GOING RATE is an expression that means the cost of the average of suppliers of like products or services. The connotation is that the cost will be "no more expensive than the competition."
GOLDEN RULES OF ACCOUNTING are: 1. Debits ALWAYS EQUAL Credits; 2. Increases DO NOT NECESSARILY EQUAL Decreases; and, 3. Assets - Liabilities = Owner's Equity (The Accounting Equation).
GOODWILL is that intangible possession which enables a business to continue to earn a profit that is in excess of the normal or basic rate of profit earned by other businesses of similar type. The goodwill of a business may be due to a particularly favorable location, its reputation in the community, or the quality of its employer and employees. The evidence that goodwill exists is the proven ability to earn excess profits. Goodwill is created on the books of a newly purchased company to the extent that the purchase price of the company is greater than the value of its net tangible assets.
GRANTEE is the person or entity to whom property or assets are transferred.
GRANTOR is the person or entity who transfers property or assets.
GREEN BOOK is a publication entitled U.S. Overseas Loans and Grants and Assistance from International Organizations. This data, which is grouped by country and geographic region, includes assistance from USAID, military assistance, P.L. 480, Export-Import Bank, etc. from 1945 to the last completed fiscal year.. This publication is released shortly after the Congressional Presentation is distributed.
GROSS is: a. the entire amount of income before any deductions are made; or, b. any total amount before any deductions (examples: gross income or gross labor).
GROSS CONTRIBUTION is the starting amount prior to any relevant deductions have been made to the gross amount, e.g., Gross Contribution to Margin.
GROSS DOMESTIC PRODUCT (GDP) is the value of all the goods and services produced by workers and capital located within a country (or region), such as the
GROSS MARGIN is the ratio of gross profit to sales revenue. (sometimes used as a synonym for gross profit). For a manufacturer, gross margin is a measure of a company's efficiency in turning raw materials into income; for a retailer it measures their markup over wholesale. GROSS MARGIN is gross income divided by net sales, expressed as a percentage.
GROSS NATIONAL PRODUCT (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period. The GNP does include allowances for depreciation and indirect business taxes such as those on sales and property. Gross national product is the output of labor and property of US nationals regardless of the location of the labor and property. Gross National Product includes income earned by the factors of production (assets and labor) owned by a country's residents but excludes income produced within the country's borders by factors of production owned by nonresidents.
GROSS NEGLIGENCE is any action or an omission in reckless disregard of the consequences to the safety or property of another. Sometimes referred to as "very great negligence" and it is more then just neglect of ordinary care towards others or just inadvertence. Also known as the Latin term culpa lata.
GROSS PAY is employee salary prior to the application of taxes and other deductions.
GROSS PROFIT is net sales minus cost of sales.
GROSS PROFIT MARGIN ON SALES (GPM) is one of the key performance indicators. The gross profit margin gives an indication on whether the average markup on goods and services is sufficient to cover expenses and make a profit. GPM shows the relationship between sales and the direct cost of products/services sold. It measures the ability of both to control costs and to pass along price increases through sales to customers. The gross profit margin should be stable over time. A persistent gradual decrease is likely to indicate that productivity needs to be increased to return profitability back to previous levels.
GROSS PROFIT METHOD is an inventory estimate based on gross margin.
GROSS RECEIPTS is the total amount received prior to the deduction of any allowances, discounts, credits, etc.
GROSS REVENUE is income (at invoice values) received for goods and services over some given period of time. See also GROSS SALES.
GROSS SALES is the total revenue at invoice value prior to any discounts or allowances. See also GROSS REVENUE.
GROSS WEIGHT is the weight of a shipment including packing material.
GROUP is a number of individual companies assembled together; often having some unifying relationship.
GROUP ACCOUNTS are the financial statements of a group of companies. These are usually presented in the form of consolidated accounts.
GUARANTEE see WARRANTY
HARD COSTS is the purchase price of actual assets. For example, the purchase price of a new printing press would be the hard cost. The soft costs are additional fees for items like factoring-invoiced installation, prepaid and extended warranties, or service contracts for the new equipment.
HARMONIZED SYSTEM is an internationally agreed upon classification system for trade. It provides code numbers to specify a goods classification; thereby making customs duty determination more predictable.
HEADCOUNT is the act of counting people in a certain way or in a particular group.
HEAD OF HOUSEHOLD is a U.S. income tax filing status that can be used by an unmarried person who maintains a home for a dependent (or nondependent relative) during the tax year.
HEDGE, in securities, is a transaction that reduces the risk of an investment.
HEDGE FUND is a special type of investment fund with fewer restrictions on the types of investments it can make. Of note is a hedge fund's ability to sell short. In exchange for the ability to use more aggressive strategies, hedge funds are more exclusive, i.e., fewer people, usually only the wealthy, are allowed to invest in hedge funds.
HEDGING, in securities, is taking two positions that will offset each other if prices change, thereby limiting financial risk.
HELD TO MATURITY normally refers to a long term security (note or bond held for more than one year) that has a predetermined maturation event.
HIDDEN ASSET is any valued asset that is not included in the book value of a company. Companies have hidden assets such as intellectual property, or customer lists which are of great value, but not reflected in the book value.
HIGH-LOW METHOD is an algebraic procedure used to separate a semi-variable cost into the variable and fixed components. The method calls for using the extreme data points (highest and lowest x - y pairs) in the COST-VOLUME FORMULA y = a + bx; where a = fixed cost portion and b = the variable rate.
HIRE AND PURCHASE AGREEMENT is a contract (more fully called contract of hire with an option of purchase) in which a person hires goods for a specified period and at a fixed rent, with the added condition that if he shall retain the goods for the full period and pay all the installments of rent as they become due the contract shall determine and the title vest absolutely in him, and that if he chooses he may at any time during the term surrender the goods and be quit of any liability for future installments upon the contract. In the United States such a contract is generally treated as a conditional sale, and the term hire purchase is also sometimes applied to a contract in which the hirer is not free to avoid future liability by surrender of the goods. In
HISTORICAL COST ACCOUNTING is an accounting principle requiring all financial statement items to be based on original cost. It is usually based upon the dollar amount originally exchanged in an arm's-length transaction; an amount assumed to reflect the fair market value of an item at the transaction date.
HOLDING COMPANY is a company which owns or controls other companies. (Control can occur through the ownership of 50 per cent or more of the voting rights or through the exercise of a dominant influence.)
HORIZONTAL FINANCIAL ANALYSIS allows comparison of one company's ratios to the ratios of other companies as well as to average industrial ratios and internal industrial deviation of these ratios.
HOSTILE TAKEOVER occurs when a company attempts to buy out another whether they like it or not. A hostile takeover can occur only through publicly traded shares, as it requires the acquirer to bypass the board of directors and purchase the shares from other sources. This is difficult unless the shares of the target company are widely available and easily purchased (i.e., they have high liquidity). A hostile takeover may presage a corporate raid.
HUMAN CAPITAL is the unique capabilities and expertise of individuals that are productive in some economic context.
HURDLE RATE is a term used in the budgeting of capital expenditures meaning the REQUIRED RATE OF RETURN in a DISCOUNTED CASH FLOW analysis. If the expected rate of return on an investment is below the hurdle rate, the project is not undertaken. The hurdle rate should be equal to the INCREMENTAL COST OF CAPITAL.
HYBRID INSTRUMENT is a package containing two or more different kinds of risk management instruments that are usually interactive.
HYPOTHECATION, in securities, is the pledging of securities to brokers as collateral for loans made to cover short sales or purchase securities. In banking, it is the pledging of property to secure a loan.
IBA, among others, can mean: Individual Brokerage Account, Individually Billed Accounts,
IBNR is Incurred But Not Reported.
IDENTIFIABLE ASSETS and LIABILITIES are those assets and liabilities of a business that can be disposed of without disposing of the entire business. It includes both tangible and intangible assets.
IMA, in accounting, refers to the
IMMATERIALITY is of complete irrelevance requiring no further consideration.
IMPAIRED ASSETS, in banking, applies to all problem assets which banks hold, and is not limited to problem loans. In addition to loans, it also captures off- balance sheet exposures and assets which have come onto banks balance sheets through enforcement of security conditions. See IMPAIRMENT OF VALUE.
IMPAIRED GOODWILL is the recognition of the reduction in value of the intangible asset known as goodwill.
IMPAIRMENT OF VALUE is the permanent decline in the value of an asset. The entry is to debit the loss account and credit the asset for the loss in utility. See IMPAIRED ASSETS.
IMPOSTA VALORE AGGIUNTO TAX (IVA TAX), in
IMPREST see PETTY CASH
IMPUTED COSTS refer to the cost of an asset, service, or company that is not physically recorded in any accounts but is implicit in the product.
IMPUTED VALUE is the logical or implicit value that is not recorded in any accounts, e.g., in the projection of annual figures, values are imputed for months for which the actual values are not yet known.
INBR see INCURRED BUT NOT REPORTED; could also mean Insurance Broker.
INCOME is money received by a person or organization because of effort (work), or from return on investments.
INCOME CAPITALIZATION: First you must determine the capitalization rate - a rate of return required to take on the risk of operating the business (the riskier the business, the higher the required return). Earnings are then divided by that capitalization rate. The earnings figure to be capitalized should be one that reflects the true nature of the business, such as the last three years average, current year or projected year. When determining a capitalization rate you should compare with rates available to similarly risky investments.
INCOME GEARING RATIO is Interest Expense / Operating Profit.
INCOME STATEMENT see PROFIT AND LOSS STATEMENT.
INCOME TAXES PAYABLE is income taxes due including current portion of deferred taxes.
INCOME THEORIES try to identify the real profit of an organization. The difficulty here is that you need to define whose income you are measuring, and that limiting income measurements to things that can be given a price devalues goods and services that are difficult or impossible to price.
INCREMENTAL COST is the increase or decrease in costs as a result of one more or one less unit of output.
INCREMENTAL COST OF CAPITAL is the weighted cost of the additional capital raised in a given period. Weighted cost of capital, also called composite cost of capital, is the weighted average of costs applicable to the issues of debt and classes of equity that compose the firm’s capital structure. Also called marginal cost of capital.
