Edition1oftutor2usacclaimedAccounts&FinanceGlossary "averygoodresource...andausefuladditiontotheworldoftheaccountingstudent.

" DuncanWilliamson,TimesEducationalSupplement,December2004

Accounting and Finance Glossary 2005 Term Absorptioncosting Description Absorptioncostingisamethodofidentifyingandascertainingthecostofproductsorservices.Thisisdoneby includingbothfixedand variablecosts.Theabsorptionmethodofcostingcanbecontrastedwithvariableormarginalcosting methodswherecostsofproductsor servicesarecalculatedusingvariablecostsonly.Theabsorptioncostingmethodrequiresthechoiceofanabsorptionbasisbywhichfixed costscanbeallocatedappropriately. Forexample,thefixedcostsoffactoryequipmentrepairsandmaintenance maybeallocatedtothe costofproducingspecificproductsonthebasisoftheiruseofmachinetime.Inanotherexample,thecostoffactoryrentandratesmaybe allocatedtoproductsbasedontheamountoffactoryspacethattheirproductiontakesup. Accountingisadifficulttermtodefine.However,itisformallydefinedbytheAmericanAccountingAssociationasTheclassificationand recordingofmonetarytransactions,thepresentationandinterpretationoftheresultsofthosetransactionsinordertoassessperformance overaperiodandthefinancialpositionatagivendate,andthemonetaryprojectionoffutureactivitiesarisingfromalternativeplanned coursesofaction. Usingthisdefinition,accountingcanbeseentobeabouttheidentificationandrecordingofbusinesstransactionsasa wayofassistingthemanagementandplanningofabusiness. Accountingconceptsaretheprinciplesthatguidethepreparationofaccountinginformation.Thesefundamentalaccountingconceptsare bestconsideredasthebuildingblocksonwhichhistoricalaccountinginformation.Thefundamentalaccountingconceptsaregenerally takingtoincludeprudence,consistency,accrualsandgoingconcern. Accountingpoliciesarethespecificaccountingbasesselectedandconsistentlyfollowedbyabusiness. Accountingpoliciesneedtobe appropriatetothecircumstancesofabusinesssothat,whenappliedtoaccountingtransactions,theresultingaccountinginformation presentsfairlyitsresultsandfinancialposition.Accountingpoliciesarelargelygovernedbytheapplicationofaccountingstandards. However,thereremainsalargeamountofsubjectivitythatneedstobeappliedwhendetermininghowtoapplyaccountingpolicies. Accountingstandardsareauthoritativestatementsofhowparticulartypesoftransactionandothereventsshouldbereflectedinfinancial statements.Accordingly,compliancewithaccountingstandardswillnormallybenecessaryforfinancialstatementstogiveatrueandfair view. WhenpreparingaccountsintheUK,businessesmusttakeaccountofstatementsissuedbytheAccountingStandardsBoard.These requiretheadoptionofcertainaccountingprinciplesandmethods.TherearecurrentlytwoformsofAccountingStandardsintheUK FinancialReportingStandards(FRSs)andStatementsofStandardAccountingPractice(SSAPs).Theonlydifferencebetweentheseisthat SSAPswereissuedpriorto1990.Sincethatdate,thenamehasbeenchangedtoFRS.Accountingstandardsapplytoallcompanies,and otherkindsofentitiesthatprepareaccountsthatareintendedtoprovideatrueandfairview. TheASBisaUKstandardsettingbodysetupin1990managetheuseofaccountingstandards.Itsdeclaredaimsare toestablishand improvestandardsoffinancialaccountingandreporting,forthebenefitofusers,preparersandauditorsoffinancialinformation. . AccountingstandardsdevelopedbytheASBarecontainedin'FinancialReportingStandards'(FRSs).TheASBcollaborateswith accountingstandardsettersfromothercountriesandtheInternationalAccountingStandardsBoard(IASB)inordertoensurethatits standardsaredevelopedasfaraspossibletobeconsistentfromcountrytocountry. Accrualsareamounts thatareowedtothirdpartiesforwhich abusinesshasnotyetbeeninvoiced.Thetotalofaccrualsis showninthe balancesheetaspartofcreditorsduelessthanoneyear.Forexample,whereabusinesshasnotbeeninvoicedbyanadvertisingagency foritscosts forthelastthreemonthsoftheyear,itwillshowinitsaccountsanaccrualfortheestimatedamountoftheinvoice. Oneofthefundamentalaccountingconcepts, theaccrualsconceptisalsoknownasthematchingconcept.Undertheaccrualsconcept, revenueandcostsarecreditedorchargedtotheprofitandlossaccountfortheyearinwhichtheyareearnedorincurred,notwhenany

