securitization function
Large
Cap / Big Cap: Companies
having a large market capitalization
For
example, In US companies with market capitalization value of more than $10
billion and in the Indian context companies market capitalization of above Rs.
20000 crore are considered large caps.
Mid
Cap: Companies having a mid sized market capitalization, for
example, In US companies with market capitalization between $2 billion and $10
billion, and in the Indian context companies market capitalization between Rs.
5000 crore to Rs. 20000 crore are considered mid caps.
Small
Cap: Refers
to stocks with a relatively small market capitalization, i.e. lessthan $2
billion in US or lessthan Rs.5000 crore in India.
A company, who is buying more than 51% of shares
from another company, is called holding company. A company shall be deemed to
be a subsidiary of another company, if that other company,
v
Controls the composition of its Board of Directors.
v
Holds more than 50% of the voting power or paid up
capital in the other company.
v
Is the subsidiary any other company, which is the
subsidiary of holding company.
Subsidiary Company: A company who is selling
more than 51% of their shares to another company is called subsidiary company.The company
controlled by holding company is known as the Subsidary Company.
Government Company : A Government Company is a
company in which not less than 51% of the paid up share capital of the company
is held by Central Government, or State Government, or partly by the by the
Central Government and partly by one or more State Governments.
Consolidated
Balance Sheet:
It is the b/s of the holding company and its subsidiary company taken together.
Partnership: Partnership means
an association between two or more persons who agree to carry the business and
to share profits and losses arising from it. "Section 464 of
the Companies Act, 2013 empowers the Center Government to prescribe
maximum number of partners in a firm but the number of partners so prescribed
cannot be more than 100.The Central Government has prescribed maximum number of
partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous)
Rules,2014.Thus, in effect, a partnership firm cannot have more than 50
members".
IPO: First time when a
company announces its shares to the public is called as an IPO. (Intial Public
Offer)
A Further public
offering (FPO):
It is when an already listed company makes either a fresh issue of securities
to the public or an offer for sale to the public, through an offer document. An
offer for sale in such scenario is allowed only if it is made to satisfy
listing or continuous listing obligations.
Rights Issue (RI): It is when a
listed company which proposes to issue fresh securities to its shareholders as
on a record date. The rights are normally offered in a particular ratio to the
number of securities held prior to the issue.
Preferential Issue: It is an issue of
shares or of convertible securities by listed companies to a select group of
persons under sec.81 of the Indian companies act, 1956 which is neither a
rights issue nor a public issue.This is a faster way for a company to raise
equity capital.
Index: An index shows how
specified portfolios of share prices are moving in order to give an indication
of market trends. It is a basket of securities and the average price movement
of the basket of securities indicates the index movement, whether upward or
downwards.
Demat Account: Demat means de
materialized account. It is a separate account maintained for investments
(Shares, Securities, Debentures, and Bonds etc.). It gives information about
shares sought and sold, prices at which shares were bought and sold, shares
presently holding and amount held.
Dematerialisation: It is the process
by which physical certificates of an investor are converted to an equivalent
number of securities in electronic form and credited to the investor’s account
with his depository participant.
Bull
and Bear Market:
Bull market is where the prices go up and Bear market where the prices come
down.
Exchange
Rate:
It is a rate at which the currencies are bought and sold.
FOREX: The Foreign
Exchange Market is the place where currencies are traded. The overall FOREX
markets is the largest, most liquid market in the world with an average traded
value that exceeds $ 1.9 trillion per day and includes all of the currencies in
the world.It is open 24 hours a day, five days a week.
Mutual
Fund:
A mutual fund is a pool of money, collected from investors, and invested
according to certain investment objectives.
Asset
Management Company (AMC): A company set up under Indian company’s act, 1956
primarily for performing as the investment manager of mutual funds. It makes
investment decisions and manages mutual funds in accordance with the scheme
objectives, deed of trust and provisions of the investment management
agreement.
Back-End
Load:
A kind of sales charge incurred when investors redeem or sell shares of a fund.
Front-End Load: A kind of sales charge that is paid before
any amount gets invested into the mutual fund.
Off
Shore Funds:
The funds setup abroad to channalise foreign investment in the domestic capital
markets.
Under
Writer:
The organization that acts as the distributor of mutual funds share to broker
or dealers and investors.
Registrar: The institution
that maintains a registry of shareholders of a fund and their share ownership.
Normally the registrar also distributes dividends and provides periodic
statements to shareholders.
Trustee: A person or a
group of persons having an overall supervisory authority over the fund managers.
Bid
(or Redemption) Price: In newspaper listings, the pre-share price that a fund
will pay its shareholders when they sell back shares of a fund, usually the
same as the net asset value of the fund.
Schemes
according to Maturity Period:
A
mutual fund scheme can be classified into open-ended scheme or close-ended
scheme depending on its maturity period.
Open-ended
Fund/ Scheme
An
open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.
Close-ended
Fund/ Scheme
A
close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The
fund is open for subscription only during a specified period at the time of
launch of the scheme. Investors can invest in the scheme at the time of the
initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where the units are listed. In order to provide
an exit route to the investors, some close-ended funds give an option of
selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit
routes is provided to the investor i.e. either repurchase facility or through
listing on stock exchanges. These mutual funds schemes disclose NAV generally
on weekly basis.
Schemes
according to Investment Objective:
A
scheme can also be classified as growth scheme, income scheme, or balanced
scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly
as follows:
Growth
/ Equity Oriented Scheme
The
aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities.
Such funds have comparatively high risks. These schemes provide different
options to the investors like dividend option, capital appreciation, etc. and
the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds
also allow the investors to change the options at a later date. Growth schemes
are good for investors having a long-term outlook seeking appreciation over a
period of time.
Income
/ Debt Oriented Scheme
The
aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are
less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation
are also limited in such funds. The NAVs of such funds are affected because
of change in interest rates in the country. If the interest rates fall, NAVs of such funds are
likely to increase in the short run and vice versa. However, long term
investors may not bother about these fluctuations.
Balanced
Fund
The
aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking
for moderate growth. They generally invest 40-60% in equity and debt
instruments. These funds are also affected because of fluctuations in share
prices in the stock markets. However, NAVs of such funds are likely to be less
volatile compared to pure equity funds.
Money
Market or Liquid Fund
These
funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively
in safer short-term instruments such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money, government securities,
etc. Returns on these schemes fluctuate much less compared to other funds.
These funds are appropriate for corporate and individual investors as a means
to park their surplus funds for short periods.
Gilt
Fund
These
funds invest exclusively in government securities. Government securities have
no default risk. NAVs
of these schemes also fluctuate due to change in interest rates and other
economic factors as is the case with income or debt oriented schemes.
Index
Funds
Index
Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities
in the same weightage comprising of an
index. NAVs of such schemes
would rise or fall in accordance with the rise or fall in the index, though not
exactly by the same percentage due to some factors known as "tracking
error" in technical terms. Necessary disclosures in this regard are made
in the offer document of the mutual fund scheme.
There
are also exchange traded index funds launched by the mutual funds which are
traded on the stock exchanges.
Earning per share (EPS): It is a
financial ratio that gives the information regarding earing available to each
equity share. It is very important financial ratio for assessing the state of
market price of share. The EPS statement is applicable to the enterprise whose
equity shares are listed in stock exchange.
Types of EPS:
Basic EPS ( with normal shares)
Diluted EPS (with normal shares and convertible
shares)
EPS Statement :
Sales ****
Less: variable cost ****
Contribution ***
Less:
Fixed cost
****
EBIT *****
Less:
Interest ***
EBT
****
Less:
Tax
****
Earnimgs ****
Less: preference dividend ****
Earnings
available to equity
Share
holders (A)
*****
EPS=A/
No of outstanding Shares
EBIT
and Operating Income are same
The
higher the EPS, the better is the performance of the company.
Cash Flow Statement: It is a statement
which shows inflows (receipts) and outflows (payments) of cash and its
equivalents in an enterprise during a specified period of time. According to
the revised accounting standard 3, an enterprise prepares a cash flow statement
and should present it for each period for which financial statements are
presented.
Funds Flow
Statement:
Fund means the net working capital. Funds flow statement is a statement which
lists first all the sources of funds and then all the applications of funds
that have taken place in a business enterprise during the particular period of
time for which the statement has been prepared. The statement finally shows the
net increase or net decrease in the working capital that has taken place over
the period of time.
Float:
The difference between the available balance and the ledger balance is referred
to as the float.
Collection
Float: The amount of cheque deposited by the firm in the bank
but not cleared.
Payment
Float: The amount of cheques issued by the firm but not paid
for by the bank.
Working Cycle or Operating Cycle: There is a
complete operating cycle is the time duration required to convert cash in to
cash cycle from cash to cash
v
Conversion of cash into raw material
v
Conversion of raw material into work in progress
v
v
Conversion
of work in progress into finished goods
v
Conversion of finished goods into debtors and
v
Conversion of debtors into cash
No. of Operating Cycle = No. of Days in a
year/Operating Cycle Period
The
operating cycle of a firm begins with the acquisition of raw material and ends
with the collection of receivables.
Objective of Working Capital Management: Optimum Investment in current assets reducing current liabilities.
Working Capital Management: Decisions are to
be taken for effective financing of current assets required for day to day
running of the organization. Working Capital Management refers to the procedures
and policies required to manage the working capital.
Marginal Costing:
Sales
– VaribleCost=FixedCost ± Profit/Loss
Contribution=
Sales –VaribleCost
Contribution=
FixedCost ± Profit/Loss
P
/ V Ratio= (Contribution / Sales)*100
Per
1 unit information is given,
P
/ V Ratio = (Contribution per Unit / Sales per Unit)*100
Two
years information is given,
P
/ V Ratio= (Change in Profit / Change in Sales) * 100
Through
Sales, P / V Ratio
Contribution
=Sales * P / v Ratio
Through
P / V Ratio, Contribution
Sales
= Contribution / P / VRatio
Break
Even Point (B.E.P)
IN
Value = (Fixed Cost) / (P / v Ratio) OR (Fixed Cost / Contribution) * Sales
In
Units = Fixed Cost / Contribution OR Fixed Cost / (SalesPrice per Unit – V.C
per Unit)
Margin
of Safety = Total Sales – Sales at B.E.P (OR) Profit / PV Ratio
Sales
at desired profit (in units)
=
FixedCost+ DesiredProfit / Contribution per Unit
Sales
at desired profit (in Value)
=
FixedCost+ DesiredProfit / PV ratio (OR) Contribution / PV Ratio
RATIO ANALYSIS
A
ratio analysis is a mathematical expression. It is the quantitative relation
between two. It is the technique of interpretation of financial statements with
the help of meaningful ratios. Ratios may be used for comparison in any of the
following ways.
Comparison
of a firm its own performance in the past.
Comparison
of a firm with the another firm in the industry
Comparison
of a firm with the industry as a whole
TYPES OF RATIOS
Liquidity
ratio
Activity
ratio
Leverage
ratio
profitability
ratio
1.
Liquidity ratio: These are ratios
which measure the short term financial position of a firm.
i. Current ratio: It is also called
as working capital ratio. The current ratio measures the ability of the firm to
meet its currnt liabilities-current assets get converted into cash during the
operating cycle of the firm and provide the funds needed to pay current
liabilities. i.e
Current
assets
= Current liabilities
Ideal
ratio is 2:1
ii. Quick or Acid
test Ratio:
It tells about the firm’s liquidity position. It is a fairly stringent measure
of liquidity.
=Quick
assets/Current Liabilities
Ideal
ratio is 1:1
Quick
Assets =Current Assets – Stock - Prepaid Expenses
iii. Absolute
Liquid Ratio:
=Absolute
Liquid Assets/Current Liabilities
Absolute
Liquid assets=Cash + Bank + Marketable Securities.
2.
Activity Ratios or Current Assets
management or Efficiency Ratios:
These
ratios measure the efficiency or effectiveness of the firm in managing its
resources or assets
Stock or Inventory
Turnover Ratio:
It indicates the number of times the stock has turned over into sales in a
year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn
over ratio indicates that the stocks are fast moving and get converted into
sales quickly.
=
Cost of goods Sold/ Avg. Inventory
Debtors Turnover
Ratio:
It expresses the relationship between debtors and sales.
=Credit
Sales /Average Debtors
Creditors Turnover
Ratio:
It expresses the relationship between creditors and purchases.
=Credit
Purchases /Average Creditors
Fixed Assets
Turnover Ratio: A
high fixed asset turn over ratio indicates better utilization of the firm fixed
assets. A ratio of around 5 is considered ideal.
=
Net Sales / Fixed Assets
Working Capital
Turnover Ratio:
A high working capital turn over ratio indicates efficiency utilization of the
firm’s funds.
=COGS/Working
Capital
=Working
capital=current assets-current liabilities
3.
Leverage Ratio: These ratios are
mainly calculated to know the long term solvency position of the company.
Debt Equity Ratio: The debt-equity
ratio shows the relative contributions of creditors and owners.
=
outsiders fund/Share holders fund
Ideal
ratios 2:1
Proprietary ratio
or Equity ratio:
It expresses the relationship between networth and total assets. A high
proprietary ratio is indicativeof strong financial position of the business.
=Share
holders funds/Total Assets
=
(Equity Capital +Preference capital +Reserves – Fictitious assets) / Total
Assets
Fixed Assets to net
worth Ratio:
This ratio indicates the mode of financing the fixed assets. The ideal ratio is
0.67
=Fixed
Assets (After Depreciation.)/Shareholder Fund
4.
Profitability Ratios: Profitability ratios measure the
profitability of a concern generally. They are calculated either in relation to
sales or in relation to investment.
