Glossary

Accounting mandating of particular accounting methods or policies by an authoritative

standards body. In Australia, this is done by the Australian Accounting Standards
Board.

Accounts payable liabilities representing amounts owed to short-term trade creditors.

Accounts amounts owing by debtors (customers), usually arising from sales of

receivable goods or services.

Accrual an amount in the accounts to reflect events or estimates that are

economically meaningful but do not (at present) involve the exchange of
cash. An example would be wages expense when the work is done.
Accrual accounting method of making an economically meaningful and comprehensive
measurement of performance and position by recognising economic
events regardless of when cash transactions happen, as opposed to
the simpler cash basis of accounting. Under this method, revenues and
expenses are reflected in the accounts in the period to which they relate.

Accrue to enter amounts in the accounts to reflect events or estimates that are
economically meaningful but do not (at present) involve the exchange of
cash. Examples would include recording interest expense that is building
up on a debt before paying it or recording interest revenue from a bank on
amounts invested before the receipt of cash from the bank.

Accrued expense expense recognised in the accounts before paying for it.

Accumulated balance sheet account that accumulates total depreciation (amortisation)

depreciation expense over a number of years. Accumulated depreciation relates to
(amortisation) tangible assets and accumulated amortisation relates to intangible assets.

Activity ratios involves the efficiency with which the company utilises its resources to
generate revenues and profits (inventory, accounts receivable).

Ageing of accounts process of classifying accounts receivable by the time that has passed
receivable since the account came into existence. This classification is used as
an aid to estimating the required allowance for doubtful debts for the
estimated amount of uncollectable accounts receivable.

Allowance for estimated amount of accounts receivable that will not be collected.
doubtful debts
Amortisation allocation of the cost of an intangible asset to an expense account over
several accounting periods to recognise the ‘consumption’ of the asset’s
economic value as it helps to earn revenue over those periods.

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Annual report document provided annually to shareholders by the officers of a company.
It includes the financial statements, the notes to the financial statements,
the auditor’s report, supplementary financial information, such as multi-
year summaries, and reports from the company’s board of directors and
management.

Asset revaluation a shareholders’ equity account showing the amount by which assets have
surplus (reserve) been revalued in the past.

Asset(s) resource that is controlled by an entity as a result of past events, and from
which future economic benefits are expected to flow to the entity.

Auditor’s report document accompanying the financial statements that expresses the
auditor’s opinion on the fairness of the financial statements.

Average age of ratio measuring the average number of days it takes to collect
receivables receivables.

Average days in ratio measuring the average number of days it takes to sell inventory.
inventory
Average days of ratio measuring the average number of days it takes to pay its suppliers.
payables
Bad debts expense expense account that results from the reduction in carrying value of those
accounts receivable that have been projected to be uncollectable or
doubtful.

Balance sheet list of assets, liabilities and shareholders’ equity that constitutes the
formal statement of a company’s financial position at a specified date,
summarising, by category, the assets, liabilities and shareholders’ equity.

Balanced scorecard combines financial measures with operational measures to evaluate

(BSC) strategic performance.
• financial measures show the financial performance outcomes of
actions already taken
• These financial measures are complemented with operational
measures that drive future financial performance (e.g. customer
satisfaction, internal processes, and innovation and improvement
activities).

Book value amount shown in the accounts for any asset, liability or shareholders’
equity item, after deducting any related contra account (for example,
the book value of a truck is the recorded cost minus accumulated
depreciation).

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 Break-even analysis determination of level of activity at which total revenues equal total costs
(fixed + variable). This can be expressed either as sales volume or sales
dollars.

Budgets forecasts of expected results usually expressed in numbers of dollars or

units.

Capitalise recognition of an expenditure that may benefit a future period as an asset

rather than as an expense of the period of its occurrence. Expenditures
are capitalised if they are likely to lead to future benefits and, thus, meet
the criterion to be an asset.

Capitalised costs costs that have been included as an asset on the balance sheet instead
of being deducted as expenses on the income statement.

Carrying amount amount at which the asset is recorded in the accounting records at a
particular date. When applied to a depreciable asset, ‘carrying amount’
means the net amount after deducting accumulated depreciation or
amortisation.