INCUR is acquiring or getting into something undesirable. In business it usually is referencing a liability, e.g., incurring a loss or to incur a debt.
INCURRED BUT NOT REPORTED (IBNR), in insurance, losses occurring over a specified period that have not been reported to the insurer. IBNR losses are often calculated as a percentage of claims paid and claims outstanding and are reported in an insurer's annual report. Reinsurers establish IBNR reserves as a part of their rating plans under a facultative reinsurance treaty, lest an overly optimistic view of treaty results lead to further under-rating on a book of business. Example: Product liability losses are seldom reported during a policy year. This "tail" of claims will upset any rating plan, unless an IBNR reserve is established and factored into the profit picture.
INDEFEASIBLE not liable to being annulled or voided or undone, usually in reference to an interest in real property (e.g., an indefeasible ownership interest in a piece of property).
INDENTURE is an agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders. There is usually a indenture document spelling out the specific terms of a bond as well as the rights and responsibilities of both the issuer of the security and the holder.
INDIRECT COST is that portion of cost that is indirectly expended in providing a product or service for sale (cannot be traced to a given cost object in an economically feasible manner) and is included in the calculation of COST OF GOODS SOLD, e.g. rent, utilities, equipment maintenance, etc. Opposite of direct cost.
INDUCTIVE ACCOUNTING THEORY (scientific method) assumes accounting standards are somewhat like evolution of a species in nature --- survival of the fittest. It relies heavily upon controlled experimentation (e.g., behavioral accounting research) and statistical testing (e.g., capital markets "events" studies of the impact of accounting information on market prices and volume of transactions).
INDUSTRIAL REVENUE BOND (I.R.B.) is a bond issued by local government agencies in favor of corporations.
INDUSTRY ANALYSIS includes, but is not limited to: a. Definition of the industry; b. Industry Life Cycle - growth, maturity or decline; c. Industry History - how old is the industry; d. In-depth historical financial performance ratio analysis; e. Industry Trends - cyclical or seasonal, increased competition etc.; f. Industry Influential Factors - does economy, government, or competition effect industry; g. Primary Competitors along with entry risk and barriers to entry; and, h. Projected Industry Sales - total sales in the industry.
INFLATION is an increase in the general price level of goods and services; alternatively, a decrease in the purchasing power of the dollar or other currency.
INFLATION ACCOUNTING is a system of accounting which, unlike historical cost accounting, takes into account changing prices.
INFLATION ADJUSTMENT is whenever any figure is adjusted for inflation/deflation. It simply means that all fluctuations in price (upward or downward) that are directly attributable to inflation/deflation are reflected into that figure through either adding or subtracting the amount that is directly caused by inflation/deflation.
INFORMATION / INFORMATIONAL RETURN is one of many returns that only communicates to the Internal Revenue Service information relevant to tax liability and does not compute the actual liability of any taxpayer or accompany the actual payment of tax; used for sale of property, dividends, and others (e.g., W-2 and Forms 1099).
INFORMATION THEORY is a branch of mathematics that overlaps into communications engineering, biology, medical science, sociology, and psychology. The theory is devoted to the discovery and exploration of mathematical laws that govern the behavior of data as it is transferred, stored, or retrieved.
INFRASTRUCTURE is the resources (as personnel, buildings, or equipment) required for an activity.
INITIATE is to set going by taking the first step, e.g., initiate contract negotiations.
IN-KIND is the value of goods or services provided for which money would have otherwise been paid.
INSIDER TRADING is the trading, primarily of securities, by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.
INSOLVENCY occurs when a business is unable to pay debts as they fall due.
INSTALLEMENT AGREEMENT see INSTALLMENT SALE.
INSTALLMENT SALE is selling property and receiving the sales price over a series of payments, instead of all at once at the close of the sale, is an installment sale. As the seller, unless you elect out, you will report the gain on that transaction as you receive it through the series of payments. As the buyer, you will usually pay interest on the unpaid balance.
INSURANCE CLAIM is a written notification to an insurance company requesting payment of an amount due under the terms of the policy.
INTANGIBLE ASSET is an asset that is not physical in nature. Examples are things like copyrights, patents, intellectual property, or goodwill. An intangible asset is the opposite of tangible asset.
INTANGIBLES (NET) are intangible assets, including goodwill, trademarks, patents, catalogs, brands, copyrights, formulas, franchises, and mailing lists, net of accumulated amortization.
INTEGRATED FINANCIAL MODEL is normally a spreadsheet based financial model that integrates all projected revenues and costs from all activity into financial performance pro-forma projections over time. Dependent upon the complexity of the model, the output can be at a very high level (non-complex) to highly granular output (higher degree of complexity).
INTEGRATED LEDGER see ENTERPRISE RESOURCE PLANNING.
INTELLECTUAL CAPITAL Intellectual capital bundles knowledge resources (how the ‘production functions”, that is the constellation of employees, users, processes and technologies, work). Intellectual capital enables a company to make a difference to users via its knowledge resources.
INTELLECTUAL CAPITAL STATEMENT (ICS) provides: a. Insights into the user’s situation (= the customers situation); b. Insight into the colleague’s skills and improvements of teamwork; c. Insight in the practical skills e.g. craftsmanship: from knowing how to develop and improve production methods to be capable of handling information technology etc.; d. Insights in the know-how represented in the company’s processes and systems and how these can be used to improve the quality of products or services; e. Insight in the motivation or commitment as regards the further development of the company’s products and services; f. Insight in the future needs for knowledge; g. Insight in the skills, competencies and qualification that can make a difference to the company.
INTENSITY DRIVERS are used to directly charge for the resources used each time an activity is performed.
INTERCOMPANY means occurring between companies.
INTEREST, in law, is a right or legal share of something or a financial involvement with something; in finance, it is a fixed charge for borrowing money; usually a percentage of the amount borrowed.
INTEREST-BEARING means paying interest.
INTERESTED PARTY is any person that has a real and direct interest in any proceeding or action being proposed or taken.
INTEREST EXPENSE is the cost of borrowing funds in the current period. It is shown as a financial expense item within the income statement.
INTEREST RATE is the rate of interest charged for the use of money, usually expressed as an annual rate. The rate is derived by dividing the amount of interest by the amount of principal borrowed. For example, if a bank charged $100 a year to borrow $1,000, the interest rate would be 10%. Interest rates are quoted on bills, notes, bonds, credit cards and many kinds of consumer and business loans. Rates in general tend to rise with inflation and in response to the Federal Reserve raising key short-term rates. A rise in interest rates has a negative effect on the stock market because investors can get more competitive returns from buying newly issued bonds instead of stocks. It also hurts the secondary market for bonds because rates look less attractive compared to newer issues.
INTERFUND LOAN is an authorized (usually) short term loan from one fund to another.
INTERIM AUDIT is an audit conducted during the fiscal year usually as a means of minimizing the work and time involved in concluding the audit after the fiscal year. A corporation might have an interim audit covering the first nine months of the fiscal year so that at the end of the fiscal year most of the auditing will focus on the last three months of the fiscal year thus allowing for a comprehensive audit and early completion of the audit reports. An interim audit does not usually yield any formal reports from the external auditors.
INTERIM DIVIDEND is the declaration and payment of a dividend prior to annual earnings determination.
INTERIM EARNINGS see INTERIM STATEMENT.
INTERIM STATEMENT is a financial report covering only a portion of a fiscal year (prepared by accountants, but usually unaudited). Quarterly statements from publicly traded companies are one example of an interim statement. Interim statements are not as detailed or as exact as annual statements.
INTERMEDIARY is the person or institution empowered to be the intermediary in making investment decisions for others. Examples: banks, savings and loan institutions, insurance companies, brokerage firms, mutual funds, and credit unions.
INTERMEDIATION COST, in finance, is the cost involved in the placement of money with a financial intermediary. The person or institution empowered as the intermediary to make investment decisions for others. Examples: banks, savings and loan institutions, insurance companies, brokerage firms, mutual funds, and credit unions.
INTERNAL AUDIT is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. The objective of internal auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed. The audit objective includes promoting effective control at reasonable cost. Occasionally a corporation may contract an external auditor or firm to conduct its internal audit function.
INTERNAL AUDITOR is an auditor who works directly for a company auditing its activities throughout the year. Internal auditors of corporations are often not certified auditors, though they usually have significant accounting experience. They should report directly to the board of directors of the corporation.
INTERNAL CONTROLS include policies and procedures that (a) pertain to the maintenance of accurate and reasonably detailed records, (b) provide reasonable assurance that transactions are properly recorded and authorized, and (c) safeguard assets.
INTERNAL RATE OF RETURN (IRR) is also called the dollar-weighted rate of return; the interest rate that makes the present value of the cash flows from all the sub-periods in an evaluation period plus the terminal market value of the portfolio equal to the initial market value of the portfolio.
INTERSEGMENT REVENUE is revenue generated within a segment; whether it be a business or geographical segment.
IN THE BLACK means making money; the opposite of "in the red."
IN THE RED means losing money; the opposite of "in the black."
INTRACOMPANY means occurring within or taking place between branches or employees of a company.
INTRINSIC VALUE, generally, is the value of a resource unto itself, regardless of its value to humans; often considered the ethical value of a resource, or the right of the resource to exist, e.g., in securities, it is the perceived actual value of a security, as opposed to its market price or book value.
INVENTORY for companies: includes raw materials, items available for sale or in the process of being made ready for sale (work in process); for securities: it is securities bought and held by a broker or dealer for resale.
INVENTORY LOAN is loan that is extended based upon the, usually, discounted / factored value of a business' inventory.
INVENTORY OBSOLESCENCE is when inventory is no longer salable. Possibly due to too much inventory on hand, out of fashion or demand. The true value of the inventory is seldom exactly what is shown on the balance sheet. Often, there is unrecognized obsolescence.
INVENTORY SHRINK, as used in retail, is reduction in physical inventory caused primarily by shoplifting and employee theft.
INVENTORY SHRINKAGE is a reduction in the physical amount of inventory that is not easily explainable. The most common cause of shrinkage is theft.
