Glossary of Financial & Accounting Terms in Business Credit
Here is a glossary of financial and accounting terms used in the field of trade (business) credit. Accounting method: The technique used to report sales, expenses, and profits. Accounting methods inlude "cash basis" accounting and "accrual basis" accounting. Accounts payable: Money owed to suppliers of goods and services delivered on open account terms.
Other resources, see also: Accounts receivable: Money due for services performed or goods delivered on open account terms. Accounts receivable pledged as collateral would be footnoted on the financial statements. Accounts receivable is normally stated net of an allowance for uncollectable accounts. Accounts receivable turnover: A method used to determine a company's average collection period for receivables. The formula is net sales divided by average accounts receivable. Accrual basis of accounting: An accounting system in which revenues are recognized when earned, regardless of when the cash is actually received. Similarly, expenses are recognized when they are incurred, regardless of when the expenses are paid. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and wages. (Acrrue means to accumulate.) Accumulated Depreciation: The total depreciation recorded against an asset since its acquisition. Acid test ratio: See Quick Ratio Additional paid-in capital: In the equity section of the balance sheet, this describes the amount received for stock by the corporation in excess of the par value of the stock sold. Adverse opinion: An audit report stating that a company's financial statements are so fundamentally flawed as to render them valueless. Amortization: A process of cost allocation; a process of gradually reducing the value of an intangible asset over time by allocating a cost of the asset to the accounting periods it benefits. Assets: Economic resources owned or controlled by the company. Annual Report: A written report to shareholders detailing and summarizing the prior fiscal year's financial performance Audit: An examination of the financial performance and the financial status of a company performed by an independent accountant or by a CPA. Audit Report: A report issued by an independent CPA that expresses some opinion about the financial statements the report is attached to. Bad debt: An uncollectible accounts receivable balance. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners' equity on a particular date. Board of Directors: Individuals elected by the board of directors to oversee the managers and offer guidance to a corporation Book value: A calculation done by dividing equity of common shares, as listed in the equity section of the balance sheet, by the number of shares of common stock outstanding. Book value of a depreciable asset: The historical or acquisition cost of a depreciable asset minus the accumulated depreciation on that asset. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more than one year. A bond is a debt security that represents an obligation of the issuer to pay interest to the creditor and to repay the principal at maturity. Break-even analysis: A calculation to determine the level of sales at which the company will break even-the point at which net income is zero. Capital lease: A lease that is, in effect, a purchase made by the lessee. The leased property is reported on the balance sheet. The lessee treats the transaction like a purchase of the leased property. Capital expenditure: An expenditure that is recorded as an asset because the asset purchased is expected to be in use beyond the current accounting period. Capital stock: The face value of all the shares of stock issued. A stock certificate is evidence of ownership of a portion of a corporation. Cash Conversion Cycle: (CCC) is the number of days between the purchase of production materials by a seller and the date when the seller is finally paid for the goods or services delivered. The formula for Cash Conversion Cycle is as follows: CCC = DSO + DSI -- DPO DSO = (Account Receivable/Total Credit Sales) X 365
DSI = (Inventory/Cost of Goods Sold) X 365
DPO = (Accounts Payable/Cost of Goods Sold) X 365 Cash dividend: A cash distribution of a portion of a corporation's earnings to its shareholders. Cash equivalents: Short term, highly liquid investments held in place of cash and readily convertible into cash. Cash or Accrual Basis accounting: A company will select one method or the other and apply it consistently. Classified balance sheet: A balance sheet in which assets and liabilities are divided into current and non-current. Commercial Paper: A short term debt represented by a note issued by a corporation with a good to excellent credit rating to raise cash quickly. Typically, commercial paper matures is a little as a week and as many as 270 days. Common stock: Common stock represents a claim on the assets of a corporation by common stockholders after all debts and other obligations have been paid in full. Common stock shares give the investor a vote on matters including the election of the company's directors. Common stockholders bear the ultimate risk of loss in a liquidation since their claim is subordinated to all other claims and classes of claims. Comparative financial statements: Statements in which two or more years of financial results are shown together for the purpose of comparison.