Cash flow cycle time from the payment of goods purchased for manufacture or resale to
receipt of cash for final product or sale; calculated as days in inventory
plus days in trade debtors minus days in creditors.

Cash flow from cash generated by day-to-day business activities and highlighted as the
operations first section in the statement of cash flows.

Completed contract method of revenue recognition for long-term contracts by which the
revenue is not reported on the income statement until the contract has
been completed.

Contingent liabilities that are contingent on the occurrence of a particular event that
liabilities has not yet happened. Disclosed in the notes rather than on the balance
sheet (e.g. law suits).

Contribution amount of revenue remaining after deducting variable costs (total sales
margin minus total variable costs)

Contribution unit selling price less unit variable costs

margin per unit
Contribution contribution margin per unit ÷ Unit selling price
margin ratio
Cost of capital cost of raising debt or equity funds; for example, the cost of borrowed
funds is mostly the interest to be paid to the lender.

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Cost of goods sold expense account that reflects the cost of goods that generated the
(COGS) revenue (also called cost of sales).

Creditor one who extends credit; that is, gives someone the right to buy or borrow
now in consideration of a promise to pay at a later date.

Current assets cash and other assets, such as temporary investments, inventory,
receivables and prepayments, that are realisable or will be consumed
within the normal operating cycle of an entity (usually one year).

Current liabilities liabilities that are expected to be paid within the normal operating cycle of
an entity (usually one year).

Deferred income liability that arises when the pre-tax income shown on the tax return is
tax liability less than what it would have been had the same accounting principles
been used in the tax return as were used in the financial statements.
Current reported accounting profit is less than the profit reported on the
tax return, so a liability for income tax is implied for later, when the income
is reported on the tax return.

Deferred revenue see Revenue received in advance, Unearned revenue.

Depreciation allocation of the cost of a noncurrent asset to expense over several

accounting periods to recognise the consumption of the asset’s economic
value as it helps to earn revenue over those periods.

Discontinued portions of the business that the entity has decided to not keep going and/
operations or to sell to others.

Earnings common synonym for net profit.

Earnings before measure of profit based on the operating profit before interest and taxes
interest are deducted.
and tax (EBIT)

Earnings before measure of profit based on the operating profit before deducting interest,
interest, tax, tax, depreciation and amortisation.
depreciation and
amortisation
(EBITDA)

Earnings per share ratio of net profit to the average number of ordinary (voting) shares
(EPS) outstanding; used to allow the owner of the shares to relate the
company’s earning power to the size of his or her investment.

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 Effective income income tax rate the company appears to incur, as deduced from the
tax rate financial statements. Differs from the statutory or legal rate because
of such factors as variations in tax incentives and varying rates across
jurisdictions. Can be estimated as the company’s income tax expense
divided by profit before income tax – both from the income statement.

Employee amounts that are deducted from an employee’s gross salary before the
deductions net amount is paid to him or her. These deductions include income tax,
superannuation, union fees and health insurance.

Equity net assets or residual interest of an owner or shareholder (Assets –

Liabilities = Equity). See the components of equity under Shareholders’
equity, Retained profits.

Equity method method of accounting for intercorporate investments usually used when a
company owns between 20 per cent and 50 per cent of another company.
The investment is carried at cost, and any profit or loss, multiplied by the
percentage ownership of the owned company, is added to or deducted
from the investment. Any dividends received are deducted from the
investment.

Expense cost of assets used and/or obligations created in generating revenue.

More formally, consumptions or losses of future economic benefits in
the form of reductions in assets or increases in liabilities of the entity,
other than those relating to distributions to shareholders, that result in a
decrease in equity during the reporting period. See Income statement,
Revenue, Accrual accounting.

Expensing classifying an expenditure or promised expenditure (accrual) as an

expense rather than an asset. The opposite of capitalisation.

Fair value amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s-length transaction.

Finance lease type of lease that effectively transfers from the lessor to the lessee
substantially all the risks and benefits incidental to ownership of the
leased property.

Financial assets near-cash assets, such as traded shares, bonds, some kinds of loans and
accounts receivable, especially as would be held by financial institutions
such as banks.

Financial entity’s ability to generate new resources from day-to-day operations

performance over a period of time. Measured by the net profit figure in the income
statement.