INVENTORY TURNOVER is a ratio that shows how many times the inventory of a firm is sold and replaced over a specific period.
INVENTORY TURNS (Period Average) measures the average efficiency of the firm in managing and selling inventories during the last period, i.e., how many inventory turns the company has per period and whether that is getting better or worse. It is imperative to compare a company’s inventory turns to the industry average. A company turning their inventory much slower than the industry average might be an indication that there is excessive old inventory on hand which would tie up their cash. The faster the inventory turns, the more efficiently the company manages their assets. However, if the company is in financial trouble, on the verge of bankruptcy, a sudden increase in inventory turns might indicate they are not able to get product from their suppliers, i.e., they are not carrying the correct level of inventory and may not have the product on hand to make their sales. If looking at a quarterly statement, there probably are more or less turns than an annual statement due to seasonality, i.e., their inventory levels will be higher just before the busy season than just after the busy season. This does not mean they are managing their inventory any differently; the ratio is just skewed because of seasonality. NOTE: Comparing the two INVENTORY TURNS (Period Average and Period End) suggests the direction in which inventories are moving, thereby allowing an analysis of efficiency improvements and/or potential burgeoning inventory problems.
INVENTORY TURNS (Period End) measures the ending efficiency of the firm in managing and selling inventories during the last period, i.e., how many inventory turns the company has per period and whether that is getting better or worse. It is imperative to compare a company’s inventory turns to the industry average. A company turning their inventory much slower than the industry average might be an indication that there is excessive old inventory on hand which would tie up their cash. The faster the inventory turns, the more efficiently the company manages their assets. However, if the company is in financial trouble, on the verge of bankruptcy, a sudden increase in inventory turns might indicate they are not able to get product from their suppliers, i.e., they are not carrying the correct level of inventory and may not have the product on hand to make their sales. If looking at a quarterly statement, there probably are more or less turns than an annual statement due to seasonality, i.e., their inventory levels will be higher just before the busy season than just after the busy season. This does not mean they are managing their inventory any differently; the ratio is just skewed because of seasonality. NOTE: Comparing the two INVENTORY TURNS (Period Average and Period End) suggests the direction in which inventories are moving, thereby allowing an analysis of efficiency improvements and/or potential burgeoning inventory problems.
INVESTMENT is the purchase of real property, stocks, bonds, collectible annuities, mutual fund shares, etc, with the expectation of realizing income or capital gain, or both, in the future. Investment is longer term and usually less risky than speculation.
INVESTMENT CAPITAL is capital realized from issuance of long term debt, common shares, or preferred shares.
INVESTMENT OPPORTUNITY SET is a graphical depiction of the Capital Allocation Line; which depicts expected rates of return between risky and risk-free assets.
INVESTMENT TAX CREDIT is a tax credit in the
INVESTMENT TURNOVER is a profitability measure used to calculate the number of times per year an investment or assets revolve.
INVOICE is a detailed list of goods shipped or services rendered, with an account of all costs; an itemized bill.
INVOICE, COMMERCIAL is a legal document that functions internationally as a bill of sale. It usually contains the exporting company, contents of the shipment, amount charged, name of carrying vessel, order number and payment terms.
INVOICE, CONSULAR is an invoice stamped or endorsed by the consulate of the country requiring such.
IOU is an informal debt instrument in the form of a written promise to pay back money owed; e.g., personal loans and professional services.
IPO (INITIAL PUBLIC OFFERING) is the first or primary offering of stock to the public.
IRR see INTERNAL RATE OF RETURN.
IRRELEVANT COST, in managerial accounting decision-making situations, is any positive or negative implications phenomenon which is not consequent upon the production process, whether it is denominated in money terms or not.
IRREVOCABLE LETTER OF CREDIT is a letter of credit in which the specified payment is guaranteed by the issuing bank if all terms and conditions are met by the drawee. It is as good as the issuing bank.
ISSUE, in securities, is stock or bonds sold by a corporation or a government; or, the selling of new securities by a corporation or government through an underwriter or private placement.
ISV can mean: Independent Software Vendor, Independent Solution Vendor, or Information Service Vendor.
IVA TAX see IMPOSTA VALORE AGGIUNTO TAX.
JCO is Justification for Continued Operation.
JIT see JUST IN TIME.
JOB COSTING is the allocation of all time, material and expenses to an individual project or job.
JOINT COSTS are costs incurred to produce a certain amount of two or more products where the cost of producing one product cannot be logically isolated and cost allocation is arbitrary.
JOINT PAYEE ENDORSEMENT, normally, when a bank draft is made out to two parties both parties are required to endorse the back of the bank draft before it will be honored by the bank.
JOINT RETURN is a
JOINT STOCK COMPANY is a company that has some features of a corporation and some features of a partnership. This type of company has access to the liquidity and financial reserves of stock markets as a corporation, however, as in a partnership; the stockholders are liable for company debts and have additional restrictions of a partnership.
JOINT VENTURES & INVESTMENTS is the total of investments and equity in joint ventures.
JOURNAL, in accounting transactions, is where transactions are recorded as they occur.
JOURNAL ENTRY is the beginning of the accounting cycle. Journal entries are the logging of business transactions and their monetary value into the t-accounts of the accounting journal as either debits or credits. Journal entries are usually backed up with a piece of paper; a receipt, a bill, an invoice, or some other direct record of the transaction; making them easy to record and to maintain traceability for each transaction.
JUNK BOND is a bond with a speculative credit rating of BB or lower. Such bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poor's and Moody's Investor Services, provide the rating systems for companies' credit.
JUST-IN-TIME (JIT) is a management philosophy that strives to eliminate sources of manufacturing waste and cost by producing the right part in the right place at the right time.
KAIZEN COSTING means "improvements in small steps" (i.e., continuous improvement). It was developed in
KEOGH is a pension plan in the
KEYNESIAN GROWTH MODELS are models in which a long run growth path for an economy is traced out by the relations between saving, investing and the level of output.
KEYNESIAN MACROECONOMICS is the theory that shows how a market-based capitalist economy may reach equilibrium with large scale unemployment and how government spending may be used to raise it out of this to a new equilibrium at the full-employment level of output.
KITING, when used in the context of banking, refers to the practice of depositing and drawing checks at two or more banks and taking advantage of the time it takes for the second bank to collect funds from the first bank. Can also refer to illegally increasing the face value of a check by changing the printed amount of the check. When used in the context of securities, it refers to the manipulation and inflation of stock prices.
LABOR INTENSIVE is used to describe industries or sectors of the economy that relies relatively heavily on inputs of labor, usually relative to capital but sometimes to human capital or skilled labor, compared to other industries or sectors.
LAG TIME is the period of time between two closely related events, phenomena, etc., as between stimulus and response or between cause and effect: a time-lag between the declaration of war and full war production.
LAND, in terms of accounting, is the value of real estate less the value of improvements, e.g. buildings.
LARGE-CAP is a stock with a level of capitalization of at least $5 billion market value.
LBO see LEVERAGED BUY-OUT.
LCL see LESS THAN CONTAINER LOAD.
LCM is Lower of Cost or Market.
LCM RULE is an abbreviation for lower-of-cost-or-market rule. LCM requires that an asset be reported on the financial statements at the lower of purchase cost or market value.
LEAD-TIME is the time between the initial stage of a project or policy and the appearance of results, for example, the long lead-time in oil production because of the need for new field exploration and drilling.
LEASEHOLD IMPROVEMENTS are those repairs and / or improvements, usually prior to occupancy, made to a leased facility by the lessee. The cost is then added to fixed assets and amortized over the life of the lease.
LEASE RATE FACTOR is the periodic lease or rental payment expressed as a percentage (or decimal equivalent) of equipment cost. Used to calculate payments given the cost of equipment (e.g. A lease rate factor of 0360 on an equipment cost of $5,000.00 requires a monthly payment of $180.00 (0360x$5,000.00=$180.00).
LEDGER is a book of accounts in which data from transactions recorded in journals are posted and thereby classified and summarized.
LEGAL ENTITY is a person or organization that has the legal standing to enter into contracts and may be sued for failure to perform as agreed in the contract, e.g., a child under legal age is not a legal entity, while a corporation is a legal entity since it is a person in the eyes of the law.
LEGITIMACY THEORY posits that businesses are bound by the social contract in which the firms agree to perform various socially desired actions in return for approval of its objectives and other rewards, and this ultimately guarantees its continued existence.
LEHMAN FORMULA is a compensation formula originally developed by investment bankers Lehman Brothers for investment banking services:
• 5% of the first million dollars involved in the transaction for services rendered
• 4% of the second million
• 3% of the third million
• 2% of the fourth million
• 1% of everything thereafter (above $4 million)
NOTE: Most investment bankers now require an additional multiplier to offset inflation.
LESS THAN CONTAINER LOAD (LCL) is a shipment in which the freight does not completely fill the container; or a particular consignor's freight when combined with others to produce a full container load.
LETTER OF AUTHORIZATION (LOA) is a form that permits a Donor to provide written instructions to transfer a stock certificate in the Donor’s name in full or in part to another party, such as a charitable organization, without using a transfer agent. This form given to the charitable organization with the designated stock certificate and a separate Stock Power is usually executed by the charitable organization’s brokerage to expedite the sale and receipt of proceeds from the gift of securities.
LETTER OF CREDIT (LOC) is a legal document issued by a buyer’s bank that upon presentation of required documents payment would be made. Usually confirmed by the seller's bank, protection is given to the seller that payment will be made if the goods are shipped correctly, and protection is given to the seller that the goods will be shipped before payment is made.
LETTER OF CREDIT, CONFIRMED is a letter of credit that is guaranteed by a bank that is acceptable to a seller (usually a local bank), regardless of buyer's bank.
LETTER OF CREDIT, IRREVOCABLE is a letter of credit where payment is guaranteed as long as the seller meets all conditions stipulated. A revocable letter of credit can be cancelled or altered by the buyer without permission of the seller.