Consolidated financial statements: Financial statements that report the combined operating results of two or more legally separate entities - such as a parent company and its wholly owned subsidiary. Conservatism Principle: This principle states that given a choice of options an independent accountant must select an accounting method that has the least favorable impact on the net income of the company being audited. The Consistency Principle: It states that companies must use the same accounting method from period to period, and that in the event that a company elects to change certain accounting methods, that fact along with an analysis of the impact of that accounting change must be reported on the financial statements in footnotes. Contingent liabilities: Typically identified in the notes to the financial statements, contingent liabilities are indefinite as to time or cost but represent a potential obligation. Example: A corporation is being sued for product negligence, and the outcome of that lawsuit is unknown. Convertible bonds: Bonds that can be converted into stock at the option of the owner after a specified period of time. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a corporation to the bondholder. They typically include an interest rate as well as a specific maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect, an IOU issued by a corporation. Corporation: A legal entity chartered by a state. Ownership of a corporation is represented by stock. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold during an accounting period. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories. Current assets include cash and any other asset that is expected to be converted into cash in the ordinary course of business within one year. Current liabilities: The sum of all money owed by the company that is payable within one year, or the current operating cycle. Deferred revenues: Payments received in advance of services performed or goods being delivered. Current Ratio: A measure of the liquidity of a business; it is a company's assets divided by current liabilities. Debenture: A debenture is a bond issued by a corporation that is not backed by the pledge of collateral such as one or more tangible assets of the issuer. Debt to equity ratio: A measure of the relative utilization of debt and of equity. Depletion: The process of cost allocation on a non-renewable natural resource. Depreciation: The reduction in value of a capital asset over time, specifically allocation of the cost of the asset over the useful life of that asset. Disclaimer of opinion: A statement by an auditor that he or she was unable to satisfy the requirement that the financial statements presented followed GAAP. Discretionary expenses: Expenses under the control of management with respect to timing. Dividend: A portion of the company's profits paid to common and/or preferred shareholders. Dividends represent profits that are not reinvested by the corporation. Double Entry Accounting: A method of recording accounting transac¬tions to maintain the equality of the accounting equation. Earnings per share: Earnings stated as a dollar value per share of stock. Equity Financing: The process of acquiring funds for a corporation in the form of additional investments by owners EBIT: Earnings before interest and taxes paid. EBITDA: Another acronym, short for earnings before interest, taxes, depreciation, and amortization. Exchange rate: The value of one currency in terms of another currency. Example: One dollar is worth 13.5 pesos. Expenses: The costs incurred in the normal course of business to generate revenues and profits. Extraordinary items: Non-operating gains or losses that are infrequent in occurrence. Face Value: The stated value of a bond certificate. Fair Market Value: The market value of an asset as determined by supply and demand FASB: The Financial Accounting Standards Board is a private organization that established Generally Accepted Accounting Principles. FIFO: A method of calculating the cost of inventory in which the first goods purchased are assumed to be the first goods sold. Financial leverage: Leverage involves the use of debt in an effort to increase the return on equity. Financial report: A report prepared by public companies at the end of the company's fiscal year describing the financial performance of the company; the financial report includes a significant amount of narrative about the successes (or failures) of the company in the fiscal year being reported on. Financial statements: These statements typically include the balance sheet, income statement, and cash-flow statement as well as notes to the financial statements and the auditor's opinion letter. Financial statements report the financial status and results of operations of a business entity. Fiscal year: Any continuous 12 month accounting period used by a company as its accounting year. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of more than one year. Full Disclosure Requirement: This is a requirement that a company disclose all facts and information that are relevant to readers of financial statements including standard reports and schedules, including footnotes. GAAP: Generally Accepted Accounting Principles define appropriate accounting practices for CP As and other accountants. Going Concern: The accounting concept that an company will have a continuing existence for the foreseeable future. If the auditor has a questions about the viability of the company, that information will be reflected in its opinion letter. Goodwill: The difference between the acquisition cost of an asset and the fair market value or book value of an asset. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold. Gross sales: Sales before deducting for any sales returns or allowances. Hedging: The process of lowering risk by purchasing a security or another product that has the effect of offsetting an undesirable risk characteristic. Historical cost: Most assets are recorded at their historical cost less accumulated depreciation. As a result, the value of an asset as recorded on the balance sheet may have little in common with the market value of that asset. Holding company: A corporation that holds a majority of the shares outstanding of a subsidiary company. In the Black: Slang term for profitable. In the Red: Slang term meaning unprofitable. Income statement: A document reporting revenues, expenses, and net in¬come (or net loss). Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics that are of monetary value. Interest coverage: Interest coverage is defined as earnings before interest and taxes divided by interest expense. Interim financial statements: Financial statements for periods of less than one year. Inventory: Inventory includes raw materials, work in progress, and finished goods inventory. Inventory turnover: Defined as the cost of goods sold for an accounting period divided by the average inventory value for that period. Lease: A contract that specifies for how long, for what cost, and under what terms and conditions the owner of an asset [the lessor] agrees to transfer the right to use the asset to another party [the lessee]. Leverage: A company is said to be leveraged if it has an abnormally high debt to equity ratio. Leverage is positive to the extent that the money borrowed generated more income than is required to repay the debt and to justify the higher interest costs. Liabilities: Debt owed by a company. LIFO: A method of valuing inventory in which the last goods purchased are assumed to be the first goods sold. Liquid assets: Current assets minus inventory; also called Quick assets. Liquidation: The process of dissolving a business and selling the assets of the business in order to pay the company's debts. Liquidity: The ability to sell assets to generate cash to pay debts. Long-term debt: Any liabilities that are not current liabilities. Long term liabilities due in more than one year. Matching principle: The accounting principle that states that revenues must be matched with the expenses required to generate those revenues in order to accurately present net income for an accounting period. Materiality: The principle that only items that are of sufficient size to be relevant to the reader of a company's financial statements will be included in the financial statements and footnotes. The Monetary Unit Assumption: All financial records must reflect foreign currency translations into a businesses home currency. Net Income: Net income is income after tax has been paid but before payment of preferred stock and/ or common stock dividends. Net sales: Gross sales (total sales) minus sales returns and allowances. Net worth: Assets minus liabilities equals net worth. No par stock: Stock that does not have a par value [a minimum selling price] printed on the stock certificate. Note payable: A debt; a short-term obligation evidenced by a contract such as a promissory note. Notes to financial statements: Narrative information intended to be an integral part of the financial statements and necessary for a comprehensive review of the statements presented. The Objective Evidence Requirement: The requirement involves the fact that financial statements must be based on hard evidence and documentation that reasonable people would interpret in similar ways. Operating lease: In essence, a rental agreement on a piece of equipment. P & L: Acronym for Profit and Loss Statement; see Income Statement. Outstanding stock: Stock held by investors. Par value: Par value is the face value of a security instrument. Par value is a stated value below which the corporation will never sell the stock. Par value is typically set quite low; for example, a par value of from one cent to one dollar per share is not uncommon. Parent company: A company that owns or controls a separate legal entity. Generally, a parent company owns more than 50% of the outstanding stock; but not necessarily 100% of it. Preferred stock: A class of stock which typically is without voting rights, but which carries a specific, stated dividend rate and a priority over com¬mon stock in dividend payments and in the event of asset liquidation. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet been delivered or received. Price-to-earnings ratio: The P /E ratio is the market value of a common stock divided by the earnings per share of common stock for the fiscal year end. A high price-to-earnings ratio might mean the company stock is overvalued. On the other hand, a high price-to-earnings ratio might also indicate that stockholders expect the company to be even more successful in the near future than it is today. Profit and Loss Statement: See Income Statement. Prospectus: A document describing a stock offering by a corporation. A prospectus contains a wealth of information about a company. If the prospectus relates to an initial public offering, the information contained in the prospectus might be the first time a credit manager has had so much information about a debtor company's financial condition, plans, goals, short-term and long-term strategy, and the competitive environment in which it operates. Qualified opinion: An opinion of an independent auditor in which the auditor states the company did not follow GAAP, and/or did not allow the auditor to perform an audit necessary to offer an Unqualified Opinion letter. Quick assets: Current assets minus inventory; also called Liquid assets. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes receivable Divided By Current liabilities. Retained earnings: Profits that have not been distributed in the form of dividends to stockholders. Specifically, retained earnings represents the cumulative amount of net profits not paid by a corporation to its stockholders in the form of dividends. Securities and Exchange Commission: The SEC is a government entity responsible for regulating the securities markets and for monitoring and regulating the financial reporting of publicly traded companies [companies selling stocks and / or bonds]. Solvency: A somewhat subjective measure of a business entity's ability to meet its short term and long term financial obligations. Statement of Cash Flows: A financial report showing a business entities cash inflows and its cash outflows during an accounting period. Stock: Ownership claims on the assets of a business after all creditors have been paid. Stockholder: A person or company that owns one or more share of stock in a company. Stock dividends: Dividends payable in the form of stock. Straight-line depreciation: An accounting procedure in which the value of assets is depreciated evenly over the useful life of the asset. Subsequent events are significant events from an accounting perspective that occur after the balance sheet date, but before the financial statements are issued.
Subsidiary: A company or a corporation that is owned and controlled by another. Tangible asset: Tangible assets include property, plant, and equipment. Total assets: All current assets, fixed assets, and other assets. Total liabilities: All current liabilities and long-term debt. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the company in a buy-back. Unearned revenues: Moneys received before they have actually been earned. Unsecured Debt: An obligation of a company of corporation not backed by any specific collateral. Warrants: Warrants are long-term options to buy stock at a stated price. Warrants are often issued to key personnel as a type of bonus. In many companies, warrants are used as a retention incentive or bonus. Working capital: Current assets minus current liabilities. Working capital is the amount of cash a company expects to generate in the short term and have available to retire current liabilities. Securities and Exchange Commission Filings
SEC filings can provide useful information to credit managers. Some of the more useful reports include: 5-1. The S-l filing is a basic registration form for a company planning to issue stock. It contains audited financial statements (including balance sheet, income statement, and cash-flow statement), a detailed description of the company, an analysis of the competitive environment, and management's analysis and discussion of the financial condition of the company, along with any legal entanglements the company may have. 8-K. Public companies use the 8-K form to report the occurrence of material events that would be of interest to investors-and, presumably, to credit managers. The 8-K provides more current information on certain events than would form lO-Q or 1O-K. 10-K. The 10K form presents an overview of the company, along with detailed financial data for the company's fiscal year-end. The 10K presents a more objective view of the company and its performance than does the annual report to shareholders. The SEC requires that lOKs be filed within 90 days after the close of the fiscal year and that they include the following information:
- Information on the market for the holders of common stock and other
securities
- A five year summary of selected financial data
- Two years of audited balance sheet data
- Three years of audited income statement information
- Management's discussion and analysis of the company's financial condition and results of operation
10-Q. Similar to the 10K form, the 10Q is filed quarterly by most reporting companies and provides investors and other interested parties with detailed information about the company, along with the company's quarterly financial statements. 10Qs must be filed within 45 days after the close of the quarter. 10-QSB. This report is filed quarterly by reporting small businesses. It includes unaudited financial statements as well as an overview of the company's financial position and results of operations. 12b-25. This is the filing made when a public company requests approval to file late. For example, by using the 12b-25 form, companies can normally get a I5-day extension on the filing deadline.
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