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Financial position entity’s set of assets, liabilities and shareholders’ equity at a point in time.
Measured by the balance sheet.

Financial reports for people who are external to the entity (but also of interest
statements to management), which generally comprise a balance sheet, income
statement, statement of cash flows and the notes to these statements.

Financing activities part of the statement of cash flows for those activities that relate to the
changing size and composition of the financial structure of the entity.

Fixed costs costs which do not change in total amount with changes in level of
activity.

Gain on sale gain that occurs when a company receives a larger amount of proceeds
for the sale of an asset than its book value.

Going concern fundamental assumption in financial accounting that a firm will continue
to be financially viable. If a firm is not a going concern, normal accounting
principles do not apply.

Goodwill difference between the price paid for a group of assets and the sum of
their apparent fair (market) values. This arises when a bundle of assets or
a whole company is acquired and when the difference is positive.

Gross profit sales revenue minus cost of goods sold. Also called ‘gross margin’.

Hedging actions that are taken to avoid or minimise the possible adverse effects of
changes in exchange rates and market prices (e.g. the price of oil).

Historical cost dollar value of a transaction on the date it happens. The cost, or historical
cost, of an asset is therefore the dollar amount paid for it or promised to
be paid as of the date the asset was acquired.

Hurdle rate represents the minimum required rate of return for an investment.
(Discount rate) The rate used to discount future cash flows may be above cost of
capital (i.e. varies with risk of project).

Impairment an asset is impaired when the carrying amount of the asset cannot be
fully recovered from a continued use of the asset or from sale of the
asset.

Impairment loss amount by which the carrying amount of an asset exceeds its recoverable
amount.

Income statement a financial statement that summarises the revenues and expenses of a
business for a stated period of time and computes the net profit (revenues
minus expenses). Sometimes referred to as a ‘profit and loss statement’.

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 Intangible assets non-physical noncurrent assets such as copyrights, patents, trademarks,
import and export licences, other rights that give a firm an exclusive or
preferred position in the marketplace, and goodwill.

Integrated reporting brings together material information about an organisation’s strategy,

governance, performance and prospects in a way that reflects the
commercial, social and environmental context within which it operates.

Internal control process that is designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
• effectiveness and efficiency of operations
• reliability of financial reporting
• compliance with applicable laws and regulations.

Inventory goods that are purchased or manufactured by a company for sale, resale
or further use in operations, including finished goods, goods in process,
raw materials and supplies.

Inventory valuation process of determining the amount at which inventory is shown on the
balance sheet, normally the lower of cost or market.

Leasehold assets such as fixtures, decorating and alterations installed into rented
improvements (leased) premises, which are therefore economic assets for the entity,
although not strictly owned, because they form part of the leased
property. Such improvements are usually amortised over the period of the
lease, as a reasonable estimate of their useful life.

Leverage increased rate of return on shareholders’ equity when assets earn a

(or Gearing) return larger than the interest rate paid for the debt financing of them.
Also refers to portion of total assets funded by debt finance. The greater
the proportion of debt, the higher the leverage.

Liability present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources
embodying economic benefits.

Liquidity ratios involves the company’s ability to meet its financial obligations on a timely
basis.

Loss on sale deficit that occurs when the asset’s book value is more than the proceeds
received from the sale of the asset.

Lower of cost method of valuing items of inventory where inventory is valued at the
or market lower of original cost or market value (that is, net realisable value).

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Marketable investments that have a ready market for resale and are held as a way
securities of earning a return from temporarily unneeded cash. Typically they are
debentures, shares, options or bonds that can be easily sold in the short
term.

Master budget includes operating and financial budgets:

• operating budgets describe the profit-generating activities of a firm:
sales, production, and finished goods inventories.
• financial budgets detail the inflows and outflows of cash and the
overall financial position.

Net present value for a project or object, the present value of future cash inflows minus the
present value of future cash outflows.

Net realisable value fair market value that an asset will bring if it is sold through the usual
product market minus any completion or disposal costs.

Net working capital current assets minus current liabilities.

Noncurrent assets assets expected to bring benefit for more than one fiscal year.

Noncurrent liabilities expected to be repaid or otherwise removed more than one year
liabilities in the future.