LEVERAGE is property rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage relative to the underlying stock because a price change in the stock may result in a relatively large increase or decrease in the value of the option. In general, in finance, leverage is the use of debt financing. Leverage, within a corporation, is the use of borrowed money to increase the return on investment. For leverage to be positive, the rate of return on the investment must be higher than the cost of the money borrowed.
LEVERAGED BUY-OUT (LBO) is a transaction used for taking a public corporation private, financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.
LEVERAGED LEASE is a lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the borrowing.
LEVERAGE RATIOS measures the relative contribution of stockholders and creditors, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm.
LIABILITY, in insurance, is a term used when analyzing insurance risks that describes possible areas of financial exposure / loss. Presently, there are three forms of liability coverage that insurers will underwrite: The first is general liability, which covers any kind of bodily injury to non-employees except that caused by automobiles and professional malpractice. The second is product liability, which covers injury to customers arising as a direct result of goods purchased from a business. The third is public liability, which covers injury to the public while they are on the premises of the insured.
LIABILITY, in accounting, is a loan, expense, or any other form of claim on the assets of an entity that must be paid or otherwise honored by that entity.
LIBOR see LONDON INTERBANK OFFERED RATE.
LIEN is the right to take another's property if an obligation is not discharged.
LIFO (last-in, first-out) is an inventory cost flow whereby the last goods purchased are assumed to be the first goods sold so that the ending inventory consists of the first goods purchased.
LIFO LIQUIDATION is a reduction in the reported value of inventory below levels established in prior years under the LIFO method; arises when purchases for the period are not sufficient to offset the sale of inventory in the period.
LIFO RESERVE is the difference between the ending inventory under LIFO and FIFO (or other method that might be chosen).
LIKE KIND, in taxes, refers to property that is similar to another for which it has been exchanged: real estate exchanged for real estate, for instance. The definitions of like kind properties can be found in the US Tax Code at Section 1031.
LIMITATION, in contracts, is a certain period limited by statute after which actions, suits, or prosecutions cannot be brought in the courts.
LIMITED LIABILITY is one that does not go beyond the owner's investment in the business.
LIMITED PARTNER is a partner in a venture who has no management authority and whose liability is restricted to the amount of his or her investment.
LINE ITEM BUDGET is a budget initiated by government entities in which budgeted financial statement elements are grouped by administrative entities and object. These budget item groups are usually presented in an incremental fashion that is in comparison to previous time periods. Line item budgets are also used in private industry for comparison and budgeting of selected object groups and their previous and future expenditure levels within an organization.
LINE OF CREDIT is an agreement whereby a financial institution promises to lend up to a certain amount without the need to file another loan application. The borrower is required to reduce the debt whenever the limit of the full amount of credit has been reached.
LIP ACCOUNT see LOAN-IN-PROCESS ACCOUNT.
LIQUID ASSET is cash and any asset that can quickly be converted into cash (e.g., cash, checks and easily-convertible securities).
LIQUIDATING DIVIDENDS are dividends paid by a corporation that is in the process of liquidation/bankruptcy. Liquidating Dividends are paid from the capital of the corporation as opposed to earnings. Recipients of Liquidating Dividends are typically shareholders, bond holders and/or creditors. In the
LIQUIDATION VALUE is a type of valuation similar to an adjusted book value analysis. Liquidation value is different than book value in that it uses the value of the assets at liquidation, which is often less than market and sometimes book. Liabilities are deducted from the liquidation value of the assets to determine the liquidation value of the business. Liquidation value can be used to determine the bare bottom benchmark value of a business, since this should be the funds the business may bring upon valuation.
LIQUIDITY is a company's ability to meet current obligations with cash or other assets that can be quickly converted to cash.
LIQUIDITY RATIO see CASH RATIO.
LISTED COMPANY is a public company listed or quoted on a stock exchange.
LISTED INVESTMENTS are those investments which are listed or quoted on a stock exchange.
LISTING is a written contract between an agent and a principal giving authorization to the agent to perform services for the principal involving the principal’s property; or, a record of a property for sale by a broker who has been authorized by the owner of the property to be sold.
LMA, among others, is an acronym for Lease Management Agreement, Local Marketing Agreement or Legal Marketing Association.
LOADED LABOR RATE is the employee hourly rate plus employee benefits, capital expenses, and other overhead.
LOAN is an agreement under which an owner of assets (the lender) allows another entity (the borrower) to use the assets for a specified time period. In return, the borrower agrees to pay the lender a payment (interest) and return the assets (cash) at the end of the agreed upon time period.
LOAN COVENANT is a legally enforceable promise or restriction in a mortgage. For example, the borrower may covenant to keep the property in good repair and adequately insured against fire and other casualties. A breach of covenant in a mortgage usually creates a default, defined by the mortgage, and can be the basis for foreclosure.
LOAN-IN-PROCESS ACCOUNT (LIP ACCOUNT) serves as a deposit account for construction funds. The buyer's down payment is deposited into this account and is used for the initial construction draws. Disbursements of actual loan funds begin once the buyer's money is depleted. Interest on the borrowed funds will be billed monthly on the amount withdrawn. Upon completion of the house, the buyer will be asked to furnish a homeowner's insurance policy and monies for completing the escrow account. Once final disbursements to the builder are made, monthly payments begin based on amortization of the balance at that time.
LOAN STOCK is stock bearing a fixed rate of interest. Unlike a debenture, loan stock may or may not be secured.
LOAN TO VALUE RATIO, in real estate, is the percentage value for the relationship between the amount of the mortgage loan and the appraised value of the property. Loan-to-value ratio is expressed to a potential purchaser of a property in terms of the percentage a lending institution is willing to finance.
LOC see Letter of Credit.
LOCKBOX is 1. a fireproof metal strongbox (usually in a bank) for storing valuables e.g., a safety deposit box; and, 2. a service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company's account, and notifies the company of the deposit. This enables the company to put the money to work as soon as it's received, but the amounts must be large in order for the value obtained to exceed the cost of the service.
LOI is Letter of Intent.
LONDON INTERBANK OFFERED RATE (LIBOR) is the rate that the most creditworthy international banks that deal in Eurodollars charge each other for large loans. It is equivalent to the federal funds rate in the
LONG-LIVED ASSETS are usually those assets that are not consumed during the normal course of business, e.g. land, buildings and equipment, etc.
LONG TERM DEBT is all senior debt, including bonds, debentures, bank debt, mortgages, deferred portions of long term debt, and capital lease obligations.
LONG-TERM DEBT TO EQUITY expresses the relationship between long-term capital contributions of creditors as related to that contributed by owners (investors). As opposed to DEBT TO EQUITY, Long-Term Debt to Equity expresses the degree of protection provided by the owners for the long-term creditors. A company with a high long-term debt to equity is considered to be highly leveraged. But, generally, companies are considered to carry comfortable amounts of debt at ratios of 0.35 to 0.50, or $0.35 to $0.50 of debt to every $1.00 of book value (shareholders equity). These could be considered to be well-managed companies with a low debt exposure. It is best to compare the ratio with industry averages.
LONG-TERM LIABILITIES are liabilities of a business that are due in more than one year. An example of a long-term liability would be a mortgage payable.
LOSS, in finance, is when expenses exceed sales or revenues, i.e. goods or services are sold for less than their cost.
LOSS LEADER is a featured article of merchandise sold at a loss in order to draw customers.
LRIC is an acronym for Long Run Incremental Cost. A service costing methodology used primarily in the telecommunications industry.
LTM means Last Twelve Months.
MACRS is Modified Accelerated Cost Recovery System.
MAINTENANCE is the activity involved in maintaining something in good working order. May include replacement of signifcant portions of the item(s) being maintained.
MALPRACTICE INSURANCE see E&O INSURANCE.
MANAGEMENT ACCOUNTING is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities.
MANAGERIAL ACCOUNTING is a system using financial accounting records as basic data to enable better business decisions in the areas of planning and control.
MANAGEMENT BY OBJECTIVES (MBO) is a management theory that calls for managing people based on documented work statements mutually agreed to by manager and subordinate. Progress on these work statements is periodically reviewed, and in a proper implementation, compensation is usually tied to MBO performance.
MANAGEMENT CONTROL SYSTEM is essentially a strategic tool for holding managers accountable and responsible for their performance. Existence of such a system also provides feedback for managers to know how they perform, in which direction the organization is heading, and what type of course correction may be required to stay on course.
MANAGEMENT INFORMATION SYSTEM (MIS) is a well-developed data management system that provides uniform organizational information from all areas of the entity within a database. Information within the database is manipulated to help management reach accurate and rapid organizational decisions.
MANAGEMENT LETTER identifies issues not required to be disclosed in the Annual Financial Report but represent the auditor's concerns and suggestions noted during the audit.
MANDATORY TRANSFERS are transfers from the current (operating) fund group to other fund groups arising out of binding legal agreements related to the financing, e.g., in education: debt retirement, interest, and grant agreements with federal agencies and other organizations to match gifts and grants. Whereas non-mandatory transfers would be transfers from the current (operating) fund group to other fund groups made at the discretion of management to serve various objectives, e.g., additions to loan funds, endowment funds, plant additions, and voluntary renewal and replacement of plant.
MANUAL TAG SYSTEM is a inventory tracking system used in inventory management that tracks inventory using tags removed at the point of purchase.
MANUFACTURING ACCOUNT is an accounting statement that is an integral part of the final accounts of a manufacturing organization. For any particular period, it indicates, among other things, prime cost of manufacturing, manufacturing overhead, the total manufacturing cost, and the manufacturing costs of finished goods.
MANUFACTURING CONCERN is an entity that derives its products for sale, thereby revenue, through the direct manufacture of those products.
MANUFACTURING STATEMENT see MANUFACTURING ACCOUNT.
MAP can mean Manufacturing Application Protocol, Merchant Account Provider, Minimum Advertised Price, or Major Accounts Processing among many others.
MARGIN see GROSS MARGIN.
MARGIN (Stocks) allows investors to buy securities/assets by borrowing money from a broker/banker. The margin is the difference between the market value of a stock/asset and the loan a broker/banker makes.