Return on Capital
Employed or Return on Investment (ROI): This ratio reveals the earning capacity of
the capital employed in the business.
=PBIT
/Capital Employed
Return on
Proprietors Fund / Earning Ratio:
Earn on Net Worth
=Net
Profit (After tax)/Proprietors Fund
Return on Ordinary
shareholders Equity or Return on Equity Capital: It expresses the
return earned by the equity shareholders on their investment.
=Net
Profit after tax and Dividend / Proprietors fund or Paid up equity Capital
Price Earning
Ratio:
It expresses the relationship between marketprice of share on a company and the
earnings per share of that company.
=MPS
(Market Price per Share) / EPS
Earning Price
Ratio/ Earning Yield:
=
EPS / MPS
EPS= Net Profit (After
tax and Interest) / No. Of Outstanding Shares.
Dividend Yield
ratio:
It expresses the relationship between dividend earned per share to earnings per
share.
=
Dividend per share (DPS) / Market
value per share
Dividend pay-out
ratio:
It is the ratio of dividend per share to earning per share.
=
DPS / EPS
DPS: It is the amount
of the dividend payable to the holder of one equity share. =Dividend paid to
ordinary shareholders / No. of
ordinary shares
C.G.S=Sales-
G.P
G.P=
Sales – C.G.S
G.P.Ratio
=G.P/Net sales*100
Net Sales= Gross Sales –
Return inward- Cash discount allowed
Net profit ratio=Net Profit/ Net
Sales*100
Operating Profit
ratio=O.P/Net
Sales*100
Interest Coverage
Ratio=
Net Profit (Before Tax & Interest) / Fixed Interest Classes
Return on Investment (ROI): It reveals
the earning capacity of the capital employed in the business. It is calculated
as,
EBIT/Capital employed.
The return on capital employed should be more than the
cost of capital employed.
Capital employed =EquityCapital+Preference
sharecapital+Reserves+Longterm loans and Debentures - Fictitious Assets – Non
OperatingAssets
al
is 'accretive to earnings', it means that the resulting PE ratio
(price/earnings) of the acquired company is less than the acquiring company.
Example: Company 'A' has earnings per share (EPS) of $1. The current share
price is $10. This gives a P/E ratio of 10 (current share price is 10 times the
EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A'
values 'B' at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit])
then the deal is accretive because company 'A' is effectively increasing its
EPS (because it now has more shares and it paid less for them compared with its
own share price).
ACCOUNTING AND
FINANCE TERMS
ABC Analysis: ABC Analysis is a method of inventory control. It
is popular system of inventory control. The item of inventory is generally
classified in to three types. These are:
A : Usage value is Maximum and number of items is
Minimum.
B: Usage value is Medium and number of items is
also medium.
C : Usage value is Lowest and number of items is
Highest.
Acceptance An undertaking by the drawee (who then
becomes the “acceptor”), of a Bill of Exchange to pay to the person presenting
the bill (called the holder in due course)
the face value of the bill on the due date.
Acceptance Form An acceptance is
made in the following form:
SIGHTED
AND ACCEPTED (Date) PAYABLE (Bank)
FOR
AND ON BEHALF OF (Authorised Signatory)
Acceptor: The person who accepts a Bill of Exchange
drawn on him/her. Until he accepts it, he is called the drawee. By accepting
the bill, the acceptor undertakes to pay the person presenting the bill, the
face value of the bill.
Acceptance Credit: A documentary
credit, which requires, amongst the documents
stipulated,
provision of a term bill of exchange. The bill is then generally accepted by
the bank on which it is drawn or discounted.
Accruals: If during the
course of a business certain charges are incurred but no invoice is received
then these charges are referred to as accruals (they 'accrue' or increase in
value). A typical example is interest payable on a loan where you have not yet
received a bank statement. These items (or an estimate of their value) should
still be included in the profit & loss account. When the real invoice is
received, an adjustment can be made to correct the estimate. Accruals can also
apply to the income side.
Accrued Expenses: The expenditure which is
incurred and the payment there of might or might not be paid.
Accrued Interest: The accrued
interest is to be added to the concerned income in the credit side of the
profit and loss account. The accrued interest is to be shown as an asset, Asset
side of Balance Sheet
Accrued Interest A/c Dr
Interest A/c
Accrued Income: means income earned, but
which is not due (no right to receive on this date). Earned during the current
accounting year but have not been actually received by the end of the same
year.
Ex: Interest on loan, Commission etc.
Outstanding Income: Income accrued and due but
was not receive.
Account payable an amount due for payment to a
supplier of goods or services, also described as a trade creditor.
Account receivable an amount
due from a customer, also described as a trade
debtor.
Accountancy firm a business partnership
(or possibly a limited company) in which the partners are qualified
accountants. The firm undertakes work for clients in respect of audit, accounts
preparation, tax and similar activities.
Accounting :the process of identifying, measuring and
communicating financial information about an entity to permit informed
judgements and decisions by users of the information.
Accounting equation :the
relationship between assets, liabilities and ownership interest.
Accounting period time period for which
financial statements are prepared (e.g. Month, quarter, year).
Accounting policies accounting
methods which have been judged by business enterprises to be most appropriate
to their circumstances and adopted by them for the purpose of preparing their
financial statements.
Accounting standards definitive statements of best practice issued by a body having
suitable authority. Indian Accounting Standard (abbreviated as
Ind-AS) is the Accounting standard adopted by companies
in India and issued under the supervision of Accounting
Standards Board (ASB) which was constituted as a body in the year
1977. ... MCA(ministry of corporate affairs) has to spell out the accounting
standards applicable for companies in India.
International Accounting Standards (IAS) are older accounting standards issued
by the International Accounting Standards Board (IASB), an
independent international standard-setting body based in London.
The IAS were replaced in 2001 by International
Financial Reporting Standards (IFRS).
Accruals basis the effects of transactions
and other events are recognised when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate
(see also matching).
Acid test the ratio of liquid assets to current liabilities.
Acquiree company that becomes controlled by another.
Acquirer company that obtains control of another.
Acquisition an acquisition takes place where one company –
the acquirer – acquires control of
another – the acquiree – usually
through purchase of shares.
Acquisition method production
of consolidated financial statements for
an acquisition. Administrative expenses costs of managing and running a
business.
Agency a relationship between a principal and an
agent. In the case of a limited liability company, the shareholder is the
principal and the director is the agent.
Agency theory a theoretical model,
developed by academics, to explain how the relationship between a principal and
an agent may have economic consequences.
After Date Payment of a
negotiable instrument, such as a bank draft, becomes due a specified number of
days after presentation of the draft.
Agent / Agency
Agreement An agent is an
independent person or legal entity that acts
on
behalf
of another (the “principal”).
Air Waybill / Air
Consignment Note
Document
which acknowledges receipt by an air transport
company
of goods dispatched by air. Normally completed in triplicate with a copy each
for the Consignor,Consignee and the Carrier. An Air Waybill is not a document
of title to goods in the same manner as a Bill of Lading.
Allocate to assign a whole item of cost, or of revenue,
to a simple cost centre, account or time period.
Amortisation process similar to depreciation, usually applied to
intangible fixed assets.
Annual report a document produced
each year by limited liability companies containing the accounting information
required by law. Larger companies also provide information and pictures of the
activities of the company. Annual Report is a report,
which will contain the all financial statements of the company and auditors
report and main opinions on performance of company.
Applicant Normally the buyer or importer who applies
(thus, the applicant), to a bank, for a documentary credit in favour of the
beneficiary, the seller or exporter.
Appreciation: A rise in the value
of a currency in terms of foreign currencies
or
gold.
Articles of association document
setting out the relative rights of shareholders in a limited liability company. This document represents rules and regulations of the company. It
defines duties, rights, and regulations of the company between themselves and
company.
Assets rights or other access to future economic
benefits controlled by an entity as a result of past transactions or events.
Associated company one company
exercises significant influence over another, falling short of complete
control.
Audit an audit is the independent examination of,
and expression of opinion on, financial statements of an entity.
Accrual method of
accounting:
Most businesses use the accrual method of accounting (because it is usually
required by law). When you issue an invoice on credit (ie. regardless of
whether it is paid or not), it is treated as a taxable supply on the date it
was issued for income tax purposes (or corporation tax for limited companies).
The same applies to bills received from suppliers. (This does not mean you pay
income tax immediately, just that it must be included in that year's profit and
loss account).
Accumulated
Depreciation Account:
This is an account held in the nominal ledger which holds the depreciation of a
fixed asset until the end of the asset's useful life (either because it has
been scrapped or sold). It is credited each year with that year's depreciation,
hence the balance increases (ie. accumulates) over a period of time. Each fixed
asset will have its own accumulated depreciation account.
Advanced
Corporation Tax (ACT - UK only - no longer in use): This is corporation
tax paid in advance when a limited company issues a dividend. ACT is then
deducted from the total corporation tax due when it has been calculated at year
end. ACT was abolished in April 1999.
Amortization: The depreciation
(or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a
fixed period of time. Example: if a loan of 12,000 is amortized over 1 year
with no interest, the monthly payments would be 1000 a month.that means
amortization is 1. The paying off of debt in regular installments
over a period of time.
2. The deduction of capital expenses over a
specific period of time (usually over the asset's life). More
specifically, this method measures the consumption of the value
of intangible assets, such as a patent or a copyright.
Annualize: To convert
anything into a yearly figure. Eg. if profits are reported as running at £10k a
quarter, then they would be £40k if annualized. If a credit card interest rate
was quoted as 1% a month, it would be annualized as 12%.
Appropriation
Account:
An account in the nominal ledger which shows how the net profits of a business
(usually a partnership, limited company or corporation) have been used.
Arrears: Bills which should
have been paid. For example, if you have forgotten to pay your last 3 months
rent, then you are said to be 3 months in arrears on your rent.
Assets: Assets represent
what a business owns or is due. Equipment, vehicles, buildings, creditors,
money in the bank, cash are all examples of the assets of a business. Typical
breakdown includes 'Fixed assets', 'Current assets' and 'non-current assets'.
Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to
cash, money in the bank, debtors etc. Non-current refers to any assets which do
not easily fit into the previous categories (such as Deferred expenditure).
At cost: The 'at cost'
price usually refers to the price originally paid for something, as opposed to,
say, the retail price.
Audit: The process of
checking every entry in a set of books to make sure they agree with the
original paperwork (eg. checking a journal's entries against the original
purchase and sales invoices).
Audit Trail: A list of
transactions in the order they occurred.
Bad debt it is known that a
credit customer (debtor) is unable
to pay the amount due.
Bad Debts Account: An account in the
nominal ledger to record the value of un-recoverable debts from customers. Real
bad debts or those that are likely to happen can be deducted as expenses
against tax liability (provided they refer specifically to a customer).
Bad Debts Reserve
Account:
An account used to record an estimate of bad debts for the year (usually as a
percentage of sales). This cannot be deducted as an expense against tax
liability.
Balance
Sheet: A summary of all the accounts of a business. Usually prepared at the end
of each financial year.
Balancing Charge: When a fixed asset
is sold or disposed of, any loss or gain on the asset can be reclaimed against
(or added to) any profits for income tax purposes. This is called a balancing
charge.
Bankrupt: If an individual
or unincorporated company has greater liabilities than it has assets, the
person or business can petition for, or be declared by its creditors, bankrupt.
In the case of a limited company or corporation in the same position, the term
used is insolvent.
Balance sheet a statement of the
financial position of an entity showing assets, liabilities and ownership
interest.
Bank facility an arrangement with
a bank to borrow money as required up to an agreed limit.
Bond the name sometimes
given to loan finance (more commonly in the usa).
Broker
(stockbroker) member
of a stock exchange who arranges purchase and sale of shares and may also
provide an information service giving buy/sell/hold recommendations.
Broker's report bulletin written by
a stockbroking firm for circulation to its clients, providing analysis and
guidance on companies as potential investments.
Business cycle period (usually 12
months) during which the peaks and troughs of activity of a business form a
pattern which is repeated on a regular basis.
Business entity a business which
exists independently of its owners.
Below the line: This term is applied to items
within a business which would not normally be associated with the everyday
running of a business.
Bill: A term typically
used to describe a purchase invoice (eg. an invoice from a supplier).
Bought Ledger: See Purchase
Ledger.
Burn Rate: The rate at which
a company spends its money. Example: if a company had cash reserves of $120m
and it was currently spending $10m a month, then you could say that at the
current 'burn rate' the company will run out of cash in 1 year.
Banker’s Acceptance A
Bill of Exchange accepted by a bank usually for the purpose of
financing
a sale of goods to or by the bank’s customer. The bill may be drawn by an
exporter on the importer’s bank and be sold on the open market at a discount.
Bank to Bank Payment A transfer of funds between remitter and
beneficiary via the
banking
system.
Barter The direct exchange of goods and/or
services for other goods and/or services without the use of money and without
the involvement of a third party.
Basis Points 100 basis points
are equal to 1%.
Beneficiary Normally the seller or exporter in whose
favour the documentary credit has been established.
Bid (buying)
Rate Exchange rate at
which foreign exchange dealers are prepared to
buy
foreign exchange in the market from other dealers, and at which potential
sellers are therefore able to sell foreign exchange to those dealers.
Bid / Tender
Bond Provides an
assurance of the intention of the party submitting a
tender
(i.e. the principal) to sign a contract if his tender is accepted.
Bill of Exchange Defined by the Bills of Exchange Act as:
“An
unconditional order in writing, addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on
demand, or at a fixed or determinable future time, a sum certain in money to or
to the order of, a specified person, or to bearer”.