Accounting

Accountingconcepts

Accountingpolicies

Accountingstandards

AccountingStandardsBoard (ASB)

Accruals

Accrualsconcept

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Accounting and Finance Glossary 2005 Term Description cashisreceivedorpaid.Forexample,ifasaleismadeoncreditthisyear,butthecashisonlyreceivednextyear,thesaleistreatedas incomeinthisyear. Similarly,ifabusinessincursacostduringtheyear(e.g.electricity)butisnotinvoiceduntilearlyinthenextyear,the accountswillshowanestimatedliabilityfortheexpectedamountoftheinvoice. Acidtestratio Theacidtestratio(alsoknowasthequickratio)isanaccountingratio thatisconcernedwithbusinessliquidity.Itis definedascurrent assets(excludingstocks)dividedbycreditorsfallingduewithinoneyear.Theacidtestratioisdesignedtotesttheshorttermsolvencyofa business,inawaysimilartothecurrentratio. Stocksareexcludedfromcurrentassetsonthebasisthatitcanoftentakeseveralmonthsto convertstocksintocash. Thetermacquisitioncommonlyreferstothetakeoverofone businessbyanother. Sometimestheacquisitionwillinvolvethepurchaseof theentiresharecapitalofacompany.Inothersituationstheacquisitionisoffcertaintradingassetsratherthananactualcompany. Acquisitionscanbefinancedbypayingcash.Oftentheyalsoinvolvetheissueofsharesbytheacquiringbusinessgiventothe shareholdersofthebusinessbeingsold.Acquisitionsaresubjecttoregulatorycontrolviathecompetitionauthorities.Forlarger,cross borderacquisitions,regulationbyauthoritiessuchastheEuropeanCompetitionCommissionmustalsobetakenintoaccount. Activitybasedcosting(commonlyshortenedtoABC)isasystemofcostingwhichrecognisesthatcostsareincurredbyeachactivitythat takesplacewithinabusinessandthatproducts(orcustomers)shouldbearcostsaccordingtotheactivitiestheyuse.TheuseofABC requirestheidentificationofcostdriversthoseactivitiesthattakeplaceinabusinessthatcausecoststobeincurred.Thecosts associatedwiththesecostdriversalsoneedtobeidentifiedsothattheycanbeappropriatelyallocatedtoeachactivitybeingcosted. Mostbusinessesmakeuseofanagedcreditorsreporttomanagethetimingofpaymenttotradecreditors.Thereportliststheamounts payabletotradecreditorsbasedonthepaymenttermsagreedwiththem.Italsolistscreditorswhohavebeenowedmoneyforthelongest period. Anageddebtorsreportlistsamountsowedtoabusinessbytradedebtorsandanalyseshowlongtheamountshavebeendue.Thereportis acrucialpieceofinformationformanagingtheamountofcreditgiventocustomersandforchasingoutstandingamounts. Thetermagencyrelationshipdescribestherelationshipbetweenmanagementandshareholders.Itexplainshowmanagementactas agentsforshareholders,usingtheirdelegatedpowerstorunthebusinessinthebestinterestsoftheshareholders Administrationisatermusedtodescribeasituationrelatingtothepossibleinsolvencyofabusiness.UnderanAdministrationOrder,a courtsupervisestheaffairsofacompanyinfinancialdifficultieswithtotheaimofsecuringitssurvivalasagoingconcernor,failingthat,to achievingamorefavourablerealisationofitsassetsthanwouldbepossibleonliquidation.Whiletheadministrationorderisinforce,the affairsofthecompanyaremanagedbyanadministrator. Whennewsharesareissuedinacompanyitmaybethatthereisexcessdemandfortheshares.Insuchacase,sharesareallottedto newsubscribersonafairbasisalthoughalmostalwaysinlowernumbersthanwererequested.Theprocessofshareallotmentisa commonfeatureofnewshareissuesontheLondonStockExchange. TheAlternativeInvestmentMarket(usuallyshortenedtoAIM)isajunior marketofthe mainLondonStockExchange.AIMreplacedthe UnlistedSecuritiesMarketin1995.Itprovidesanopportunityforsmallercompanieswithgrowthprospectstoraisecapitalandhavetheir sharestradedinamarketwithouttheexpenseofafullmarketlisting. Amortisationisatermusedtodescribethereductioninvalueofanassetthroughwearorobsolescence. Inrelationtotangiblefixedassets, amortisationismodecommonlyknownasdepreciation.IntheUK,amortisationusuallyreferstothereductioninvalueof intangibleassets suchasacquiredgoodwill.