MARGIN ACCOUNT (Stocks) is a leverageable account in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
MARGINAL COST is a calculation showing the change in total cost as a result of a change in volume, e.g. if one more item of output increases the total cost by $25, the marginal cost is $25. It is usually useful to determine marginal cost because it can aid in determining if the rate of production should be altered.
MARGINAL REVENUE is the change in total revenue as a result of producing one additional unit of output.
MARGINAL TAX RATE is the top rate of income tax that is charged to individuals on their earnings.
MARGIN CALL (Stocks) is a demand for additional funds because of adverse price movement is a stock.
MARINE INSURANCE is insurance coverage protecting against loss or damage of goods transported by sea.
MARK ENDORSEMENT, normally, it is when a signatory (payee) cannot endorse with their signature, due to illiteracy or an infirmary, the signatory is allowed to make a mark that identifies that the signatory has signed. Such mark endorsements are normally witnessed with the witness endorsing the mark endorsement.
MARKETABLE SECURITY is a readily tradable equity or debt security with quoted prices; to include commercial paper and Treasury bills. It is a "close to cash" asset which is classified as a current asset.
MARKET CAPITALIZATION is the total dollar value of all outstanding shares. It is calculated by multiplying the number of shares times the current market price. The term is commonly referred to as “market cap”.
MARKET DISCOUNT is the stated redemption price of a bond at maturity minus your basis in the bond immediately after you acquire it. Market discount arises when the value of a debt obligation decreases after it's issue date.
MARKET DISCOUNT BOND is any bond having market discount except: short-term obligations with fixed maturity dates of up to 1 year from the date of issue, tax-exempt obligations that you bought before May 1, 1993, U.S. savings bonds, and certain installment obligations
MARKETING LEVER is anything that provides positional advantage or power to act effectively: Potential levers may be price, brand name, corporate image, broad distribution, effective advertising, etc.
MARKET MULTIPLE see PRICE/EARNINGS RATIO.
MARKET POSITION, from a marketing context, is the strength of an entity or product within the target market. In investing, it is the amount and/or depth and breadth of holdings within identified sectors of the capital market.
MARKET TO BOOK VALUE is calculated by dividing the market value (MV) of a company, i.e., the total value of all its outstanding shares, by the value of its tangible assets (TA). Also known as TOBIN RATIO = MV/TA.
MARKET VALUE, in general, is the price at which buyers and sellers trade similar items in an open marketplace. In the absence of a market price, it is the estimated highest price a buyer would be warranted in paying and a seller justified in accepting, provided both parties were fully informed and acted intelligently and voluntarily. See also OPEN MARKET VALUE (OMV).
MARKUP is the amount added to the cost of goods in order to produce the desired profit.
MATCHING, in accounting, is the matching of invoices to purchase orders and delivery notes prior to payment.
MATCHING CONCEPT is the accounting principle that requires the recognition of all costs that are directly associated with the realization of the revenue reported within the income statement.
MATCHING PRINCIPLE see MATCHING CONCEPT.
MATERIALITY is the importance of information or an event that influences a company's price of stock.
MATERIALITY PRINICIPLE requires accountants to use generally accepted accounting principles except when to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. If a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader's ability to judge the financial statements be impaired.
MATERIALS are physical goods (and their cost) used in the manufacture of a product, often separated into DIRECT MATERIAL (that which goes directly into the product such as cream into ice cream, or steel into cars) and INDIRECT MATERIAL (that which is used in maintaining the manufacturing environment such as cleaning fluids or oil for lubrication of manufacturing equipment). Indirect materials are usually part of the overhead component of cost. The term material, when used without the direct or indirect qualifier, usually refers to direct materials.
MATERIAL WEAKNESS is a condition that could potentially result in the material misstatement of the financial statements.
MATRIX ORGANIZATION is where a company superimposes a group or interdisciplinary team of project specialists on a functional organizational design. In a matrix organization the members have dual allegiances, i.e., to that particular assignment or project as well as their normal organizational department.
MBO see MANAGEMENT BY OBJECTIVES.
MD&A is an acronym for Management Discussion and Analysis. MD&A usually refers to that section of a corporate annual or quarterly report that provides managerial comment on corporate performance for the time period in question.
MEAN is the measure of central tendency; also called the 'average'. It is calculated by the sum of the data points divided by the number of data points.
MEASUREMENT THEORY involves the assignment of numerals to objects or events in order to represent certain attributes, or properties, of those objects and events.
MEDIAN is the value of the midpoint variable when the data are arranged in ascending or descending order.
MEDIA PLAN, in advertising, is the plan that details the usage of media in an advertising campaign including costs, running dates, markets, reach, frequency, rationales, and strategies.
MEDIUM TERM ASSETS, usually, are those assets that are expected of having a useful life of between six months and two years of the present.
MER (Management Expense Ratio) is the percentage of the assets that were spent to run a mutual fund. It includes things like management and advisory fees, travel costs and 12b-1 fees. The expense ratio does not include brokerage costs for trading the portfolio. Also referred to as the Expense Ratio.
MERGER is the union of two or more commercial interests or corporations. The distinction being that identity of the merged companies, product lines, etc., may or may not lose its individual identity.
MEZZANINE FINANCING usually is a class of investment that is a stage intermediate between venture capital and an initial public offering; or, subordinated debt used in leveraged buyouts (LBOs).
MID-CAP is a stock with a capitalization, total equity value, between $500 million and $5 billion.
MIDDLE MARKET COMPANY: see MID-CAP.
MILLAGE is a rate (as of taxation) expressed in mills per dollar.
MINIMUM WAGE is the lowest compensation you are allowed to pay an employee for hourly work. It is defined by Federal, state, and sometimes local laws. State or local laws may be more restrictive than Federal law, and certainly may differ.
MINORITY INTEREST is the interest or percentage ownership of a group of stockholders who, in total, own less than 50% of the shares in the corporation.
MINOR MATTERS is a term used in accounting and legal reports to cover areas considered to be cosmetic or superficial; thereby deemed by the author to be of little consequence.
MIS see MANAGEMENT INFORMATION SYSTEM.
MISCELLANEOUS INCOME is that income realized that is not directly related to the sale of standard products and services.
MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) is a system used in accounting to define the rate and method under which a fixed asset will be depreciated for tax purposes.
MODIFIED ACCRUAL BASIS accounting is a mixture of the cash and accrual basis. The modified accrual basis should be used for governmental funds. To be recognized as a revenue or expenditure, the actual receipt or disbursal of cash must occur soon enough after a transaction or event has occurred to have an impact on current spendable resources. In other words, revenues must be both measurable and available to pay for the current period's liabilities. Revenues are considered available when collectible either during the current period or after the end of the current period but in time to pay year-end liabilities. Expenditures are recognized when a transaction or event is expected to draw upon current spendable resources rather than future resources.
MONETARY is anything pertaining to or having to do with money, money creation, money supply, and the government management of money.
MONEY MEASUREMENT CONCEPT stipulates that all business transactions must be expressed in money terms, i.e., if something cannot be measured in money; it will not be included in accounting books.
MONEY MEASUREMENT PRINCIPLE see MONEY MEASUREMENT CONCEPT.
MONETARY UNIT is the unit used to measure economic activity (e.g.,
MORTGAGE is a conditional conveyance of property as security for the repayment of a loan.
MORTGAGE BOND is a bond in which the issuer has granted the bondholders a lien against the pledged assets.
MOU is Memorandum of Understanding.
MUD is Multi Unit Discount.
MULTIPLE same as Price/Earnings Ratio.
MULTIPLIER is a. the investment multiplier which quantifies the overall effects of investment spending on total income; or, b. the deposit multiplier which shows the effects of a change in bank deposits on the total amount of outstanding credit and the money supply.
MUTUAL AGENCY is the right of all partners in a partnership to act as agents for the normal business operations of the partnership, with the authority to bind it to business agreements.
NATURAL BUSINESS YEAR is a fiscal year based on the cycle of the given business rather than a calendar year. The year ends with inventories and activities at a low level, e.g., after winter shipments for a ski manufacturer.
NATURAL CLASSIFICATION of costs focuses on the nature of the cost item. In this classification structure, the total operating costs of an activity can be classified into manufacturing costs and commercial costs. Manufacturing costs include all direct materials and direct labor, as well as, factory overhead. Such factory overhead costs include indirect materials (such as factory supplies & lubricants), indirect labor (such as supervision and inspection) and other indirect costs (such as rent, insurance, and utilities). Commercial expenses include marketing expenses (such as advertising, printing, and sales salaries) and administrative (general and administrative (G&A)) expenses (such as administrative office salaries, rent, and legal expenses).
NCD is Negotiable Certificate of Deposit.
NEAR-CASH ASSETS are non-cash assets that can be readily exchanged for cash within a relatively short period (e.g., short-term CD's and money market funds).
NEBT is Net Earning Before Taxes.
NEGATIVE AMORTIZATION is a loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid Interest is added to the outstanding principal, to be repaid later.
NEGATIVE CONTRIBUTOR is any item, activity, or cost that offsets attainment of positive results, e.g., a rise in unemployment and its effect upon the economy.
NEGATIVE GOODWILL arises where the net assets at the date of acquisition, fairly valued, exceed the cost of acquisition. It is reflected on the balance sheet net of other intangible assets. Negative goodwill is recognized as income as follows:
- To the extent that negative goodwill relates to expected future losses and expenses, it is recognized in the income statement when the future losses and expenses are recognized.
- The amount of negative goodwill relating to identifiable
non-monetary assets (not exceeding the fair values of such acquired
assets), is recognized as income on a systematic basis over the remaining
useful lives of the identifiable acquired
depreciable/amortizable assets with a maximum of 20 years. - The amount of the negative goodwill in excess of the fair values of the acquired identifiable non-monetary assets is recognized as income immediately.
- The amount of the negative goodwill relating to monetary assets is recognized as income immediately
NOTE: Intangible assets are not revalued.
NEGATIVE PLEDGE CLAUSE is a covenant or promise in an indenture agreement
that states the corporation will not pledge any of its assets if doing so would
result in less security to the debt holders covered under the indenture
agreement. Also called covenant of equal coverage.NEGLIGENCE is the omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do.