A
bill is signed by the drawer and addressed to a drawee, who becomes the
acceptor by writing his name across the face of the bill. The person to whom
the bill is payable is referred to as the payee.
A
Bill of Exchange is a negotiable instrument.
Bill of Lading Receipt issued by a shipowner or his agent
incorporating a contract setting out the rights and obligations of a shipping
company in transporting goods by sea. It specifies the name of the ship, the
port and destination of the ship, the goods and the consignee. In some
instances, a Bill of Lading could cover goods transported by more than one
means e.g. sea, rail, etc.
A
Bill of Lading is not automatically a negotiable instrument, but it does
possess a certain similarity to a negotiable instrument insofar that it is drawn
“to the order” of the person named; it may be endorsed and transferred by
delivery thereby giving the transferee right to the goods. Delivery of the
goods is made upon the surrender of one valid “negotiable copy” of the bill of
lading fully endorsed. All other copies are then rendered void.
A
Bill of Lading is a document of title.
Bill of Lading
Guarantee A letter usually
from an importer to the shipping company in
which
the
importer undertakes to indemnify the shipping company against the consequences
of delivering goods without production of a Bill of Lading. The importers
letter of undertaking usually requires the prior endorsement or guarantee by
his bankers before it is acceptable to the shipping company who will then
release the goods - see Trade Guarantees.
Blank Endorsement An endorsement in blank specifies no endorsee and a
bill so
endorsed
becomes payable to bearer and may be negotiated by delivery.
When
a bill has been endorsed in blank, any holder may convert the blank endorsement
into a special endorsement by writing above the endorser’s signature a
direction to pay the bill to the order of himself, or some other person.
BOLERO Electronic platform for the transmission of
all trade documents developed by SWIFT and
TT Club as owners.
Bond Warrant The document of
title to goods being held in bond storage.
CAGR: (Compound Annual
Growth Rate) The year on year growth rate required to show the change in value
(of an investment) from its initial value to its final value. If a $1
investment was worth $1.52 over three years, the CAGR would be 15% [(1 x 1.15)
x 1.15 x 1.15]
Called up (share capital) the
company has called upon the shareholders who first bought the shares, to make
their payment in full.
Called-up Share
capital:
The value of unpaid (but issued shares) which a company has requested payment
for. See Paid-up Share capital.
Capital: An amount of
money put into the business (often by way of a loan) as opposed to money earned
by the business.
Capital an amount of
finance provided to enable a business to acquire assets and
sustain
its operations.
Capital expenditure
spending
on non-current (fixed) assets of a
business.
Capitalisation
issue issue
of shares to existing shareholders in proportion to shares already held. Raises
no new finance but changes the mix of share capital and reserves.
Cash cash on hand (such
as money held in a cash box or a safe) and deposits in a bank that may be
withdrawn on demand.
Cash equivalents short-term, highly
liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
Cash Against
Documents
(CAD) Indicates invoice amount to be paid by the
buyer/importer at sight on
presentation of relative commercial documents e.g. Bill of Lading, insurance
certificate etc.
Call A demand for payment under a loan or guarantee.
Case of Need The drawer of a
bill, and any endorser, may insert therein the name of a party to whom the
holder may resort in case of need,
i.e.
in case the bill is dishonoured by non-acceptance or non- payment.
Such
a party is called the referee in case of need.
Cash flow
projections statements
of cash expected to flow into the business and cash expected to flow out over a
particular period.
Cash flow statement
provides
information about changes in financial position in cash only.
Chairman the person who
chairs the meetings of the board of directors of a company (preferably not the
chief executive).
Chief executive the director in
charge of the day-to-day running of a company.
Certificate of Origin Certificate given by the exporter
certifying the origin of either the
materials
or production of goods being shipped.
Certificate of Inspection A document certifying the quality, quantity
and/or price of a given
shipment
of goods. May involve the buyer stipulating an independent inspection agency.
Charter Party A contract under
which a charterer agrees to rent/hire the use of a
ship
or part of a ship from a shipowner. The charterer will, in some cases, be
empowered to issue their own Bills of Lading, known as Charter Party Bills of
Lading, subject to the conditions of the original charter party contract.
CIF Cost, Insurance and Freight
Close season period during which
those who are 'insiders' to a listed company should not buy or sell shares.
Clean Bills Bills of Exchange
(drafts, cheques etc.) drawn payable overseas and which are not accompanied by
commercial documents.
Clean Bills of Lading A Bill of Lading indicating that the
goods were received in
apparent
good condition. A clean bill is one that contains no notations of defect,
damage or loss and signed by the carrier or it’s authorised representative or
agent.
Collar A simultaneous purchase and sale of an
option with different strike prices.
Collection of a Bill Where an exporter hands a Bill of Exchange,
which may be
accompanied
by documents, to his bank, together with instructions as to the manner in which
they are to be made available to the importer through a bank in the buyer’s
country.
Collecting Bank Is any bank, other
than the remitting bank, involved in processing
the
collection.
Commercial Invoice The basic document
of international trade containing a record of
the transaction between the seller (exporter) and buyer (importer) containing
description of goods, price, discounts, quantities and delivery and payment
terms.
Consignment This is a method of financing trade.
When goods are shipped on a
consignment
basis, related shipping documents are dispatched either directly to the
importer or through his bank, which will be instructed to deliver them, free of
payment, against a simple form of receipt undertaking payment when the
merchandise is sold, or within a specified time.
Payment
is usually made when the goods are sold, or within a specified time thereafter,
and title to the goods remains with the exporter until they are sold by the
consignee.
Del-credre Commission: It is extra
commission paid to bear the bad debts collection loss.
Consignee The intended receiver of a cargo shipment.
Consular Invoice A specifically
printed invoice which is completed by the exporter
and
presented to the Consul of the country of import for stamping and signature.
Correspondent Bank Formal
relationships which is established between an
overseas
bank
and a domestic bank to facilitate international banking transactions.
Cost and Freight (C & F) The seller/exporter of goods must pay the
cost and freight
necessary
to bring the goods to the named destination but the risk of loss or damage to
the goods, as well as of any cost increases, is transferred from the seller to
the buyer/importer when the goods pass the ships rail in the port of shipment.
Any insurance premium becomes the care of the buyer/importer – see Incoterms.
Countertrade Includes barter, buy-back,
counterpurchase, offset requirements,
and
swaps relating to exporters commitments to take products from the importers or
from their respective countries in full or part payment for their exports.
Cross Rate In calculating a
spot or future price between two currencies, reference to their respective
quotations in a third currency determines the cross rate.
Currency Option A Foreign Currency
Option gives the holder the right but not the
obligation,
to buy or sell a currency on or before a future date, at a specified price in
return for a premium.
Currency Swap A transaction in
which the two counterparties’ exchange specific
amounts
of two different currencies at the outset and repays over time according to a
predetermined rule which reflects interest rates and possibly amortisation of
principal. The payment flows in currency swaps, (in which payments are based on
fixed interest rates in each currency) are generally like those of spot and
forward currency transactions.
Customs Broker Licensed agent or
broker whose function is to handle the process
of
clearing goods though customs for importers.
Customs Duty Tax levied by the
government on goods crossing their borders,
usually
a tax imposed on imports.
Customs /
Forwarding Agent A
Customs Agent is one specialising in clearance of imports
through
local customs authorities.
A
Forwarding Agent is one specialising in arrangements covering the physical
movement of goods to overseas.
Both
tasks may be carried out by the one agent.
Commercial paper a method of
borrowing money from commercial institutions such as banks.
Companies act the companies act
1985 as modified by the companies act 1989. Legislation to control the
activities of limited liability companies.
Comparability qualitative
characteristic expected in financial statements, comparable within company and
between companies.
Conceptual
framework a
statement of principles providing generally accepted guidance for the
development of new reporting practices and for challenging and evaluating the
existing practices.
Conservatism see prudence. Sometimes used with a
stronger meaning of understating assets and overstating liabilities.
Consistency the measurement and
display of similar transactions and other events is carried out in a consistent
way throughout an entity within each accounting period and from one period to
the next, and also in a consistent way by different entities.
Consolidated
financial statements present
financial information about the group as a single reporting entity.
Contingent
liabilities obligations
that are not recognised in the balance sheet because they depend upon some
future event happening.
Convertible loan loan finance for a
business that is later converted into share
capital.
Corporate
governance the
system by which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies.
Corporate social
responsibility companies
integrate social and environmental concerns in their business operations and in
their interactions with stakeholders.
Corporation tax tax payable by
companies, based on the taxable profits of the period.
Cost of a non-current
asset is the cost of making it ready for use, cost of finished goods is cost of
bringing them to the present condition and location.
Coupon rate of interest
payable on a loan.
Credit (bookkeeping
system) entries
in the credit column of a ledger account represent increases in liabilities,
increases in ownership interest, revenue, or decreases in assets.
Credit (terms of
business) the
supplier agrees to allow the customer to make payment some time after the
delivery of the goods or services. Typical trade credit periods range from 30
to 60 days but each agreement is different.
Credit note a document sent to
a customer of a business cancelling the customer's debt to the business,
usually because the customer has returned defective goods or has received
inadequate service.
Credit purchase a business entity takes delivery of goods or
services and is allowed to make payment at a later date.
Credit sale a business entity sells goods or services and
allows the customer to make payment at a later date.
Creditor a person or
organisation to whom money is owed by the entity.
Current asset an asset that is
expected to be converted into cash within the trading cycle.
Current liability a liability which
satisfies any of the following criteria: (a) it is expected to be settled in
the entity's normal operating cycle; (b) it is held primarily for the purpose
of being traded; (c) it is due to be settled within 12 months after the balance
sheet date.
Current value a method of valuing
assets and liabilities which takes account of changing prices, as an
alternative to historical cost.
Customers'
collection period average
number of days credit taken by customers.
Capital account: A term usually
applied to the owner’s equity in the business.
Capital
Allowances (UK specific): The depreciation on a fixed asset is shown in the
Profit and Loss account, but is added back again for income tax purposes. In
order to be able to claim the depreciation against any profits the Inland
Revenue allow a proportion of the value of fixed assets to be claimed before
working out the tax bill. These proportions (usually calculated as a percentage
of the value of the fixed assets) are called Capital Allowances.
Capital Assets: See Fixed Assets.
Capital Employed
(CE):
Gross CE=Total assets, Net CE=Fixed assets plus (current assets less current
liabilities).
Capital Gains Tax: When a fixed asset
is sold at a profit, the profit may be liable to a tax called Capital Gains
Tax. Calculating the tax can be a complicated affair (capital gains allowances,
adjustments for inflation and different computations depending on the age of
the asset are all considerations you will need to take on board).
Cash Accounting: This term
describes an accounting method whereby only invoices and bills which have been
paid are accounted for. However, for most types of business in the UK, as far
as the Inland Revenue are concerned as soon as you issue an invoice (paid or
not), it is treated as revenue and must be accounted for. An exception is VAT:
Customs & Excise normally require you to account for VAT on an accrual
basis, however there is an option called 'Cash Accounting' whereby only paid
items are included as far as VAT is concerned (eg. if most of your sales are on
credit, you may benefit from this scheme - contact your local Customs &
Excise office for the current rules and turnover limits).
Cash Book: A journal where a
business's cash sales and purchases are entered. A cash book can also be used
to record the transactions of a bank account. The side of the cash book which
refers to the cash or bank account can be used as a part of the nominal ledger
(rather than posting the entries to cash or bank accounts held directly in the
nominal ledger - see 'Three column cash book').
Cash Flow: A report which
shows the flow of money in and out of the business over a period of time.
Cash Flow Forecast: A report which
estimates the cash flow in the future (usually required by a bank before it
will lend you money, or take on your account).
Cash
in Hand: See Undeposited funds account.
Charge Back: Refers to a credit
card order which has been processed and is subsequently cancelled by the
cardholder contacting the credit card company directly (rather than through the
seller). This results in the amount being 'charged back' to the seller (often
incurs a small penalty or administration fee to the seller).
Chart of Accounts: A list of all the
accounts held in the nominal ledger.
CIF
(Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of
goods where the seller agrees to supply the goods, pay the insurance, and pay
the freight charges until the goods reach the destination (usually a port -
rather than the actual buyers address). After that point, the responsibility
for the goods passes to the buyer.
Circulating assets: The opposite to
Fixed assets. Circulating assets describe those assets that turn from cash to
goods and back again (hence the term circulating). Typically, you buy some raw
materials, start to manufacture a product (the asset is called work in progress
at this point), produce a product (it is now stock), sell it (it is now back to
cash again).
Closing
the books: A term used to describe the journal entries necessary to close the
sales and expense accounts of a business at year end by posting their balances
to the profit and loss account, and ultimately to close the profit & loss
account too by posting its balance to a capital or other account.
Companies House (UK
only):
The title given to the government department which collects and stores
information supplied by limited companies. A limited company must supply
Companies House with a statement of its final accounts every year (eg. trading
and profit and loss accounts, and balance sheet).
Compensating error: A double-entry
term applied to a mistake which has cancelled out another mistake.
Compound interest: Apply interest on
the capital plus all interest accrued to date. Eg. A loan with an annually applied
rate of 10% for 1000 over two years would yield a gross total of 1210 at the
end of the period (year 1 interest=100, year two interest=110). The same loan
with simple interest applied would yield 1200 (interest on both years is 100
per year).
Contra account: An account created
to offset another account. Eg: a Sales contra account would be Sales Discounts.
They are accounts included in the same section of a set of books, which when
compared together, give the net balance. Example: Sales=10,000 Sales Discounts=1,000
therefore Net Sales=9,000. This example, affecting the revenue side of a
business, is also referred to as Contra revenue. The tell-tale sign of a contra
account is that it has the oposite balance to that expected for an account in
that section (in the above example, the Sales Discounts balance would be shown
in brackets - eg. it has a debit balance where Sales has a credit balance).