Acquisition

Activitybasedcosting

Agedcreditorsreport

Ageddebtorsreport Agencyrelationship Administration

Allotmentofshares

AlternativeInvestmentMarket

Amortisation

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Accounting and Finance Glossary 2005 Term Annualgeneralmeeting Description Theannualgeneralmeeting(AGM)isanannualmeetingoftheshareholdersofacompany,whichmustbeheldeveryyear.Theusual businesstransactedatanAGMisthepresentationoftheauditedaccounts,theappointmentofdirectorsandauditors,thefixingoftheir remuneration,andrecommendationsforthepaymentofdividends.Otherbusinessmaybetransactedifnoticeofithasbeengiventothe shareholders. AlllimitedcompaniesarerequiredbyUKcompanylaw(theCompaniesAct) toprepareanannualreporteachyear,containingtheirfinancial statements,directorsreportand,forlargercompanies,theauditorsreport.Theannualreportofalistedbusiness(i.e.abusinessquotedon apublicstockexchange)mustalsocontainafiveyearsummaryofresults togetherwithawide rangeofotherfinancialandoperating disclosures).TheannualreportandaccountsmustbesenttoshareholdersandtotheRegistrarofCompaniesthegovernmentdepartment that maintainsthepublicrecordsofcompanies.OncesenttotheRegistrar,theannualreportbecomesapublicdocument,availablefor anyonetoview. Anannuityisaconstantannualpayment.Theguaranteeofthemaintenanceofsuchannualpaymentsisalsoknownasanannuity,andcan usuallybepurchasedfrominsurancecompanies.Acertainannuityispaidoveraspecifiednumberofyears,whereasalifeannuityispaid untilthedeathofthenamedrecipient.Anannuitymaybeboughtwithalumpsumorthroughaseriesofcontributions. Arbitragereferstotheexploitationofdifferencesbetweenthepricesoffinancialassetsorcurrencyoracommoditywithinorbetween marketsbybuyingwherepricesarelowandsellingwheretheyarehigher.Forexample,ifcoffeeischeaperinNewYorkthaninLondon afterallowingfortransportanddealingcosts,itwillpaytobuyinNewYorkandsellinLondon.IfinterestratesarehigheronaEurodeposit inLondonthaninFrankfurt,ahigherreturnwillbeobtainedbyswitchingfundsfromonecentretotheother.Unlikespeculation,arbitrage doesnotnormallyinvolvesignificantrisks,sincethebuyingandsellingoperationsarecarriedoutmoreorlesssimultaneouslyandtheprofit madedoesnotdependupontakingaviewonfuturepricechanges.Byeliminatingpricedifferentials,arbitragecontributestothe achievementofmarketequilibrium. TheArticlesofAssociation(theArticles) istheofficialcompanydocumentthatactsasacontractbetweenabusinessanditsshareholders. TheArticlesdescribetherightsanddutiesoftheshareholderswiththebusinessandbetweenthemselves(seealsoMemorandumof Association) AnassetisdefinedbyFinancialReportingStandardNumber5asarightorotheraccesstofutureeconomicbenefitscontrolledbyanentity asaresultofpasttransactionsorevents.Futureeconomicbenefitsmightsimplymeantheconversionoftheassetintocash(e.g.payment ofcashreceivedfromatradedebtor).Bycontrast,afixedassetdescribesownershipofanassetthatcanbeusedinthelongtermto createvalueforabusiness(seealsocurrentassets,fixedassets,intangibleassets). Assetturnoverisanaccountingratio.It measurestheproductivityoftheassetsofabusinessachievedbycomparingassetvalueswith salesrevenue. Forexample,fixedassetturnovercouldbecalculatedbydividingthenetbookvalueoffixedassetsbysales. Anauditcanbedefinedasasystematicexaminationoftheactivitiesandstatusofanentity,basedprimarilyoninvestigationandanalysisof itssystems,controlsandrecords.TheAccountingStandardsBoarddefinestheannualauditthatisrequiredbymostUKlimitedcompanies asanindependentexaminationof,andexpressionofanopinionon,thefinancialstatementsoftheenterprise.Notallcompaniesrequirean audit thereareexemptionsavailableforsmallcompaniesprovidedthattheymeetcertaincriteria. Allcompaniesaboveacertainsizearerequiredtohavetheirfinancialstatementsauditedbyaregisteredauditor.Theauditorpreparesan auditreport(whichispresentedatthefrontofthefinancialstatements)statingwhetherornotthefinancialstatementsgiveatrueandfair viewofthebusinesssresultsandfinancialposition.Inmostcasestheauditreportgiveniscleaninotherwordstherearenoproblems reportedtoshareholders.However,auditreportscanalsobequalified.Inqualifyinganauditreport,theauditordrawstheattentionofthe