NEGOTIABLE INSTRUMENT is an unconditional order or promise to pay an amount of money; it is easily transferable from one person to another, e.g. a check, promissory note, bearer bond, and draft (bill of exchange).
NET, in general, is the figure remaining after all relevant deductions have been made from the starting, or gross, amount.
NET ACCOUNTS RECEIVABLE is equal to total accounts receivable, minusan estimate for amounts the company believes it will never collect.
NET ASSETS is the difference between total assets and current liabilities including noncapitalized long-term liabilities.
NET ASSETS BASIS is a simple division of net asset attributable to the class of shareholders with the number of shares, i.e. the per share value of net assets.
NET ASSET VALUE (NAV) in securities, except money market funds which always have a NAV of $1.00, represents the market value or price of one fund share. It is calculated by the total value of the fund's portfolio less liabilities divided by the number of shares; or, in corporate valuations, it is a measure of the shareholders’ aggregate wealth in the company, which is defined as the actual or hypothetical market value of the company’s assets less its liabilities.
NET BOOK VALUE is the current book value of an asset or liability; i.e., its original book value net of any accounting adjustments such as depreciation.
NET CHANGE IN CASH is calculated by adding cash from operating, investing, and financing activities and foreign exchange effects from the Statement of Cash Flows.
NET CONTRIBUTION is the amount remaining after all relevant deductions have been made to the gross amount, e.g., Net Contribution to Margin.
NET DEBT is: debt + short term loans less cash on hand.
NET INCOME is the difference between a businesses total revenue and its total expenses. This caption and amount is usually found at the bottom of a company's Profit and Loss statement. Same as Net Profit.
NET LEASES, typically, there are three net leases: net lease, double-net lease, and triple-net lease. A net lease is a base rent plus an additional charge for taxes. A double-net lease is a base rent plus an additional charge for taxes and insurance. A triple-net lease is base rent plus an additional charge for taxes, insurance, and common area expenses.
NET OF TAXES means the effect of applicable taxes (usually income taxes) has been considered in determining the overall effect of an item on the financial statements. The phrase is used when a company has items that must be disclosed in a separate section. Each such item should be reported net of the applicable taxes.
NET OPERATING INCOME (NOI) is income after deducting for operating expenses but before deducting for income taxes and interest.
NET OPERATING LOSS (NOL) is experienced by a business when business deductions exceed business income for the fiscal year. For income tax purposes, a net operating loss can be used to offset income in a prior year, or a taxpayer can elect to forego the carry back and carry the net operating loss forward.
NET PRESENT VALUE (NPV) is a method used in evaluating investments, whereby the net present value of all cash outflows (such as the cost of the investment) and cash inflows (returns) is calculated using a given discount rate, usually REQUIRED RATE OF RETURN. An investment is acceptable if the NPV is positive. In capital budgeting, the discount rate used is called the HURDLE RATE and is usually equal to the INCREMENTAL COST OF CAPITAL.
NET PROFIT is the company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Same as Net Income.
NET PROFIT MARGIN (NPM After Tax) measures profitability as a percentage of revenues after consideration of all revenue and expense, including interest expenses, non-operating items, and income taxes. For a business to be viable in the long term profits must be generated; making the net profit margin ratio one of the key performance indicators for any business. It is important to analyze the ratio over time. A variation in the ratio from year-to-year may be due to abnormal conditions or expenses which need to be addressed. A decline in the ratio over time may indicate a margin squeeze suggesting that productivity improvements may need to be initiated. In some cases, the costs of such improvements may lead to a further drop in the ratio or even losses before increased profitability is achieved.
NET PROFIT MARGIN (NPM Pre-Tax) incorporates all of the expenses associated with ordinary business (excluding taxes) thus is a measure of the overall operating efficiency of the firm prior to any tax considerations which may mask performance. For a business to be viable in the long term profits must be generated; making the net profit margin ratio one of the key performance indicators for any business. It is important to analyze the ratio over time. A variation in the ratio from year-to-year may be due to abnormal conditions or expenses which need to be addressed. A decline in the ratio over time may indicate a margin squeeze suggesting that productivity improvements may need to be initiated. In some cases, the costs of such improvements may lead to a further drop in the ratio or even losses before increased profitability is achieved.
NET PURCHASES are those items purchased less returns, discounts and allowances on those purchases.
NET RECEIVABLES are a company's accounts receivable (money owed to the company) minus any provisions for bad debts.
NET REVENUE is GROSS REVENUE less discounts, allowances, sales returns, freight out, etc.
NET SALES is gross sales less discounts, allowances, sales returns, freight out, etc.
NET SALES TO GROSS SALES shows the percent of all transactions that may be considered as "good" net transactions. Differences may arise from returns, bad product, or other sales concessions.
NET 10, 30, etc. usually refers to payment terms on an invoice, e.g. 'Net 10 2%, 30', would mean that if a purchaser pays the invoice within 10 days a 2% reduction in invoice amount may be enjoyed, but full invoice amount is due within 30 days.
NET WORTH is the difference between Total Liabilities and Total Assets. Minority interest is included here.
NEUTRALITY, in an economic model, is where money is said to be neutral in the model if changes in the level of nominal money have no effect on the real equilibrium.
NEXUS, dependent upon usage, is a. the means of connection between things linked in series; or, b. a connected series or group; or, c. is the sufficient presence within the jurisdiction of a taxing authority. The taxable income of a multistate corporation may be apportioned to a specific state only if the corporation has a sufficient nexus in the state. The nexus for state sales tax requires a physical presence in the state, whereas the nexus for state income tax purposes requires more than just solicitations of sales.
NIM is Net Interest Margin.
NOMINAL means small payment, or value.
NOMINAL ACCOUNTS are those accounts that are closed out each period: revenue accounts, expense accounts, and dividend or withdrawals accounts.
NOMINAL DOLLARS are dollars that have not been adjusted for inflation.
NOMINAL CAPITAL is total face value of authorized issuable capital.
NOMINAL LEDGER is the account book showing expenditure on nominal accounts i.e. named business accounts such as postage, printing, etc.
NOMINAL VALUE is the par, or face, value of something e.g. a share issue.
NON-CASH EXPENSE is that expense which is recognized within the financial statements without actual cash being disbursed (e.g., depreciation, amortization, and write-offs).
NON-CURRENT ASSETS includes PPE (property, plant and equipment) as opposed to current assets which includes cash, cash equivalents (e.g. securities, short-term notes, etc.), inventory and accounts receivable.
NON-DISCRETIONARY means it is mandatory, not up to the individual or company.
NON-DISCRETIONARY ACCRUAL is a mandatory expense/asset that is recorded within the accounting system that has yet to be realized. An example of this would be payroll taxes.
NON-EQUITY SHARE is a share in an entity that a. evidences indebtedness of the entity to the holder of the share, and b. does not represent an equity interest in the entity.
NON-EXPENDABLE PROPERTY is durable (e.g., equipment and furniture), lasting for a year or longer, and generally has a high dollar value. Non-expendable property must be accounted for throughout its useful life.
NON-EXPENSE CASH DISBURSEMENT is spending not shown on the income statement, i.e., the expenditure of cash on something that does not appear on the profit-and-loss statement, for example, spending on a fixed asset or discharging part or the entire principal in a debt.
NON-FIXED ASSET is normally equipment and furnishings with an original purchase value less than some pre-determined value (e.g., <$1,000 in acquisition cost assets are considered to be non-fixed assets). These items are not assigned asset inventory tags. Typical examples of non-fixed asset items are calculators, typewriters, chairs, desks, filing cabinets, shelving units and small tools.
NON-PERFORMING ASSET is an asset not effectual in the production of income. For example, in banking, commercial loans 90 days past due and consumer loans 180 days past due are classified as non-performing.
NONPROFIT ORGANIZATION is one that has committed legally not to distribute any net earnings (profits) to individuals with control over it such as members, officers, directors, or trustees. It may pay them for services rendered and goods provided. Also known as NOT-FOR-PROFIT ORGANIZATION.
NONRECURRING is an income statement item that is infrequent in occurrence or unusual in nature.
NO-PAR VALUE CAPITAL STOCK are shares designated in the charter that do not have a par or assigned value printed on the issued stock certificate.
NOPAT (NET OPERATING PROFIT AFTER TAX) is a company's potential cash earnings if its capitalization was unleveraged. NOPAT is commonly used in EVA calculations.
NOPLAT is Net Operating Profit Less Adjusted Taxes.
NORMALIZED EARNINGS is earnings that have been adjusted in order to take into account the effect of cycles in the economy.
NORMAL PROFIT is the opportunity cost of using entrepreneurial abilities in the production of a good, or the profit that could have been received by entrepreneurship in another business venture. Like the opportunity costs of other resources, normal profit is deducted from revenue to determine economic profit. It is, however, never included as an accounting cost when accounting profit is computed.
NORMAL RATE OF RETURN, for individuals, is the average rate of return on all investments, i.e. the average of all returns yields the normal rate of return. For capital investments for businesses, it is the profit relative to capital investment.
NORMATIVE ACCOUNTING THEORY is where theorists tend to advocate their opinions on accounting based upon subjective opinion, deductive logic, and inductive methods. In the final analysis, nearly all standards are based upon normative theory. Generally conclude that some accounting rule is better or worse than its alternatives. Normative theorists tend to rely heavily upon anecdotal evidence (e.g., examples of fraud) that generally fails to meet tests of academic rigor. For example, the Wizard reported that Montgomery Ward would fail. However, the Wizard always reports that every company will fail or lose its self identity in a pattern of acquisitions and mergers. Eventually, he will always be correct.
NOSTRO ACCOUNT is an account held by a bank in a foreign country in the currency of that country e.g., a German bank with an account in
NOTARIAL is relating to or done by a notary public.
NOTARY PUBLIC is a certifier of legal documents, i.e., somebody who is legally authorized to certify the authenticity of signatures and documents. Also called notary.
NOTE see PROMISSORY NOTE.
NOTES PAYABLE-SHORT TERM are all short term note obligations, including bank and commercial paper. Does not include trade notes payable.