Control Account: An account held in
a ledger which summarises the balance of all the accounts in the same or another
ledger. Typically each subsidiary ledger will have a control account which will
be mirrored by another control account in the nominal ledger (see
'Self-balancing ledgers').
Cook the books: Falsify a set of
accounts. See also creative accounting.
Cost accounting: An area of
management accounting which deals with the costs of a business in terms of
enabling the management to manage the business more effectively.
Cost-based pricing: Where a company
bases its pricing policy solely on the costs of manufacturing rather than
current market conditions.
Cost-benefit: Calculating not
only the financial costs of a project, but also the cost of the effects it will
have from a social point of view. This is not easy to do since it requires
valuations of intangible items like the cost of job losses or the effects on
the environment. Genetically modified crops are a good example of where
cost-benefits would be calculated - and also impossible to answer with any
degree of certainty!
Cost centre: Splitting up your
expenses by department. Eg. rather than having one account to handle all power
costs for a company, a power account would be opened for each depatrment. You
can then analyse which department is using the most power, and hopefully find
of way of reducing those costs.
Cost of finished
goods:
The value (at cost) of newly manufactured goods shown in a business's
manufacturing account. The valuation is based on the opening raw materials
balance, less direct costs involved in manufacturing, less the closing raw materials
balance, and less any other overheads. This balance is subsequently transferred
to the trading account.
Cost of Goods Sold
(COGS):
A formula for working out the direct costs of your stock sold over a particular
period. The result represents the gross profit. The formula is: Opening stock +
purchases - closing stock.
Cost of Goods Sold Ratio = Cost of Goods
Sold / Sales x 100
Cost of Sales: A formula for
working out the direct costs of your sales (including stock) over a particular
period. The result represents the gross profit. The formula is: Opening stock +
purchases + direct expenses - closing stock. Also, see Cost of Goods Sold.
Creative
accounting:
A questionable! means of making a companies figures appear more (or less)
appealing to shareholders etc. An example is 'branding' where the 'value' of a
brand name is added to intangible assets which increases shareholders funds
(and therefore decreases the gearing). Capitalizing expenses is another method
(ie. moving them to the assets section rather than declaring them in the Profit
& Loss account).
Credit: A column in a
journal or ledger to record the 'From' side of a transaction (eg. if you buy
some petrol using a cheque then the money is paid from the bank to the petrol
account, you would therefore credit the bank when making the journal entry).
Credit Note: A sales invoice in
reverse. A typical example is where you issue an invoice for £100, the customer
then returns £25 worth of the goods, so you issue the customer with a credit
note to say that you owe the customer £25.
Creditors: A list of
suppliers to whom the business owes money. That means from
whom have taken goods on credit people to whom we owes i.e., these people have
lent money to the business or given money to business.
Creditors
(control account): An account in the nominal ledger which contains the overall
balance of the Purchase Ledger.
Current Assets: These include
money in the bank, petty cash, money received but not yet banked (see 'cash in
hand'), money owed to the business by its customers, raw materials for
manufacturing, and stock bought for re-sale. They are termed 'current' because
they are active accounts. Money flows in and out of them each financial year
and we will need frequent reports of their balances if the business is to
survive (eg. 'do we need more stock and have we got enough money in the bank to
buy it?').
Current cost
accounting:
The valuing of assets, stock, raw materials etc. at current market value as
opposed to its historical cost.
Current
Liabilities:
These include bank overdrafts, short term loans (less than a year), and what
the business owes its suppliers. They are termed 'current' for the same reasons
outlined under 'current assets' in the previous paragraph.
Customs and Excise: The government department
usually responsible for collecting sales tax (eg. VAT in the UK).
Debenture a written
acknowledgement of a debt – a name used for loan financing taken up by a
company.
Debtor a person or
organisation that owes money to the entity.
Deck Cargo Goods shipped on
the deck of a ship rather than in its holds. Due to the additional risks
involved with deck cargo, traders often stipulate that cargo may not be carried
on deck.
Deep discount bond a loan issued at a
relatively low price compared to its nominal value.
Default failure to meet
obligations as they fall due for payment.
Deferred asset an asset whose
benefit is delayed beyond the period expected for a current asset, but which
does not meet the definition of a fixed asset.
Deferred income revenue, such as a
government grant, is received in advance of performing the related activity.
The deferred income is held in the balance sheet as a type of liability until
performance is achieved and is then released to the income statement.
Deferred taxation the obligation to
pay tax is deferred (postponed) under tax law beyond the normal date of
payment.
Depreciable amount cost of a non-current (fixed) asset minus residual value.
Depreciation the systematic
allocation of the depreciable amount of
an asset over its useful life. The depreciable amount is cost less residual value.
Director(s) person(s) appointed
by shareholders of a limited liability company to manage the affairs of the
company.
Disclosed,
disclosure an
item which is reported in the notes to the accounts is said to be disclosed but
not recognised.
Discount received a supplier of goods
or services allows a business to deduct an amount called a discount, for prompt
payment of an invoiced amount. The discount is often expressed a percentage of
the invoiced amount.
Dividend:
Dividend is a return on the investment to the share
holders. It is paid out of the divisible profits of the company. Dividend is
normally expressed in terms of percentage of the face value of the share.
Dividend
amount paid to a shareholder, usually in the form of cash, as a reward for
investment in the company. The amount of dividend paid is proportionate to the
number of shares held.
Types of Dividend: Dividend is 3 types. These
are,
i) Dividend of Preference Shares, ii) Dividend on
Equity Shares and, iii) Interim Dividend.
Dividend yield dividend per share
divided by current market price.
Doubtful debts amounts due from
credit customers where there is concern that the customer may be unable to pay.
Drawings cash taken for
personal use, in sole trader or partnership business, treated as a
reduction of ownership interest.
Days Sales
Outstanding (DSO):
How long on average it takes a company to collect the money owed to it. See:
ratios.html (the first item in the list).
Debenture: This is a type of
share issued by a limited company. It is the safest type of share in that it is
really a loan to the company and is usually tied to some of the company's
assets so should the company fail, the debenture holder will have first call on
any assets left after the company has been wound up.
Debit: A column in a
journal or ledger to record the 'To' side of a transaction (eg. if you are
paying money into your bank account you would debit the bank when making the
journal entry).
Debtors: A list of
customers who owe money to the business. That means taken goods
on credit. People who owes us i.e. people who has taken loan or money.
Debtors (control
account):
An account in the nominal ledger which contains the overall balance of the Sales
Ledger.
Deferred
expenditure:
Expenses incurred which do not apply to the current accounting period. Instead,
they are debited to a 'Deferred expenditure' account in the non-current assets
area of your chart of accounts. When they become current, they can then be
transferred to the profit and loss account as normal.
Depreciation: The value of
assets usually decreases as time goes by. The amount or percentage it decreases
by is called depreciation. This is normally calculated at the end of every
accounting period (usually a year) at a typical rate of 25% of its last value.
It is shown in both the profit & loss account and balance sheet of a
business. See straight-line depreciation.
Dilutive: If a company
acquires another and says the deal is 'dilutive to earnings', it means that the
resulting P/E (price/earnings) ratio of the acquired company is greater than
the acquiring company. Example: Company 'A' has an earnings per share (EPS) of
$1. The current share price is $10. This gives a P/E ratio of 10 (current share
price is 10 times the EPS). Company 'B' has made a net profit for the year of
$20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000
valuation/20,000 profit]) then the deal is dilutive because company 'A' is
effectively decreasing its EPS (because it now has more shares and it paid more
for them in comparison with its own share price). (see Accretive)
Dividends: These are payments
to the shareholders of a limited company.
Demand
Draft A Bill of Exchange payable at sight or on demand.
Demurrage The extra charges paid to a shipowner or
carrier when a specified period for
loading/unloading is exceeded.
Depreciation A decline in the value of a currency in
terms of foreign currencies
or
gold.
Devaluation A downward change in the official parity of
an exchange rate from that which it
was previously set.
Discount a Bill To discount a bill means to purchase
a Bill of Exchange before it
is
due for payment for the amount estimated to be its value at the date it is
bought. The person for whom the bill is discounted remains liable until the
bill is paid although the discounter (bank) looks to the acceptor in the first
instance should the bill not be paid. When a bill is sold prior to maturity it
is also said to be sold at a discount.
Discount Interest
Rate Discount refers to
the amount of interest for the period of finance
deducted
from the face value of a term Bill of Exchange or promissory note. A discount
rate is the discount expressed as a rate per cent per annum related to the face
value of the Bill of Exchange or Promissory Note.
Discrepancy Irregularity in trade documentation
presented for payment under a
documentary
credit. The bank will refuse to pay against the documents unless the applicant
(buyer) agrees to amend the credit or waive objections to payment under the
credit.
Documentary Bill A Bill of Exchange
drawn payable overseas and accompanied by
commercial
documents such as Bills of Lading, invoice and insurance papers.
Documentary Credit
Irrevocable An irrevocable documentary credit is a
definite undertaking by the
issuing
bank that the provision for payment, acceptance or negotiation embodied in the
credit will be fulfilled, provided all terms and conditions of the credit are
met. An irrevocable credit cannot be cancelled or amended without the consent
of all parties, thus once he is in possession of an acceptable credit with
which he is able to comply fully, an exporter can fulfil the sales order and
shipment of goods, secure in the knowledge that this security of payment cannot
be withdrawn or varied without his consent and only exceptional circumstances
prevailing in the issuing bank’s country could frustrate due payment. If the
irrevocable credit is also confirmed by a bank, these contingent risks are
removed – see Confirmation of a
Documentary Credit.
Documentary Credit
Revocable As the name implies, the fundamental
difference between this type of instrument and an irrevocable credit is that it
can be amended or cancelled by the issuing bank (possibly on request from the
applicant), without the consent of the beneficiary.
Documentary
CreditLimit A documentary
credit limit is the maximum amount for which
an importer may have balances outstanding under documentary credits at
any one time.
Documents Against Acceptance (D/A) The exporter draws a
term bill on the overseas buyer and lodges
it,
together with shipping documents, with instructions to obtain acceptance of the
bill and to release the documents against the acceptance. The collecting bank
is also instructed to arrange for presentation of the bill for payment on due
date to the drawee (importer/buyer) – see Remittance
– Documents Against Payment.
Documents Against Payment (D/P) The exporter draws
a sight bill on the overseas buyer and hands
it,
together with shipping documents, to his bank with instructions to arrange
presentation to the drawee for release of the documents only on payment of the
relative bill – see Remittance –
Documents Against Acceptance.
Document of Title An instrument that enables the holder to
deal with the property
described
in it as if he were the owner e.g. Bill of Lading.
DOCDEX Rules ICC Rules for
Documentary Credit Dispute Resolution Expertise.
Rules
for disputes related to documentary credits.
Draft See Bill
of Exchange.
Drawee The individual or entity on whom a
draft is drawn.
Drawer The individual or entity that issues
or signs a draft instructing the
drawee to pay a specified sum of money to, or to the order of, a named person
(payee) or to bearer.
Due Date The date on which a
bill of exchange or other instrument becomes due and payable.
Double-entry
book-keeping:
A system which accounts for every aspect of a transaction - where it came from
and where it went to. This from and to aspect of a transaction (called
crediting and debiting) is what the term double-entry means. Modern
double-entry was first mentioned by G Cotrugli, then expanded upon by L
Paccioli in the 15th century.
Drawings: The money taken
out of a business by its owner(s) for personal use. This is entirely different
to wages paid to a business's employees or the wages or remuneration of a limited
company's directors(see'Wages').
Earnings for
ordinary shareholders profit after deducting interest charges and taxation
and after deducting preference dividends (but before deducting extraordinary
items).
Earnings per share calculated as earnings for ordinary shareholders divided
by the number of shares which have been issued by the company.
Effective interest
rate the
rate that exactly discounts estimated future cash payments or receipts through
the expected life of the financial instrument.
Efficient markets
hypothesis share
prices in a stock market react immediately to the announcement of new
information.
Enterprise a business activity
or a commercial project.
Entity, entities something that
exists independently, such as a business which exists independently of the
owner.
Equity shares shares in a company
which participate in sharing dividends and in sharing any surplus on winding
up, after all liabilities have been met.
Eurobond market a market in which
bonds are issued in the capital market of one country to a non-resident
borrower from another country.
Exit value a method of valuing
assets and liabilities based on selling prices, as an alternative to
historical
cost.
Expense an expense is
caused by a transaction or event arising during the ordinary activities of the
business which causes a decrease in the ownership interest.
External reporting reporting financial
information to those users with a valid claim to receive it, but who are not
allowed access to the day-to-day records of the business.
External users (of
financial statements) users of financial statements who have a valid interest
but are not permitted access to the day-to-day records of the company.
EBIT: Earnings before interest and tax (profit before any interest or taxes have been deducted).
EBITA: Earnings before
interest, tax and amortization (profit before any interest, taxes or
amortization have been deducted).
EBITDA: Earnings before
interest, tax, depreciation and amortization (profit before any interest,
taxes, depreciation or amortization have been deducted).
Economic Value Added: A company or
business earning profit which is more than cost of capital (Return expected by
Investors).
Encumbrance: A liability (eg. a
mortgage is an encumbrance on a property). Also, any money set aside (ie.
reserved) for any purpose.
Entry: Part of a
transaction recorded in a journal or posted to a ledger.
Equity: The value of the
business to the owner of the business (which is the difference between the
business's assets and liabilities).