Notes payable accounts payable that are supported by signed contracts or other
agreements and usually carry interest.

Notes receivable accounts receivable supported by signed contracts or other agreements

specifying repayment terms, interest rate and other conditions.

Off balance sheet methods of obtaining financing that avoid having to record the sources as
financing liabilities or equity.

Operating activities part of a statement of cash flows that relates to the provision of goods and
services.

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 Operating budget consists of a budgeted profit and loss statement accompanied by the
following support schedules:
• Sales budget
• Production budget
• Direct material purchases budget
• Direct labour budget
• Overhead budget
• Selling and administrative expenses budget
• Ending finished goods inventory budget
• Cost of goods sold budget

Operating lease lease under which the lessor effectively retains substantially all the risks
and benefits incidental to ownership of the leased property.

Outside equity portion of a subsidiary company that is included in consolidated financial

interest statements and is not owned by the controlling (majority) shareholders of
the parent company.

Percentage of method of allocating revenue (and associated expenses) over several

completion fiscal periods during which the revenue is earned. Used for long-term
construction contracts, franchise revenue and similar multi-period
revenues.

Prepayments expenses that have been paid but not yet incurred; an expenditure
(prepaid expenses) recorded as a current asset because the benefit will be obtained in the
near future (e.g. insurance coverage good for the next year).

Present value future cash inflows or outflows reduced to their ‘present’ amount by
removing from them the interest that could have been earned or paid had
the money been on hand for investment today.

Price-to-earnings calculated by dividing the market price of one share of a company by

ratio earnings per share.
(P/E ratio)
Profit excess of revenues over expenses. The (net) profit of a business is the
residual after deduction of expenses from revenues.

Profit margin percentage of sales revenue that ends up as profit; hence it is the
average profit for each dollar of sales.

Profitability ratios involves the company’s effectiveness in earning profits and providing a
return on shareholders’ investments.

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Property, plant and noncurrent assets that are tangible, and are used in the operating activity
equipment of an entity.

Provision liability of uncertain timing or amount.

Provision for liability for future economic benefits to be paid to employees that
employee employees accumulate as a result of the rendering of their services to an
entitlements employer up to the reporting date. They include, but are not limited to,
wages and salaries (including fringe benefits and non-monetary benefits),
annual leave, sick leave, long service leave, superannuation and other
post-employment benefits.

Ratio analysis examining the relationship between various items in the financial
statements, e.g. ROA = profit/total assets.

Retained profits profits not yet distributed to shareholders; the sum of net profits earned
(retained earnings) over the life of a company, less distributions (dividends declared) to
shareholders.

Revaluation act of recognising a reassessment of the values of noncurrent assets, as

at a particular date.

Revenue class of income relating, typically, to the ordinary activities of an entity.

Revenue received liability account used for customer deposits or other cash receipts before
in advance the completion of the sale (e.g. before delivery).

Share buyback process by which a company buys its own shares at market value on the
stock exchange, then cancels them to reduce the total number of shares
on issue.

Share capital portion of a company’s equity obtained by issuing shares in return for
cash or other considerations.

Shareholders’ sum of shareholders’ direct investment (share capital) and indirect

equity investment (retained profits
and reserves).

Solvency ratios involves the relative balance of debt and shareholders’ equity as sources
of the company’s financing.

Stock option(s) promises, usually made to senior managers, to issue shares to them at
specified prices. The prices are usually set to be higher than present
prices but lower than expected future prices, to provide an incentive to
work to increase those future prices.

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 Sustainability a broad term to describe an organisation’s reporting on its environmental,
reporting social and economic performance.

Time value of preference to receive money earlier rather than later and to pay money
money later rather than earlier.

Unearned liability account used for deposits or other cash receipts before the
revenue completion of the sale (e.g. before delivery).

Valuation determination of the amounts at which assets, liabilities and equity should
be shown in the balance sheet.

Variable costs costs which vary proportionately with changes in the level of activity.

Wages payable amounts owing to employees in the form of wages at the end of the pay
period.

Working capital current assets used in operations: cash, marketable securities, inventory
and accounts receivable.

Written-down value for a noncurrent asset, this is the net amount after deducting accumulated
depreciation.

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