NOTES TO THE FINANCIAL STATEMENTS is a detailed set of notes immediately following the financial statements contained in the annual report that expands upon and/or explains in some depth the information contained in the financial statements.
NOT-FOR-PROFIT ORGANIZATION see NONPROFIT ORGANIZATION.
NPV is an acronym for Net Present Value.
NRGT (Non-Resettable Grand Total) is a concept used in retail point of sale (POS) terminals that does not allow the Grand Total to be reset, but does allow adjustments to be entered, e.g., errors, overwring, etc. Improved security and control is provided for independent retail and chain operations with a Non-Resettable Grand Total (NRGT). Updated by all sales, this valuable audit figure may be selected by programmability to print on the Daily Business Report.
NTA can mean either Net Tangible Assets or Net Total Assets.
NWC is Net Working Capital.
OAC is On Approved Credit.
O&M is an acronym for either Operations & Maintenance or Operations & Management.
OBJECT CODE designates the type of expense or revenue to be charged to an account.
OBJECT COST is the total cost of producing an item: direct cost (labor & material) + overhead cost = Total Object Cost.
OBJECTIVE is a statement that is written in terms of specific measurable time-based and verifiable outcomes that challenge the organization to be more responsive to the environment to achieve the desired goals. Dependent upon usage, GOALS are general in nature, while OBJECTIVES are specific, measurable and time-based. In some organizations, the meanings for GOAL and OBJECTIVE are reversed.
OBJECTIVITY PRINCIPLE states that accounting will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. Simply put, this means that accounting entries will be based on fact and not on personal opinion or feelings.
OBLIGATION, in business, is a legal duty to pay or do something.
OCCUPANCY COST is any cost or charge incurred by a tenant pursuant to its lease, such as rent, operating expense increases, parking charges, moving expenses, remodeling costs, etc.
OCF is Operating Cash Flow.
OCOR see OPPORTUNITY COST OF REVENUE.
OEM is an acronym for Original Equipment Manufacturer.
OFA is Oracle Flexible Architecture or Oracle Financial Accounting.
OFF-BALANCE SHEET ASSET is an item representing a resource of the entity or something that is projected to have future economic value. It is a positive indicator of the entities financial position even though it is not contained within the balance sheet.
OFF-BALANCE SHEET FINANCING is a method of obtaining funds through a long-term non-cancelable lease that is accounted for as an operating lease. The lease does not meet the criteria of a 'capital lease'. This being the case, the present value of the lease obligation in not included in the lessee's balance sheet.
OFF-BALANCE SHEET LIABIILITY is an item not reported within the body of a financial statement as a liability that may require future payment or services, e.g., litigation, renegotiated claims within a government contract, and guarantees of future performance.
OFF-BOOK PARTNERSHIP is a type of blind trust. It offers some advantages over the traditional methods of capital procurement. In some cases there is a fatal lack of transparency (e.g. Enron) that allows off-book partners to hide debts, pump profits, launder money and enrich insiders, but ultimately bankrupting the company and stripping assets from its employees’ pension funds. See BLIND TRUST.
OFFER PRICE see ASK PRICE.
OFFICIAL INTEREST RATE, normally, is the rate of interest charged by the government or traders within the money market, e.g., federal funds rate and bank repurchase agreement (repo rate).
OFFSET is: a. In banking, the deduction by a debtor from a claim or demand of a debt or obligation. Such an offset is based upon a counterclaim against the party making the original claim. Example: Seller makes a claim or files a lawsuit asking for $20,000 from Debtor as the final payment in purchase of a restaurant; as part of his defense Debtor claims an offset of $10,000 for alleged funds owed by Seller for repairs Debtor made on property owned by Seller, thus reducing the claim of Seller to $10,000; b. in accounting, the amount equaling or counterbalancing another amount on the opposite side of the same ledger or the ledger of another account; c. in securities, the elimination of a long or short position by making an opposite transaction. See also OFFSET ACCOUNT.
OFFSET ACCOUNT is an account that is setup for elimination of a long or short position by making an opposite transaction.
OFFSOURCE, slang, is to outsource to an offshore location to primarily save on the cost of labor. See OUTSOURCE.
ON ACCOUNT is a partial payment made towards satisfaction of a debt.
ONE-SHOTS is slang for governmental expenditures done on a one time appropriation.
ONE-WRITE SYSTEM (also known as PEGBOARD SYSTEM) is a useful system for small and home-based businesses. It captures information at the time the transaction takes place. These One-Write Systems are efficient because they eliminate the need for recopying the data and are compatible with electronic data processing if you should decide to computerize. Many small businesses rely totally on the One-Write System for simplicity and versatility. With only two pieces of paper, a check and a ledger, you get all the benefits of sound bookkeeping: accuracy, money distribution, check control, audit trail, running bank balance, and instant review.
OPEN ACCOUNT is a non-guaranteed payment arrangement, e.g. similar to department store credit. Goods are purchased and delivered without payment. Future payment for delivered goods is dependent on the good faith of the purchaser.
OPEN ALLOTMENT is where there is no restriction as to an amount that may be taken from that which is being allotted.
OPEN-BOOK CREDIT is a form of trade credit in which sellers ship merchandise on faith that payment will be forthcoming.
OPEN INFLATION means that prices are rising on consumer goods and services.
OPENING BALANCE is the balance of an account at the start of an accounting period.
OPEN MARKET VALUE (OMV) is an opinion of the best price at which the sale of an interest in an asset would have been completed unconditionally for cash consideration on the date of valuation, assuming:
(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the asset and state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;
(c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;
(d) that no account is taken of any additional bid by a purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion.
OPEN TO BUY is the dollar amount budgeted by a business for inventory purchases for a specific time period.
OPERATING ALLOWANCE is an advance/reimbursement against certain costs/expenses and/or a reduction in amount payable to cover those certain costs/expenses.
OPERATING EXPENDITURES is the amount used during a particular period directly in support of day-to-day operations such as wages, maintenance, office supplies, etc.
OPERATING EXPENSES is all selling and general & administrative expenses. Includes depreciation, but not interest expense.
OPERATING EXPENSE TO SALES reports the operating expenses as a percent of Net Revenues. This then is a measure of the total overhead employed in the firm per Net Sales Revenue Dollar; thereby giving an indication of the efficiency of the cost structure of the company. It gives an indication of the ability of a business to convert income into profit. Generally, businesses with low ratios will generate more profit than others. In general business operations with larger and more stable cash flows can sustain higher ratios than smaller and less stable operations. Scale and income stability are important considerations though it is up to the management of a business to monitor costs in an appropriate manner whatever its size.
OPERATING EXPOSURE, in foreign exchange, is currency fluctuations combined with price level changes that can alter the amounts and riskiness of a firm’s future revenues and costs. It is typified by evaluating real exchange gains or losses. It is prospective and long-term in nature.
OPERATING INCOME is revenue less cost of goods sold and related operating expenses that are applied to the day-to-day operating activities of the company. It excludes financial related items (i.e., interest income, dividend income, and interest expense), extraordinary items, and taxes.
OPERATING INTEREST is the legal right to assets used to produce revenue, e.g., produce oil or gas from a well, accompanied by the responsibilities to pay production costs and assume the risks.
OPERATING LEASE is a short-term, cancelable lease.
OPERATING LEVERAGE is fixed operating costs divided by total (fixed plus variable) operating costs.
OPERATING MARGIN is the ratio of operating income to sales revenue.
OPERATING PROFIT is Gross Profit minus Operating Expenses.
OPERATING PROFIT TO SALES is a useful ratio when evaluating value of a firm. It discounts the effect of varying tax rates and benefits to give a more accurate indication of the return associated with the firm.
OPERATING RATIO measures a firm's operating efficiency; calculated: company operating expenses divided
by its operating revenues.
OPERATING REVENUE is that revenue realized from the day-to-day operations of the entity, e.g., sales revenue.
OPPORTUNITY COST is widely used in business planning in evaluating capital investment. A company measures the projected return against the anticipated return it would receive on a highest yielding alternative investment that contains a similar risk profile.
OPPORTUNITY COST OF REVENUE (OCOR) is where revenue/money held now may be invested to produce more money - thus we consider opportunity cost a return or more revenue.
OPPORTUNITY LOSS see OPPORTUNITY COST
OPTION is the formal reservation of the right to buy or sell property / assets at a certain price and / or within a given time in the future.
OPTIONALITY TEST is part of the NAIC security insurer provisional exemption rules: A. Optionality Test: for corporate and municipal issues, principal and interest must be paid in US dollars, contract terms state that principal is repayable in full and the principal repayment schedule is fixed. Further the principal is set at closing, fixed in US dollars and coupon payments cannot be less than zero in any period. B. Optionality Test: for Asset-Backed/Residential Mortgage-Backed securities, the principal and interest must be paid in US dollars, and the coupon payment cannot be less than zero in any payment period. In addition, with the exception for credit enhancements, the timing and amount of cash flows to pay the obligation must depend on the timing and amount of cash flow from the assets underlying the bond. If the bond is prepaid immediately, the insurer must receive at least 98% of the purchase price.
ORDER OF LIQUIDITY is when items on a balance sheet are listed in order of liquidity. After cash, the other current assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…)
ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e. land first, then buildings, then equipment ...).
ORDINARY ASSET is a non-capital asset used for business purposes. See CAPITAL ASSET.
ORDINARY INCOME is the income derived from the regular operating activities of a business or individual, but exclusive of capital gains. Net income from a business, along with personal wages, interest, and dividends are examples of ordinary income.
ORGANIZATIONAL COSTS see ORGANIZATION COST.
ORGANIZATION COST is amounts spent to begin a business entity, e.g., business filing fees, franchise acquisition, and legal fees. In the
ORIGINAL EQUIPMENT MANUFACTURER is a company that builds components or systems that are used in systems or products sold by another company using the purchasing company's brand. Sometimes referred to as "private label."
ORIGINAL ISSUE DISCOUNT is when a long-term debt instrument is issued at a price that is lower than its stated redemption value; the difference is called Original Issue Discount (OID).