Error of
Commission:
A double-entry term which means that one or both sides of a double-entry has
been posted to the wrong account (but is within the same class of account).
Example: Petrol expense posted to Vehicle maintenance expense.
Error of Ommission: A double-entry
term which means that a transaction has been ommitted from the books entirely.
Error of Original
Entry:
A double-entry term which means that a transaction has been entered with the
wrong amount.
Error of Principle: A double-entry
term which means that one or both sides of a double-entry has been posted to
the wrong account (which is also a different class of account). Example: Petrol
expense posted to Fixtures and Fittings.
Expenses: Goods or services
purchased directly for the running of the business. This does not include goods
bought for re-sale or any items of a capital nature (see Stock and Fixed
Assets).
EFIC Export Finance and Insurance Corporation –
a statutory corporation promoting the export of Australian goods and services by providing finance and
insurance to exporters.
Endorsement A writing on the back of an
instrument (e.g. Bill of Exchange).
It
is a means of transference of liability/title of Bill of Exchange, Bill of
Lading etc. and the writing need not necessarily be on the back of the
instrument to be operative.
An
endorsement may be:
- In
Blank:
where the person to whom the instrument is payable merely signs (endorses)
and delivers the instrument to another
- Special: where the
name of the transferee is specified
- Restrictive: where
further transfer of the bill is prohibited or which expresses a mere
authority to deal with the bill as directed
and not a transfer of ownership thereof
- Conditional: where the
endorsement contains certain conditions
- Without
Recourse:
an endorsement having the effect of negotiating a bill but negating the
liability of the endorser
Euro Official currency of the participating
member states introduced on January 1, 1999. Westpac does not deal in the
legacy currency of member countries.
Exchange Control Government
regulations covering the inflow and outflow of
foreign
exchange
or securities.
Exchange Rate/
Foreign Exchange Rate The rate which
would apply when changing the money (currency)
of
one country to that of another country.
EXDOC Electronic Export Documentation
System – AQIS system enabling exporters to obtain export approval and health certification.
EXIT Export Integration – customs electronic clearance
and reporting system for exports administered by Australian Customs Service
Export Credit
Insurance Insurance coverage
for exporters to protect against commercial
and political risks of making an international sale.
Fair value the amount at which
an asset or liability could be exchanged in an arm's-length transaction between
a willing buyer and a willing seller.
Financial
accounting a
term usually applied to external
reporting by a business where that reporting is presented in financial
terms.
Financial
adaptability the
ability of the company to respond to unexpected needs or opportunities.
Financial gearing ratio of loan
finance to equity capital and reserves.
Financial reporting
standard title
of an accounting standard issued by the accounting
standards board as a definitive statement of best practice. Prior to 2017,
Indian companies used to follow Indian
generally acceptable accounting principle (IGAAP).
Financial risk exists where a
company has loan finance, especially long-term
loan finance where the company cannot relinquish its commitment. The risk
relates to being unable to meet payments of interest or repayment of capital as
they fall due.
Financial
statements documents
presenting accounting information which is expected to have a useful purpose.
Financial viability
the
ability to survive on an ongoing basis.
Fixed asset an asset that is
held by an enterprise for use in the production or supply of goods or services,
for rental to others, or for administrative purposes on a continuing basis in
the reporting entity's activities.
Fixed cost one which is not
affected by changes in the level of output over a defined period of time.
Floating charge security taken by
lender which floats over all the assets and crystallises over particular assets
if the security is required.
Forecast estimate of future
performance and position based on stated assumptions and usually including a
quantified amount.
Forward exchange
contracts an
agreement to buy foreign currency at a fixed future date and at an agreed
price.
Foreign Exchange The system or
process of converting one national currency
into
another
and of transferring money from one country to
another.
Foreign Currency
Account Deposit account
expressed in a foreign currency maintained with
a
domestic bank.
Forward Deal An agreement to buy
or sell foreign currency against the local
currency
or another foreign currency for value on a date more than two business days
from date of deal.
Forward Exchange
Contract
(FEC) An agreement entered into between customer
and his bank wherein customer agrees to buy or sell foreign currency from or to
his bank for delivery at an agreed future date.
Forward Margin The premium or
discount on forward exchanges against spot
exchanges.
Forward Discount The term applied to
a foreign currency which is less expensive to
trade
forward than for spot settlement. A forward discount favours the buyer of the
foreign currency.
Forward Premium The term applied to
a foreign currency which is more expensive to
trade
forward than for spot settlement. A forward premium favours the seller of a
foreign currency.
Fully paid shares on which the
amount of share capital has been paid in full to the company.
Free On Board [FOB] A shipping term, which applies, when
the goods are placed on
board
a ship by the seller at the port of shipment named in the sales contract. The
risk of loss of, or damage to, the goods is transferred from the seller to the
buyer when the goods pass the ships rail. Freight charges and any insurance
premium then becomes the care of the overseas buyer/importer – see Incoterms.
Freight Forwarder Assembles and
consolidates small shipments into a single lot
and
assumes,
in some cases, full responsibility for transportation of the goods from point
of receipt to point of destination.
Futures Contract A contract for
future delivery of a commodity, currency or
security
on
a specific date. In contrast to forward contracts, futures contracts are for
standard quantities and for standard periods of time and are primarily traded
on exchanges such as the Sydney Futures Exchange.
FIFO: First In First
Out. A method of valuing stock.
Fiscal year: The term used for
a business's accounting year. The period is usually twelve months which can
begin during any month of the calendar year (eg. 1st April 2001 to 31st March
2002).
Fixed Assets: These consist of
anything which a business owns or buys for use within the business and which
still retains a value at year end. They usually consist of major items like
land, buildings, equipment and vehicles but can include smaller items like
tools. (see Depreciation)
Fixtures &
Fittings:
This is a class of fixed asset which includes office furniture, filing
cabinets, display cases, warehouse shelving and the like.
Flash earnings: A news release
issued by a company that shows its latest quarterly results.
Flow of Funds: This is a report
which shows how a balance sheet has changed from one period to the next.
FOB: An abbreviation of
Free On Board. It generally forms part of an export contract where the seller
pays all the costs and insurance of sending the goods to the port of shipment.
After that, the buyer then takes full responsibility. If the goods are to
travel by train, it's called FOR (Free on Rail).
Freight collect: The buyer pays the
shipping costs.
GAAP standards set by
the American institute of certified public accountants (AICPA)
General purpose
financial statements documents
containing accounting information which would be expected to be of interest to
a wide range of user groups. For a limited liability company there would be: a
balance sheet, a profit and loss account, a statement of recognised gains and
losses and a cash flow statement.
Going concern basis
the
assumption that the business will continue operating into the foreseeable
future.
Goodwill : on acquisition is the difference between
the fair value of the amount paid
for an investment in a subsidiary and
the fair value of the net assets acquired. It is an amount paid over and above the value of assets and liabilities
of the under taking.
Goodwill is the reputation of the business. This
reputation is due to excess sales and profit made then normal sales and profit.
Reasons for goodwill are:
- Good reputation
- Favorable location
- Ability and skill of employees
- Good management.
Goodwill is of two types, these are i) Purchased
Goodwill and ii) Developed Goodwill
Gross margin sales minus cost of
sales before deducting administration and selling expenses (another name for gross profit). Usually applied when
discussing a particular line of activity.
Gross margin ratio gross profit as a
percentage of sales.
Gross profit sales minus cost of
sales before deducting administration and selling expenses (see also gross margin).
Group economic entity formed by parent and one or more subsidiaries.
Guarantee legal arrangement
involving a promise by one person to perform the obligations of a second person to a third person, in the event the
second person fails to perform.
Gearing (
leverage):
The comparison of a company's long term fixed interest loans compared to its
assets. In general two different methods are used: 1. Balance sheet gearing is
calculated by dividing long term loans with the equity (or proprietor's net
worth). 2. Profit and Loss gearing:
Fixed interest payments for the period divided by the profit for the period.
General
Ledger: See Nominal Ledger.
Goodwill: This is an extra
value placed on a business if the owner of a business decides it is worth more
than the value of its assets. It is usually included where the business is to
be sold as a going concern.
Gross loss: The balance of the
trading account assuming it has a debit balance.
Gross profit: The balance of the
trading account assuming it has a credit balance.
Growth and
Acquisition (G&A): Describes a way a company can grow. Growth means
expanding through its normal operations, Acquisition means growth through
buying up other companies.
Hedge a financial term
for a specific type of financial instruments trading for risk management.
Holding period the time in which
an investor acquires property/asset and the date on which it is sold.
Holder The payee or endorsee of a Bill of
Exchange or Promissory Note who is in possession of it, or the bearer thereof.
Holder in Due Course A holder who takes a bill, complete
and regular on the face of it, under the following conditions:
that
he becomes the holder of it before it was overdue, and without notice that it
has been previously dishonoured, if such was the case, and;
that
he took the bill in good faith and for value, and that at the time the bill was negotiated to him,
he had no notice of any defect in the title of the person who negotiated it
Until
the contrary is proved, every holder is deemed to be a holder in due course.
This applies to all holders except the original payee as it has been held that
he cannot be a holder in due course.
The
rights of a holder in due course are not affected when the acceptor or other
party has been induced to sign the bill by fraud.
House Air Waybill A transport
document issued by an air freight consolidator.
House Bill of Lading A Bill of Lading issued by a freight
forwarder. Often covers a
consignment
of parcels from various shippers that has been grouped or consolidated by the
forwarder.
Historical Cost: method of valuing
assets and liabilities based on their original cost without adjustment for
changing prices.Assets, stock, raw materials etc. can be valued at what they
originally cost (which is what the term 'historical cost' means), or what they
would cost to replace at today's prices (see Price change accounting).
Impersonal
Accounts:
These are accounts not held in the name of persons (ie. they do not relate
directly to a business's customers and suppliers). There are two types, see
Real and Nominal.
Imprest System: A method of
topping up petty cash. A fixed sum of petty cash is placed in the petty cash
box. When the petty cash balance is nearing zero, it is topped up back to its
original level again (known as 'restoring the Imprest').
Income: Money received by
a business from its commercial activities. See 'Revenue'.
Inland
Revenue: The government department usually responsible for collecting your tax.
Insolvent: A company is
insolvent if it has insufficient funds (all of its assets) to pay its debts
(all of its liabilities). If a company's liabilities are greater than its
assets and it continues to trade, it is not only insolvent, but in the UK, is
operating illegally (Insolvency act 1986).
IASB international
accounting standards board, an independent body that sets accounting standards
accepted as a basis for accounting in many countries, including all member
states of the european union.
ICC International Chamber of Commerce, the
world business organisation, headquartered in Paris, France.
Indemnity A form of contract when a person (who
thereby becomes primarily liable), undertakes to compensate another for loss he
may suffer as a result of a transaction with a third party.
Instrument A formal legal document in writing e.g.
bill of exchange
Ias Indian
Accounting Standard, Ind as is issued under the supervision of accounting standards board (ASB), Institute
Of Chartered Accountants Of India (ICAI), are named and numbered in line
with the International Financial
Reporting Standards (IFRS).
Impairment a reduction in the
carrying value of an asset, beyond
the expected depreciation, which
must be reflected by reducing the amount recorded in the balance sheet.
Income statement financial statement
presenting revenues, expenses, and profit. Also called
profit
and loss account.
Incorporation, date of. The date
on which a company comes into existence.
Indirect method (of
operating cash flow) calculates
operating cash flow by adjusting operating profit for non-cash items and for
changes in working capital.
Insider information
information
gained by someone inside, or close to, a listed company which could confer a
financial advantage if used to buy or sell shares. It is illegal for a person
who is in possession of inside information to buy or sell shares on the basis
of that information.
Institutional
investor an
organisation whose business includes regular investment in shares of companies,
examples being an insurance company, a pension fund, a charity, an investment
trust, a unit trust, a merchant bank.
Intangible without shape or
form, cannot be touched.
Interest (on loans)
the
percentage return on capital required
by the lender (usually expressed as a percentage per annum).
Interim reports financial
statements issued in the period between annual reports, usually half- yearly or
quarterly.
Internal reporting reporting financial
information to those users inside a business, at various levels of management,
at a level of detail appropriate to the recipient.
Inventory stocks of goods
held for manufacture or for resale.
Investing
activities the
acquisition and disposal of long-term assets and other investments not included
in cash equivalents.
Investors persons or
organisations which have provided money to a business in exchange for a share
of ownership.
Integration Account: See Control
Account.
Inventory: A subsidiary
ledger which is usually used to record the details of individual items of
stock. Inventories can also be used to hold the details of other assets of a
business. See Perpetual, Periodic.
Invoice: A term describing
an original document either issued by a business for the sale of goods on
credit (a sales invoice) or received by the business for goods bought (a
purchase invoice).
Journal(s): A book or set of
books where your transactions are first entered.
Journal entries: A term used to
describe the transactions recorded in a journal.
Journal Proper: A term used to
describe the main or general journal where other journals specific to
subsidiary ledgers are also used.
Joint and several
liabilities (in a partnership) the partnership liabilities are shared
jointly but each person is responsible for the whole of the partnership.
Joint Venture When two or more
persons or organizations gather CAPITAL to provide a product or service. Often
carried out as a PARTNERSHIP.
Journal Any book containing
original entries of daily financial transactions.
Journal Entry A notation in the
GENERAL JOURNAL. It records a single transaction.
Just-In-Time An overall
operating philosophy of INVENTORY management in which all resources, including
materials, personnel, and facilities, are used only as needed.
Key performance
indicators quantified
measures of factors that help to measure the performance of the business
effectively.
Landed Costs: The total costs
involved when importing goods. They include buying, shipping, insuring and
associated taxes.
Ledger: A book in which
entries posted from the journals are re-organised into accounts.
Leverage:
See Gearing.
Liabilities: This includes bank
overdrafts, loans taken out for the business and money owed by the business to
its suppliers. Liabilities are included on the right hand side of the balance
sheet and normally consist of accounts which have a credit balance.
LIFO: Last In Last Out.
A method of valuing stock.
Long term liabilities: These usually
refer to long term loans (ie. a loan which lasts for more than one year such as
a mortgage).
Loss: See Net loss.
Letter of credit See Documentary Credit.
Lodgement Instructions The
written instructions from a customer which constitutes the
bank’s
authority to act in respect of collection of proceeds on customer’s behalf.
Legal form representing a
transaction to reflect its legal status, which might not be the same as its
economic form.
Leverage alternative term
for gearing, commonly used in the
usa.
Leveraged Buy Out Acquisition of a
controlling INTEREST in a company in a transaction financed by the issuance of
DEBT instruments by the acquired entity.
Liabilities obligations of an
entity to transfer economic benefits as a result of past transactions or
events.
LIFO ACCOUNTING method
of valuing inventory under which the costs of the last goods acquired are the
first costs charged to expense.
Limited liability a phrase used to
indicate that those having liability in respect of some amount due may be able
to invoke some agreed limit on that liability.
Limited liability
company company
where the liability of the owners is limited to the amount of capital they have
agreed to contribute.
Liquidity the extent to which
a business has access to cash or items which can readily be exchanged for cash.
Listed company a company whose
shares are listed by the stock exchange as being available for buying and
selling under the rules and safeguards of the exchange.
Listing
requirements rules
imposed by the stock exchange on companies whose shares are listed for buying
and selling.
Loan covenants agreement made by
the company with a lender of long-term finance, protecting the loan by imposing
conditions on the company, usually to restrict further borrowing.
Long-term finance,
long-term liabilities money lent to a business for a fixed period, giving
that business a commitment to pay interest for the period specified and to
repay the loan at the end of the period also called non-current liabilities information in the financial statements
should show the commercial substance of the situation.
Management collective term for
those persons responsible for the day-to-day running of a business.
Management
accounting reporting
accounting information within a business, for management use only.
Market value (of a
share) the
price for which a share could be transferred between a willing buyer and a
willing seller.
Marking to market valuing a
marketable asset at its current
market price.
Margin profit, seen as the
'margin' between revenue and expense.
Matching expenses are
matched against revenues in the period they are incurred (see also
accruals basis).
Materiality information is material if its omission or
misstatement could influence the economic decisions of users taken on the basis
of the financial statements.
Maturity the date on which a
liability is due for repayment.
Maturity profile of
debt the
timing of loan repayments by a company in the future.
Memorandum of Association/Memorandum (for a
company) It is the main document of the company. This
document represents constitution of that company. It contains i) Name Clause,
ii) Objective Clause, iii) State Clause, iv) Capital Clause, v) Liability
Clause, and vi) Situation Clause.This document setting
out main objects of the company and its powers to act.
Merger two organisations
agree to work together in a situation where neither can be regarded as having
acquired the other.
Minority interest the ownership interest in a company held by
persons other than the parent company and
its subsidiary undertakings. Also
called a non-controlling interest.
Management
accounting:
Accounts and reports are tailor made for the use of the managers and directors
of a business (in any form they see fit - there are no rules) as opposed to
financial accounts which are prepared for the Inland Revenue and any other
parties not directly connected with the business. See Cost accounting.
Manufacturing
account:
An account used to show what it cost to produce the finished goods made by a
manufacturing business.
Matching principle: A method of
analysing the sales and expenses which make up those sales to a particular
period (eg. if a builder sells a house then the builder will tie in all the raw
materials and expenses incurred in building and selling the house to one period
- usually in order to see how much profit was made).
Maturity value: The (usually
projected) value of an intangible asset on the date it becomes due.
MD&A:
Management Discussion and Analysis. Usually seen in a financial report. The
information disclosed has deen derived from analysis and discussions held by
the management (and is presented usually for the benefit of shareholders).
Memo
billing ( memo invoicing): Goods ordered
and invoiced on approval. There is no obligation to buy.
Memorandum
accounts:
A name for the accounts held in a subsidiary ledger. Eg. the accounts in a
sales ledger.
Minority interest: A minority
interest represents a minority of shares not held by the holding company of a subsidiary.
It means that the subsidiary is not wholly owned by the holding company. The
minority shareholdings are shown in the holding company accounts as long term
liabilities.
Moving average: A way of smoothing
out (i.e. removing the highs and lows) of a series of figures (usually shown as
a graph). If you have, say, 12 months of sales figures and you decide on a
moving average period of 3 months, you would add three months together, divide
that by three and end up with an average for each month of the three month
period. You would then plot that single figure in place of the original monthly
points on your graph. A moving average is useful for displaying trends. See
Normalize.
Multiple-step
income statement (Multi-step): An income statement (Profit and Loss)
which has had its revenue section split up into sub-sections in order to give a
more detailed view of its sales operations. Example: a company sells services
and goods. The statement could show revenue from services and associated costs
of those revenues at the start of the revenue section, then show goods sold and
cost of goods sold underneath. The two sections totals can then be amalgamted
at the end to show overall sales (or gross profit). See Single-step income
statement.
Main / Spread The difference between the buying
and selling rates of a foreign
exchange
quotation or between the borrowing and lending rates in deposits.
Marine
Bill of Lading
(also Ocean Bill of Lading) See Bill
of Lading.
Marine Insurance:Insurance covering
international transport of goods. Marine
insurance
can be provided either in terms of a specific policy or certificate or by open
cover under which the insurer covers an indefinite number of future shipments
and declares each shipment to the insurer as they are made.
Policy
terms can include:
Average
– loss or damage
average – loss occurring
when extraordinary measures are taken to preserve
the safety of the vessel
Particular
average – partial loss or damage; loss to an individual cargo interest rather
than entire vessel
With
Average (WA) or With Particular Average (WPA) – coverage of partial loss
provided the claim amounts to at least 3% of the cargo’s insured value
Free
of Particular Average (FPA) – coverage does not include partial loss; a very
restrictive form of policy
Narrative: A comment appended
to an entry in a journal. It can be used to describe the nature of the
transaction, and often in particular, where the other side of the entry went to
(or came from). Net after making
deductions.
Net assets assets minus liabilities (equals ownership interest).
Net book value cost of non-current (fixed) asset minus accumulated depreciation. Net profit sales minus cost of sales
minus all administrative and selling costs.
Net realisable
value the
proceeds of selling an item, less the costs of
selling.
Neutral qualitative
characteristic of freedom from bias.
Nominal value (of a
share) the
amount stated on the face of a share certificate as the named value of the
share when issued.
Non-controlling
interest see
minority interest.
Non-current assets any asset that does
not meet the definition of a current asset. Also described as fixed assets.
Non-current
liabilities any
liability that does not meet the definition of a current liability. Also described as long-term liabilities.
Notes to the
accounts information
in financial statements that gives more detail about items in the financial statements.
Net loss: The value of
expenses less sales assuming that the expenses are greater (ie. if the profit
and loss account shows a debit balance).
Net of Tax: The price less any
tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the
'net of tax' price would be $10
Net profit: The value of sales
less expenses assuming that the sales are greater (ie. if the profit and loss
account shows a credit balance).
Intrinsic value: Means the potential price
of a company’s common stock.
Liquidation: Winding up of the company.
Net Worth: Means the sum of paid up share capital plus
reserves plus the preference share capital.
Nominal Accounts: A set of accounts
held in the nominal ledger. They are termed 'nominal' because they don't
usually relate to an individual person. The accounts which make up a Profit and
Loss account are nominal accounts (as is the Profit and Loss account itself),
whereas an account opened for a specific customer is usually held in a
subsidiary ledger (the sales ledger in this case) and these are referred to as
personal accounts.
Nominal Ledger: A ledger which
holds all the nominal accounts of a business. Where the business uses a
subsidiary ledger like the sales ledger to hold customer details, the nominal
ledger will usually include a control account to show the total balance of the
subsidiary ledger (a control account can be termed 'nominal' because it doesn't
relate to a specific person). Full details
Normalize: This term can be
applied to many aspects of accounting. It means to average or smooth out a set
of figures so they are more consistent with the general
trend
of the business. This is usually done using a Moving average.
Negotiable Instrument A negotiable
instrument is one which, by the custom of trade,
passes
from hand to hand by delivery so as to give a bona fide holder for value, a
good title to the instrument notwithstanding that the transferor may have had
defective title.
The
characteristics of negotiable instruments are:
The
title of them passes by mere delivery, or where necessary by endorsement
followed by delivery
Westpac
Banking Corporation ABN 33 007 457 141
Glossary
11 March 2002
No
notice of such transfer need be given to the party liable on the instrument
A
holder in due course can sue in his own name
A
holder in due course does not take the instrument subject to equities and in
fact may obtain a better title than the transferor Bills of Exchange, Cheques
and Promissory Notes are three kinds
of negotiable instruments.
Negotiate a Bill For these purposes, synonymous to the
“discount” of a bill.
Non Business
Day A non-business day
means any Saturday or Sunday or any bank
holiday
(not being part holiday) and includes in respect of any bank premises every day
on which those premises are not opened for business.
Non-Circumvention
Non-Disclosure
Agreements
[NCND] A type of contract sometimes
requested by international brokers or middlemen in order to prevent buyers from
dealing directly with suppliers.
Notary Public A public officer
whose chief duties are certifying deeds and
documents,
noting and protesting Bills of Exchange etc.
Noting A minute or memorandum made by a
Notary Public on a Bill of Exchange which has been dishonoured. The Bills of
Exchange Act instructs that noting be done within 48 hours of dishonour.
It
consists of his initials, his charges and the date. In the case of a Bill of
Exchange drawn and payable outside of Australasia, it is preparatory to a
formal protest.
Opening the books: Every time a
business closes the books for a year, it opens a new set. The new set of books
will be empty, therefore the balances from the last balance sheet must be
copied into them (via journal entries) so that the business is ready to start
the new year.
Ordinary Share: This is a type of
share issued by a limited company. It carries the highest risk but usually
attracts the highest rewards.
Off-balance-sheet finance an arrangement to keep matching assets and
liabilities away from the entity's balance sheet.
Offer for sale a company makes a
general offer of its shares to the public.
Operating
activities, the
principal revenue-producing activities of the entity and other activities that
are not investing or financing activities.
Operating and
financial review section
of the annual report of many companies which explains the main features of the
financial statements.
Operating gearing the ratio of fixed
operating costs to variable operating costs.
Operating margin operating profit as
a percentage of sales.
Operating risk exists where there
are factors, such as a high level of fixed operating costs, which would cause
profits to fluctuate through changes in operating conditions.
Ordinary shares shares in a company
which entitle the holder to a share of the dividend declared and a share in net
assets on closing down the business.
Ownership interest the residual amount
found by deducting all of the entity's liabilities from all of the entity's
assets. (also called equity interest.)
Ocean Bill of Lading Marine Bill of Lading.
Offered (Selling)
Rate Exchange rate at
which dealers are prepared to sell foreign
exchanges
in the market and at which potential buyers are therefore able to buy foreign
exchanges from those dealers.
Open Account A method of
settling payments for trade transactions. The
supplier
ships
the required goods to the buyer who, after receiving and checking the related
shipping documents, credits the suppliers account in his books with the invoice
amount.
The
account is then settled periodically, say monthly, by the buyer sending a bank
draft, or arranging through his bank a telegraphic remittance in favour of his
overseas party.
Outright The purchase or sale of foreign currency
for delivery at any forward date beyond two working days ahead.
Overdue (Bill of Exchange) A Bill of Exchange is said to be
overdue when the time for its
payment
has passed, or if it is a bill payable on demand when it appears to have been
in circulation for an unreasonable length of time as defined by the Bills of
Exchange Act.
Original book of
entry:
A book which contains the details of the day to day transactions of a business
(see Journal).
Overheads: These are the
costs involved in running a business. They consist entirely of expense accounts
(eg. rent, insurance, petrol, staff wages etc.).
Paid-up
Share capital: The value of issued shares which have been paid for. See
Called-up Share capital. Par value see nominal
value.
Parent company company which
controls one or more subsidiaries in a group.
Partnership two or more persons
in business together with the aim of making a profit.
Partnership deed a document setting
out the agreement of the partners on how the partnership is to be conducted
(including the arrangements for sharing profits and losses).
Partnership law legislation which
governs the conduct of a partnership and which should be used where no
partnership deed has been written.
Portfolio (of
investment) a
collection of investments.
Portfolio of shares
a
collection of shares held by an investor.
Preference shares shares in a company
which give the holder a preference (although not an automatic right) to receive
a dividend before any ordinary share dividend is declared.
Preliminary
announcement the
first announcement by a listed company of its profit for the most recent
accounting period. Precedes the publication of the full annual report. The
announcement is made to the entire stock market so that all investors receive
information at the same time.
Premium an amount paid in
addition, or extra.
Prepayment an amount paid for
in advance for an benefit to the business, such as insurance premiums or rent
in advance. Initially recognised as an asset, then transferred to expense in
the period when the benefit is enjoyed. (also called a prepaid expense.)
Price–earnings
ratio market
price of a share divided by earnings per share.
Price-sensitive
information information
which, if known to the market, would affect the price of a share.
Primary financial
statements the
balance sheet, profit and loss account, statement of total recognised gains and
losses and cash flow statement.
Principal (sum) the agreed amount
of a loan, on which interest will be charged during the period of the loan.