OSHA (OCCUPATIONAL SAFETY AND HEALTH ACT) is a federal law in the
OTC see OVER THE COUNTER.
OUT-OF-P0CKET are expenses requiring an outlay of cash in a given time period, e.g., payroll, advertising and other operating expenses, but not depreciation.
OUTSOURCE is to obtain goods or services from an outside supplier; i.e., to contract work outside of your budget and control. (An example would be companies outsourcing a percentage of their direct labor in order to maintain a flexible workforce.).
OUTSTANDING SHARES is the number of shares that are currently owned by all investors. It also includes restricted shares (shares owned by officers and insiders of the company) as well as shares held by the public. Shares that the company has repurchased or retired are not considered outstanding stock.
OVERDRAFT is, a. a draft in excess of the credit balance within an account; or b. a facility (usually at a bank or other financial institution) enabling an account holder to borrow up to an agreed amount and often for an agreed time.
OVERHEAD is the costs associated with providing and maintaining a manufacturing or working environment. For example: renting the building, heating and lighting the work area, supervision costs and maintenance of the facilities. Includes indirect labor and indirect material.
OVERHEAD ABSORPTION is the term used for describing the transfer of value from a fixed asset such as a building or machine to the final product. In this way the indirect costs of the entity can be assigned to the products or services supplied.
OVERHEAD RATE is calculated by totaling all your expenses for one year, excluding labor and materials, and then divide this number by your total cost of labor and materials.
OVERLEVERAGED is a balance sheet condition where the entity is incapable of servicing its debt load (interest payments) with available capital sources. Simply put, the entity is carrying too much debt.
OVER THE COUNTER (OTC) is a
OVERTRADING, in securities, is: a. excessive buying and selling by a broker in a discretionary account, or, b. practice of a member of an underwriting group inducing a brokerage client to buy a portion of a new issue by purchasing other securities from the client at a premium. In finance, it is when a firm expands sales beyond a level that can be financed with normal working capital.
OVERSTATED is when something is represented as greater than is true or reasonable.
OWNERS DRAW see PROPRIETORS DRAW.
OWNERS EQUITY see SHAREHOLDER'S EQUITY
OWN WORK CAPITALIZED represents the value of work performed for own purposes and capitalized as part of fixed assets.
PACKING CREDIT is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
PACKING LIST is a statement of the contents of a container, usually put into the container so that the quantity of merchandise may be counted by the person who opens the container. Also known as a packing slip.
PACKING SLIP see PACKING LIST.
PAID-IN-CAPITAL is capital received from investors for stock, equal to capital stock plus paid-in capital, NOT that capital received from earnings or donations. Also called contributed capital.
PAID-UP CAPITAL is the total amount paid by shareholders for their shares of capital stock.
PARENT COMPANY is a company of which others are subsidiaries.
P&L see PROFIT AND LOSS STATEMENT.
PARETO PRINCIPLE/LAW see 80-20 RULE.
PARTNERSHIP is an unincorporated business that has more than one owner. It is different from a sole proprietorship in that a sole proprietorship can have only one owner.
PAR VALUE is a. the maturity value or face value, i.e., the amount that an issuer agrees to pay at the maturity date; b. the official exchange rate between two countries' currencies; or, c. the value of a security that is set by the company issuing it; unrelated to market value.
PAS could mean: Personal Accounting System, Personnel Accounting System, or Personnel Accounting Symbol.
PASSIVE ACTIVITY is defined in the US Tax Code as one or more trades, business or rental activity, that the taxpayer does not materially participate in managing or running. All income and losses from passive activities are grouped together on an income tax return and, generally, loss deductions are limited or suspended until the passive activity that generated them is disposed of in its entirety.
PATENT is a legal form of protection that provides a person or legal entity with exclusive rights to exclude others from making, using, or selling a concept or invention for the duration of the patent. There are three types of patents available: design, plant, and utility.
PAYABLE TO SHAREHOLDERS normally refers to distribution of dividends to shareholders and / or repayment of notes held by shareholders.
PAYBACK PERIOD, in capital budgeting, is the length of time needed to recoup the cost of CAPITAL INVESTMENT. The payback period is the ratio of the initial investment (cash outlay, regardless of the source of the cash) to the annual cash inflows for the recovery period. The major shortcoming for the payback period method is that it does not take into account cash flows after the payback period and is therefore not a measure of the profitability of an investment project. For this reason, analysts generally prefer the DISCOUNTED CASH FLOW methods of capital budgeting; primarily, the INTERNAL RATE OF RETURN and the NET PRESENT VALUE methods.
PAY CYCLE is a set of rules that defines the criteria by which scheduled payments are selected for payment creation, e.g., payroll may be on a weekly, bi-weekly, or monthly pay cycle.
PAYMENT is the satisfaction of a debt or claim; primarily money paid to fulfill an obligation.
PAYMENT ON ACCOUNT see ON ACCOUNT.
PAYOUT RATIO is dividends paid divided by company earnings over some period of time, expressed as a percentage.
PAYROLL BURDEN, in the
PBC LIST (PROVIDED BY CLIENT LIST) is a request by external auditors of items that will be required from the client by the auditor prior to the commencement of fieldwork. Such PBC lists are preliminary and will likely be expanded once the audit commences.
PC is an acronym for Professional Corporation (business legal entity).
PEGBOARD SYSTEM see ONE-WRITE SYSTEM.
PEG RATIO compares earnings growth and the Price Earnings Ratio. The PEG Ratio (formula) is the current Price Earnings Ratio divided by the expected long-term growth rate (per the earnings per share).
PENDING usually refers to either: 1. Not yet decided; or, 2. Being in continuance.
PENSION MAXIMIZATION is a controversial strategy, often espoused by life insurance agents, of using insurance to augment a company benefit plan. Under this arrangement, a retiree takes pension payments for his or her own life only and buys life insurance to provide for a surviving spouse. Also known as pension max.
P/E RATIO (PRICE/EARNINGS RATIO) is a stock analysis statistic in which the current price of a stock (today's last sale price) is divided by the reported actual (or sometimes projected, which would be forecast) earnings per share of the issuing firm; it is also called the "multiple".
PER CAPITA INCOME is the mean income computed for every man, woman, and child in a particular group. It is derived by dividing the total income of a particular group by the total population in that group.
PERCENTAGE DESIGN, in construction, is the percentage expended for design and construction management services in proportion to total construction.
PERCENTAGE LEASE is a type of lease where the landlord charges a base rent plus an additional percentage of any profits realized by the business tenant.
PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING is instituted if your revenues exceed $10,000,000 (3-year average) or your contracts will not be completed within a two-year period, you are generally required to use the percentage of completion accounting for contracts. There are many advantages to using to percentage of completion method including:
- It is the best measurement of income.
- Percentage of completion normally needs to be computed for financial statement purposes eliminating confusing timing differences from tax to financial statements.
- There is no increase in alternative minimum taxable income.
- Losses can be recognized on contracts before the job is complete.
- It is useful in leveling taxable income, permitting use of lower tax brackets each year.
- When using the percentage of completion method, it is important to carefully compute the percent complete, for it may have a great impact on your taxable income.
- Estimated costs to complete the contract, a component of calculating the percent to complete, determine what your taxable income will be. Also, carefully reviewing the over-head allocation may result in lower tax.
PERFORMANCE BUDGET is a budget format that relates the input of resources and the output of services for each organizational unit individually. Sometimes used synonymously with program budget.
PERFORMANCE INDICATORS are those empirical data points that indicate how well, or poorly, an entity is performing against preset goals and objectives. Normally, in business or strategic planning, a company will set targets over a specified period that the business believes are attainable and track performance over time to those targets or objectives.
PERFORMING ASSET is an asset that provides a dependable annual financial return; for example, production machinery or, in transportation, an airliner.
PERIOD COST is an expense that is not inventoriable; it is charged against sales revenues in the period in which the revenue is earned (e.g., SG&A is a period cost). Also called period expense.
PERIODICITY CONCEPT is the concept that each accounting period has an economic activity associated with it, and that the activity can be measured, accounted for, and reported upon.
PERMANENCE is the quality or state of being permanent; primarily judged by durability and useful life. See ORDER OF PERMANENCE.
PERPETUAL INVENTORY is an inventory accounting system whereby book inventory is kept in continuous agreement with stock on hand. A daily record is maintained of the dollar amount and physical quantity. There are periodic physical inventories taken to reconcile at short intervals.
PERPETUAL SUCCESSION is one of the legal distinctions between a business and a company. A company has perpetual succession meaning that a change in the membership does not affect the existence of the company whereas a business does not enjoy this perpetual succession. For example, in the case of a partnership, which is one form of business registration, a change in the membership affects the partnership.
PERSONAL LOAN is a short-term loan that is extended based on the personal integrity of the borrower.
PERVASIVENESS OF ESTIMATES means that the estimates have to be complete, of high quality and in depth, i.e., they have to adequately cover the whole accounting entity.
PETTY CASH, normally, is an account and location where tangible cash is stored for usage in purchasing or the reimbursing of inexpensive out-of-pocket expenditures.
PHANTOM PROFIT is hypothetical profit, i.e., no cash flow is generated. Appreciation on any asset, e.g. stock, is considered phantom profit unless or until the asset is sold, thereby generating cash flow.
PHYSICAL INVENTORY is the counting of all merchandise or equipment on hand.
PIERCING THE CORPORATE VEIL is a legal concept through which a corporation's shareholders, who generally are shielded from liability for the corporation's activities, can be held responsible for certain actions.
PIGGYBACK, dependent upon usage, can mean: 1. On the back or shoulder or astraddle on the hip; 2. Two lenders participating in the same loan (piggyback loan); 3. Unauthorized access to a data processing system via an authorized user's legitimate connection (piggyback entry); 4. Haul by railroad car; 5. SEC registration of existing holdings of shares in a corporation combined with an offering of new public shares (piggyback registration); 6. Rights that entitle an investor to register and sell his or her stock whenever the company conducts a public offering (piggyback rights).
PINK PEARL is a type of a pencil-lead eraser that auditing companies use.
PIPE is an acronym for Private Investment in a Public Entity.
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