Private limited
company (ltd) a
company which has limited liability but
is not permitted to offer its shares to the public.
Production overhead
costs costs
of production that are spread across all output, rather than being identified
with specific goods or services.
Profit calculated as
revenue minus expenses.
Profit and loss
account financial
statement presenting revenues, expenses, and profit. Also called income statement.
Prospectus financial
statements and supporting detailed descriptions published when a company is
offering shares for sale to the public.
Provision a liability of
uncertain timing or amount.
Provision for
doubtful debts an
estimate of the risk of not collecting full payment from credit customers,
reported as a deduction from trade receivables
(debtors) in the balance sheet.
Prudence a degree of caution
in the exercise of the judgements needed in making the estimates required under
conditions of uncertainty, such that gains and assets are not overstated and
losses and liabilities are not understated.
Public limited
company (plc) a
company which has limited liability and
offers its shares to the public.
Purchase method method of producing
consolidated financial statements (see acquisition
method).
Purchases total of goods and
services bought in a period.
P.A.Y.E (UK only): 'Pay as you earn'.
The name given to the income tax system where an employee's tax and national
insurance contributions are deducted before the wages are paid.
Pareto
optimum: An economic theory by Vilfredo Pareto. It states that the optimum
allocation of a society's resources will not happen whilst at least one person
thinks he is better off and where others perceive themselves to be no worse.
Pay on delivery: The buyer pays the
cost of the goods (to the carrier) on receipt of them.
Periodic inventory: A Periodic
Inventory is one whose balance is updated on a periodic basis, ie. every
week/month/year. See Inventory.
PE ratio: An equation which
gives you a very rough estimate as to how much confidence there is in a
company's shares (the higher it is the more confidence). The equation is:
current share price multiplied by earnings and divided by the number of shares.
'Earnings' means the last published net profit of the company.
Perpetual
inventory:
A Perpetual Inventory is one whose balance is updated after each and every
transaction. See Inventory.
Personal Accounts: These are the
accounts of a business's customers and suppliers. They are usually held in the
Sales and Purchase Ledgers.
Petty Cash: A small amount of
money held in reserve (normally used to purchase items of small value where a
cheque or other form of payment is not suitable).
Petty Cash Slip: A document used to
record petty cash payments where an original receipt was not obtained
(sometimes called a petty cash voucher).
Point of Sale
(POS):
The place where a sale of goods takes place, eg. a shop counter.
Post
Closing Trial Balance: This is a trial balance prepared after the balance sheet
has been drawn up, and only includes balance sheet accounts.
Posting: The copying of
entries from the journals to the ledgers.
Preference Shares: This is a type of
share issued by a limited company. It carries a medium risk but has the
advantage over ordinary shares in that preference shareholders get the first
slice of the dividend 'pie' (but usually at a fixed rate).
Pre-payments: One or more
accounts set up to account for money paid in advance (eg. insurance, where part
of the premium applies to the current financial year, and the remainder to the
following year).
Price change
accounting:
Accounting for the value of assets, stock, raw materials etc. by their current
market value instead of the more traditional Historic Cost.
Prime book of
entry:
See Original book of entry.
Profit: See Gross profit,
Net profit, and Profit and Loss Account.
Profit and Loss
Account:
An account made up of revenue and expense accounts which shows the current
profit or loss of a business (ie. whether a business has earned more than it
has spent in the current year).
Profit margin: The percentage
difference between the costs of a product and the price you sell it for. Eg. if
a product costs you $10 to buy and you sell it for $20, then you have a 100%
profit margin. This is also known as your 'mark-up'.
Pro-forma accounts
(pro-forma financial statements): A set of accounts prepared before the
accounts have been officially audited. Often done for internal purposes or to
brief shareholders or the press.
Pro-forma invoice: An invoice sent
that requires payment before any goods or services have been despatched.
Provisions: One or more
accounts set up to account for expected future payments (eg. where a business
is expecting a bill, but hasn't yet received it).
Purchase Consideration: Consideration
paid by the transferor company to the shareholders of Transferee Company.
Purchase consideration means the purchase price agreed upon, which is paid by
the purchasing company in order to pay to the Vendor Company.
Purchase Invoice: See Invoice.
Purchase Ledger: A subsidiary ledger
which holds the accounts of a business's suppliers. A single control account is
held in the nominal ledger which shows the total balance of all the accounts in
the purchase ledger.
Par Is the term applied when the forward price
of the purchase or sale of foreign currency is the same as the spot price.
Performance Bond
/Guarantee A safeguard against
the party to whom the commercial contract is
awarded failing to meet an obligation under such a contract, which, by its
nature, normally requires a period of time for completion.
Point / Pip The last decimal place of an exchange rate quotation.
Post-shipment Finance Finance required
for the period of time after goods have been
shipped
before payment is received by the exporter.
Prepayment Paying for goods at the time the order is
placed and prior to receipt of the goods.
When
prepaying, the importer carries all the risk. They are placing implicit faith
in the supplier to fulfil the terms of the contract.
Pre-shipment Finance Financing of goods
whilst in the manufacturing/collation stage.
Presentation The act of presenting a Bill of
Exchange for acceptance and payment.
Presenting Bank The collecting bank making presentation (of
the collection) to the
drawee.
Principal The party (exporter) entrusting the
handling of a collection to a bank.
Pro Forma
Invoice A sample invoice
provided by an exporter prior to a sale or
shipment
of merchandise, informing the buyer of the price, description and quantities of
goods offered.
Promissory Note An unconditional
order in writing, made by one person to another,
signed
by the maker engaging to pay on demand, or at a fixed or determinable future
time, a sum certain in money to or to the order of a specified person or to
bearer.
Protest A solemn declaration by a Notary
Public stating that he has demanded acceptance or payment of a bill of exchange
and that it has been refused with
the reasons, if any, given by the drawee or acceptor for the dishonour. The
object of a protest is to give satisfactory evidence of the dishonour to the drawer
or other antecedent party.
Qualified Acceptance Is one which in
express terms varies the effect of the bill
of
exchange
as drawn, and may be:
- Conditional: one which
makes payment by the acceptor
dependent on the fulfilment of a condition
- Partial: an
acceptance to pay part of the amount only for which the bill is drawn
- Local:
an
acceptance to pay only at a particular or
specified place
- Qualified
as to Time: a
bill drawn for two months accepted
payable in three months
Acceptance by Some
Drawees Only: the
holder may refuse to take a qualified acceptance and if they do not obtain an
unqualified acceptance, they may treat the bill as dishonoured
Qualified audit
opinion an
audit opinion to the effect that: the accounts do not show a true and fair view; or the accounts show a true and fair
view except for particular matters.
Quality of earnings
opinion
of investors on reliability of earnings (profit) as a basis for their
forecasts.
Realised profit,
realisation a
profit arising from revenue which has been earned by the entity and for which
there is a reasonable prospect of cash being collected in the near future.
Recognised an item is
recognised when it is included by means of words and amount within the main
financial statements of an entity.
Registrar of
companies an
official authorised by the government to maintain a record of all annual
reports and other documents issued by a company.
Relevance qualitative
characteristic of influencing the economic decisions of users.
Reliability qualitative characteristic
of being free from material error and bias, representing faithfully.
Replacement cost a measure of current value which estimates the cost
of replacing an asset or liability at the date of the balance sheet. Justified
by reference to value to the business.
Reserves the claim which
owners have on the assets of a
company because the company has created new wealth for them over the period
since it began.
Residual value the estimated
amount that an entity would currently obtain from disposal of the asset, after
deducting the estimated cost of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
Retained earnings accumulated past
profits, not distributed in dividends, available to finance investment in
assets.
Retained profit profit of the
period remaining after dividend has
been deducted.
Return the yield or reward
from an investment.
Revaluation reserve
the
claim which owners have on the assets of
the business because the balance sheet records a market value for an asset that
is greater than its historical cost.
Revenue created by a
transaction or event arising during the ordinary activities of the business
which causes an increase in the ownership interest.
Rights issue a company gives its
existing shareholders the right to buy more shares in proportion to those
already held.
Risk (in relation
to investment) factors
that may cause the profit or cash flows of the business to fluctuate.
Raw Materials: This refers to the
materials bought by a manufacturing business in order to manufacture its
products.
Real accounts: These are accounts
which deal with money such as bank and cash accounts. They also include those
dealing with property and investments. In the case of bank and cash accounts they
can be held in the nominal ledger, or balanced in a journal (eg. the cash book)
where they can then be looked upon as a part of the nominal ledger when
compiling a balance sheet. Property and investments can be held in subsidiary
ledgers (with associated control accounts if necessary) or directly in the
nominal ledger itself.
Realisation
principle:
The principle whereby the value of an asset can only be determined when it is
sold or otherwise disposed of, ie. its 'real' (or realised) value.
Rebate: If you pay for a
service, then cancel it, you may receive a 'rebate'. That is, you may be
refunded some of the money you paid for the service. (eg. if you cancel a 1
year insurance policy after 3 months, you may get a rebate for the remaining 9
months)
Receipt: A term typically
used to describe confirmation of a payment - if you buy some petrol you will
normally ask for a receipt to prove that the money was spent legitimately.
Reconciling: The procedure of
checking entries made in a business's books with those on a statement sent by a
third person (eg. checking a bank statement against your own records).
Refund:
If you return some goods you have just bought (for whatever reason), the
company you bought them from may give you your money back. This is called a
'refund'.
Reserve accounts: Reserve accounts
are usually set up to make a balance sheet clearer by reserving or apportioning
some of a business's capital against future purchases or liabilities (such as
the replacement of capital equipment or estimates of bad debts).
A
typical example is a company where they are used to hold the residue of any
profit after all the dividends have been paid. This balance is then carried
forward to the following year to be considered, together with the profits for
that year, for any further dividends.
Retail: A term usually
applied to a shop which re-sells other people's goods. This type of business
will require a trading account as well as a profit and loss account.
Retained
earnings: This is the amount of money held in a business after its owner(s)
have taken their share of the profits.
Retainer: A sum of money
paid in order to ensure a person or company is available when required.
Retention ratio: The proportion of
the profits retained in a business after all the expenses (usually including
tax and interest) are taken into account. The algorithm is retained profits
divided by profits available for ordinary shareholders (or available for the
proprietor/partners in the case of unincorporated companies).
Revenue: The sales and any
other taxable income of a business (eg. interest earned from money on deposit).
Run Rate: A forecast for the
year based on the current year to date figures. If a company's 1st quarter
profits were, say, $25m, they may announce that the run rate for the year is
$100m.
Rebate An interest adjustment used when
retiring a Bill of Exchange before it is due.
Recourse The right of a holder of a Bill of Exchange
to demand payment from a person rather than the acceptor. Bills may be endorsed
“without recourse” in which case the endorser does not become liable to any holder.
Red Clause
Credit documentary credit
provision, which allows the beneficiary
(seller),
to draw partial advance payments under the credit. This provision had
historically been written/typed in red ink, hence the “red clause”.
Remittance
– Documents Against Acceptance
[Rem D/A] An advance facility
similar to Rem D/P except that the bill of exchange allows for term payment and
accompanying documents may be released on acceptance of the bill .
Remittance
– Documents Against Payment
[Rem D/P] An advance facility
which provides for negotiation or purchases of bills of exchange (sight) drawn
outside documentary credits and where accompanying documents are to be released
on payment of the bill overseas .
Remitting Bank Under documentary
collections the bank to which the principal
(exporter)
has entrusted the handling of a collection.
Retention of Title Clause A contract clause whereby a seller declares
his intention to retain
title
or ownership over the contract goods until payment by the buyer is completed.
Retire (a Bill of Exchange) To pay, or take up before maturity, usually under
rebate and thus
withdraw
(or retire) a bill from circulation.
If
a bill is retired by the acceptor, the bill is discharged in the same way as
upon payment at maturity.
Revaluation An upward change in the official parity of
an exchange rate from that which it was previously set.
Revolving Credit A documentary
credit which, after notice of drawing against it is
received
by the issuing bank, the balance available for drawing again reverts back or
“revolves” to its original amount, providing the credit has not expired in the
meantime.
Rollover The extension of a maturing foreign
exchange transaction or the extension of a maturing currency deposit/loan.
Sales: Income received
from selling goods or a service. See Revenue.
Sales Invoice: See Invoice
definition.
Sales Ledger: A subsidiary
ledger which holds the accounts of a business's customers. A control account is
held in the nominal ledger (usually called a debtors' control account) which
shows the total balance of all the accounts in the sales ledger.
Sales
see revenue, turnover.
Sales invoice document sent to
customers recording a sale on credit and requesting payment.
Secured loan loan where the
lender has taken a special claim on particular assets or revenues of the company.
Share capital name given to the
total amount of cash which the shareholders have contributed to the company.
Share certificate a document
providing evidence of share ownership.
Share premium the claim which
owners have on the assets of a company because shares have been purchased from
the company at a price greater than the nominal value.
Shareholders owners of a limited liability company.
Shareholders' funds
name
given to total of share capital and reserves in a company balance sheet.
Shares the amount of share
capital held by any shareholder is measured in terms of a number of shares in
the total capital of the company.
Short-term finance money lent to a
business for a short period of time, usually repayable on demand and also
repayable at the choice of the business if surplus to requirements.
Sole trader an individual
owning and operating a business alone.
Stakeholders a general term
devised to indicate all those who might have a legitimate interest in receiving
financial information about a business because they have a 'stake' in it.
Statement of
recognised income and expense a financial statement reporting realised and unrealised income and expense as part of a statement of changes in equity under the iasb system.
Stewardship taking care of
resources owned by another person and using those resources to the benefit of
that person.
Stock a word with two
different meanings. It may be used to describe an inventory of goods held for resale or for use in business. It may
also be used to describe shares in
the ownership of a company. The meaning will usually be obvious from the way in
which the word is used.
Stock exchange (also called stock market.) Stock
Exchange is the place, where stocks, shares and other securities of the listed
companies bought and sold. Stock exchange An organisation which has the
authority to set rules for persons buying and selling shares. The term 'stock'
is used loosely with a meaning similar to that of 'shares'.
Stock
market see stock exchange.
Subsidiary company company in a group
which is controlled by another (the parent company). Sometimes called
subsidiary undertaking.
Suppliers' payment
period average
number of days credit taken from suppliers.
Sea Waybill
Transport
document for marine shipments serving as evidence of contract of carriage and as a receipt for the goods. It is
not a document of title.
Shading A request to
narrow, or close up, the spread or margin between foreign currency buying and
selling rates of exchange.
Shipper The party (exporter or importer) who
enters into a contract of carriage for the international transport of goods.
Shipping Documents Documents often
attached to bills of exchange payable overseas.
The
basic documents usually consist of:
Invoices
Insurance
policy
Bill
of Lading/Sea Waybill/Air Waybill/Air Consignment note Others may include:
Certificate
of origin
Certificate
of quality
Veterinary certificate
Consular invoice
e
iWght certificate
Inspection certificate
Packing list
Sight Bill A Bill of Exchange
payable at sight is treated as being payable by the drawee on presentation or
on demand.
Smart Forward
Contracts A Smart Forward
Contract enables both importers and exporters
to
protect themselves against adverse movements in exchange rates, while providing
some potential for them to benefit from favourable movements in exchange rates.
– see Westpac Banking Corporation.
Sola Draft A single Bill of
Exchange as distinguished from one in a set, the latter being marked as “First
of Exchange” and the former “Sola of
Exchange”.
Spot Exchange Foreign exchange
bought and sold for immediate delivery. In
practice,
almost invariably for delivery two business days after the conclusion of the
deal.
Standby Letter of Credit A form of guarantee such as a demand
guarantee. Used as
security
for a contingent event i.e. an importer failing to honour the exporter’s
invoices under open account – the importer claims against the standby letter of
credit.
Swap An agreement where one party provides
foreign currency or local currency to another in a spot transaction while at
the same time entering into a contract to repurchase the currency at some
future time.
SWIFT Society for Worldwide Inter-bank
Financial Telecommunications – organisation providing international electronic
funds transfer and messaging system used by most major banks.
Self Assessment (UK
only):
A new style of income tax return introduced for the 1996/1997 tax year. If you
are self-employed, or receive an income which is un-taxed at source, you will
need to register with the Inland Revenue so that the relevant self assessment
forms can be sent to you. The idea of self assessment is to allow you to
calculate your own income tax.
Self-balancing
ledgers:
A system which makes use of control accounts so that each ledger will balance
on its own. A control account in a subsidiary ledger will be mirrored with a
control account in the nominal ledger.
Self-employed: The owner (or
partner) of a business who is legally liable for all the debts of the business
(ie. the owner(s) of a non-limited company).
Selling,
General & Administrative expense (SG&A): The expenses involved in
running a business.
Service: A term usually
applied to a business which sells a service rather than manufactures or sells
goods (eg. an architect or a window cleaner).
Shareholders: The owners of a
limited company or corporation.
Share premium: The extra paid
above the face value of a share. Example: if a company issues its shares at $10
each, and later on you buy 1 share on the open market at $12, you will be
paying a share premium of $2
Shares: These are
documents issued by a company to its owners (the shareholders) which state how
many shares in the company each shareholder has bought and what percentage of
the company the shareholder owns. Shares can also be called 'Stock'.
Shares
issued ( Shares outstanding): The number
of shares a company has issued to shareholders.
Simple interest: Interest applied
to the original sum invested (as opposed to compound interest). Eg. 1000
invested over two years at 10% per year simple interest will yield a gross
total of 1200 at the end of the period (10% of 1000=100 per year).
Single-step
income statement: An income statement where all the revenues are shown as a
single total rather than being split up into different types of revenue (this
is the most common format for very small businesses). See Profit and Loss,
Multiple-step income statement.
Sinking fund: An account set up
to reduce another account to zero over time (using the principles of
amortization or straight line depreciation). Once the sinking fund reaches the
same value as the other account, both can be removed from the balance sheet.
SME: Small and Medium
Enterprises (ie. small and medium size businesses): The distinction between
what is 'small' and what is 'medium' varies depending on where you are and who
you talk to.
Sole trader: See
Sole-proprietor.
Sole-proprietor: The self-employed
owner of a business (see Self-employed).
Source document: An original
invoice, bill or receipt to which journal entries refer.
Stock: This can refer to
the shares of a limited company (see Shares) or goods manufactured or bought
for re-sale by a business.
Stock control
account:
An account held in the nominal ledger which holds the value of all the stock
held in the inventory subsidiary ledger.
Stockholders: See Shareholders.
Stock Taking: Physically
checking a business's stock for total quantities and value.
Stock valuation: Valuing a stock of
goods bought for manufacturing or re-sale.
Straight-line
depreciation:
Depreciating something by the same (ie. fixed) amount every year rather than as
a percentage of its previous value. Example: a vehicle initially costs $10,000.
If you depreciate it at a rate of $2000 a year, it will depreciate to zero in
exactly 5 years. See Depreciation.
Subordinated debt: If a company is
liquidated (i.e. becomes insolvent), the secured creditors are paid first. If
any money is left, the unsecured creditors are then paid. The amount of money
owed to the unsecured creditors is termed the 'subordinated debt' of the
company.
Subsidiary ledgers: Ledgers opened in
addition to a business's nominal ledger. They are used to keep sections of a
business separate from each other (eg. a Sales ledger for the customers, and a
Purchase ledger for the suppliers). (See Control Accounts)
Suspense Account: A temporary
account used to force a trial balance to balance if there is only a small
discrepancy (or if an account's balance is simply wrong, and you don't know
why). A typical example would be a small error in petty cash. In this case a
transfer would be made to a suspense account to balance the cash account. Once
the person knows what happened to the money, a transfer entry will be made in
the journal to credit or debit the suspense account back to zero and debit or
credit the correct account.
Sweat Equity Shares: means equity shares issued
by the company to employees, directors. Such issue should be authorized by a
special resolution passed by the company in general meeting.
T Account: A particular
method of displaying an account where the debits and associated information are
shown on the left, and credits and associated information on the right.
Tangible assets: Assets of a
physical nature. Examples include buildings, motor vehicles, plant and
equipment, fixtures and fittings. See Intangible assets.
Three
column cash book: A journal which deals with the day to day cash and bank
transactions of a business. The side of a transaction which relates directly to
the cash or bank account is usually balanced within the journal and used as a
part of the nominal ledger when compiling a balance sheet (ie. only the side
which details the sale or purchase needs to be posted to the nominal ledger).
Total assets usage sales divided by
total assets.
Trade creditors persons who supply
goods or services to a business in the normal course of trade and allow a
period of credit before payment must be made.
Trade debtors persons who buy
goods or services from a business in the normal course of trade and are allowed
a period of credit before payment is due.
Trade payables amounts due to
suppliers (trade creditors), also
called accounts payable.
Trade receivables amounts due from customers
(trade debtors), also called accounts receivable.
Turnover the sales of a
business or other form of revenue from operations of the business.
Tender Bond / Guarantee A guarantee provided by a company
responding to an
international
invitation to submit bids or tenders. The tender bond is required to discourage
frivolous bids and ensures that the winning bidder will execute the contract.
Tenor (of a Bill of
Exchange) The
period for which a bill is drawn e.g. sight, 30 days after date etc.
Through Bill of Lading A Bill of Lading issued to cover transport
by at least two
successive
modes of transport -
Trade Finance The term “Trade
Finance” may simply be described as finance for
working
capital. The main distinguishing feature about trade finance is that it relates
to the movement, purchase and/or sale of goods, services and “know-how” and it
applies to international trade, therefore, foreign currencies and exchange
risks can be involved – see Westpac
Banking Corporation.
Transferable Credit A documentary
credit under which the bank called upon to effect
payment or acceptance, or to any bank entitled to effect negotiation, makes the
credit available in whole or in part to one or more third parties (second
beneficiaries).
Total Cost of
Ownership (TCO):
The real amount an asset will cost. Example: An accounting application retails
at $1000. Support - which is mandatory, costs a further $200 per annum.
Assuming the software will be in use for 5 years, TCO will be $2000
(1000+5x200=2000).
Trading
account: An account which shows the gross profit of a manufacturing or retail
business.
Transaction:
Two or more entries made in a journal which when looked at together reflect an
original document such as a sales invoice or purchase receipt.
Trial Balance: A statement
showing all the accounts used in a business and their balances.
Turnover: The income of a
business over a period of time (usually a year).
Undeposited Funds
Account:
An account used to show the current total of money received (ie. not yet banked
or spent). The 'funds' can include money, cheques, credit card payments,
bankers drafts etc. This type of account is also commonly referred to as a
'cash in hand' account.
Unlisted (company) limited liability
company whose shares are not listed on
any stock exchange.
Limited Liability: Liability is limited to the
face value of the share.
Unrealised gains and losses
representing changes in values of assets and liabilities that are notrealised through sale or use.
Unsecured creditors
those
who have no claim against particular assets when a company is wound up, but
must take their turn for any share of what remains.
Unsecured loan loan in respect of
which the lender has taken no special claim against any assets.
Value to the
business an
idea used in deciding on a measure of current
value.
Valuation The process of
determining the PRESENT VALUE of a BOND based on the current MARKET INTEREST
RATE.
Variance the difference
between a planned, budgeted or standard cost and the actual cost incurred. An
adverse variance arises when the actual cost is greater than the standard cost.
A favourable variance arises when the actual cost is less than the standard
cost.
Vendor Supplier of goods
or services of a commercial nature; may be a manufacturer, importer, or wholesale
distributor.
Venture Capital Investment company
whose primary objective is capital growth. New ASSETS invested largely in
companies that are developing new ideas, products, or processes.
Voidable CONTRACT that can be
annulled by either party after it is signed because FRAUD, incompetence, or
another illegality exists or because a right of rescission applies.
Volume Total number of
stock shares, bonds, or COMMODITIES futures contracts traded in a particular
period.
Value Added Tax (VAT - applies to many
countries): Value Added Tax, or VAT as it is usually called is a sales tax
which increases the price of goods. At the time of writing the UK VAT standard
rate is 17.5%, there is also a rate for fuel which is 5% (this refers to
heating fuels like coal, electricity and gas and not 'road fuels' like petrol
which is still rated at 17.5%).
VAT
is added to the price of goods so in the UK, an item that sells at £10 will be
priced £11.75 when 17.5% VAT is added.
Wages: Payment for
services of employees at an hourly rate/daily rate. Payments made to the
employees of a business for their work on behalf of the business. These are
classed as expense items and must not be confused with 'drawings' taken by
sole-proprietors and partnerships (see Drawings).
Warrant Option to purchase
additional SECURITIES from the issuer.
Weighted-Average-Cost
Method An
AVERAGE-COST METHOD procedure for determining the cost of ENDING INVENTORY
under the PERIODIC INVENTORY SYSTEM
Wholesale The sale of goods
in large quantities, especially to a person or COMPANY that plans to sell them
at retail.
Working capital finance provided to
support the short-term assets of the business (stocks and debtors) to the
extent that these are not financed by short-term creditors. It is calculated as
current assets minus current liabilities.
Working capital
cycle total
of stock holding period plus customer’s collection period minus suppliers
payment period.
Work-in-progress cost of partly
completed goods or services, intended for completion and recorded as an asset.
Written down value
see net
book value.
Write Off Charging an ASSET
ACCOUNT to EXPENSE or LOSS.
Warehouse to Warehouse Insurance coverage of international
cargo from exporter’s warehouse to
importer’s warehouse.
Waybill A non-negotiable transport document,
issued for either ocean transport
(sea waybill) or air transport (air waybill).
Without Recourse The purchase and
discounting of trade documentation issued by
an
exporter under, and in full compliance with the terms of a documentary credit
with the negotiating bank’s sole recourse to the documentary credit issuer.
World Wide Web
(www: the Web) Internet sub-set which hosts “home pages”
of commercial,
individual,
academic and government departments.
Work in Progress: The value of partly
finished (ie. partly manufactured) goods.
Write-off: Depreciating an
asset to zero in one go.
X
no entries
Yield Return on an
INVESTMENT an investor receives from DIVIDENDS or INTEREST expressed as a
percentage of the cost of the SECURITY.
Yield Curve Graph showing the
TERM structure of interest rates by plotting the yields of all bonds of the
same quality with maturities ranging from the shortest to the longest
available.
Yield to Call YIELD on a BOND
assuming the bond will be redeemed by the ISSUER at the first call date
specified in the INDENTURE agreement.
Yield to Maturity Rate of return on a
SECURITY to its maturity, giving effect to the stated interest rate, accrual of
discount, or AMORTIZATION of PREMIUM.
Yield Interest
Rate The actual rate of interest
expressed as a rate percentage per annum
relating to the net proceeds or outlay. This method of quoting is preferred in
the market.
Zero Based Account
(ZBA):
Usually applied to a personal account (checking) where the balance is kept as
close to zero as possible by transferring money between that account and, say,
a deposit account.
Zero Based Budget
(ZBB): Starting
a budget at zero and justifying every cost that increases that budget.
Zero-Coupon Bond BOND on which the
holder receives only one payment at maturity which includes both PRINCIPAL and
INTEREST from issuance to maturity.
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