Annualreport&accounts

Annuity

Arbitrage

ArticlesofAssociation

Asset

Assetturnover Audit

Auditreport

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Accounting and Finance Glossary 2005 Term Description userofthefinancialstatementstomatterswhicharematerialandwhichshouldbeconsideredwhenreadingtheaccounts.Forexample,the auditormaybeconcernedabouttheabilityofthecompanytocontinueonagoingconcerninwhichcasetheauditreportwouldbe qualifiedonagoingconcernbasis. Audittrail Theaudittrailistherangeofdocumentsandotherevidencewhichrecordsalltheactivitiesandtransactionsofabusiness.Suchahistoric recordallowsthe firmtopiecetogetherthechronologyofatransaction.Itisalsorequiredforcompliancepurposes. Theaudittrailisof particularimportancetotheauditorwhoisrequiredtoobtainevidencethattransactionsarecorrectlyrecordedandreportedbyabusiness. TheAuditingPracticesBoard(APB)(formedin1991)isresponsiblefordevelopingandissuingprofessionalstandardsforauditorsinthe UnitedKingdomandtheRepublicofIreland. Anauditorisaprofessionallyqualifiedaccountantwhoisappointedby,andreportsindependentlyto,theshareholders.Theauditorprovides anindependentopiniontoshareholdersandotherusersthatthefinancialstatementshavebeenpreparedproperlyandinaccordancewith legislativeandregulatoryrequirementsthattheypresenttheinformationtruthfullyandfairly,andthattheyconformtothebestaccounting practiceintheirtreatmentofthevariousmeasurementsandvaluations(seeauditandauditreport) Theauthorisedsharecapitalofacompanyisthemaximumamountofsharecapitalthatmaybeissuedbyacompany.Thisamountcanbe foundbylookinginthecompany'smemorandumofassociation.Theauthorisedsharecapitalmustbedisclosedonthefaceofthebalance sheetoralternativelyinthenotestotheaccounts.Thisisalsoreferredtoasnominalsharecapital. Averagecostrepresentstheaveragecostperunitofoutput.Itiscalculatedbydividingtotalcosts,bothfixedcostsandvariablecosts,bythe totalunitsofoutput. Forexample,iftotalcostsare250,000(comprisingfixedcostsof150,000andvariablecostsof100,000)andtotal outputunitsare10,000thentheaveragecostis25 Abaddebtisadebtowedtoabusinessthatisnotexpectedtobereceived. Thismayarise,forexample,asaresultoftheinsolvencyofa customerwhohadbeenbuyingproductsonacreditbasis.Baddebtsarewrittenoffeitherasachargetotheprofitandlossaccountor againstanexistingdoubtfuldebtprovision. Thebalancesheetprovidesastatementofabusinesssfinancialpositionatagivenpointintime.Itdetailstheassetsofthebusinessand howtheseassetsarebeingfinanced.Financingisbrokendownintotwomajorcategoriesshareholders'fundsandliabilities.Duetothe wayinwhichthebalancesheetisprepared,totalassetswillalwaysequaltotalfinance,i.e.thebalancesheetwillbalance. Thebalancedscorecardisapopularapproachtotheanalysisandreportingofmanagementinformation. Itemphasisestheneedto providetheuserwithasetofinformationwhichaddressesallrelevantareasofperformanceinawaythatisobjectiveandunbiased. The informationcontainedinthebalancedscorecardusuallyincludesbothfinancialandnonfinancialelements,andcoversareassuchas profitability,customersatisfaction,internalefficiency,innovationandquality. Bankingcovenantsareacrucialpartofanybankloanagreement. Aloanagreementintheformofacovenantwillincludeaseriesof undertakings,thebreachingofwhichwillmaketheloanrepayableimmediately. Thebreachingofanundertakingwillalsobeaneventof default. Inthissituation,thebankassumesmuchgreaterfinancialcontroloverthebusiness(forexample,itcanpreventthepaymentofany dividends). Aformofcostinginwhichtheunitcostsareexpressedonthebasisofabatchproduced Bookkeepingistheprocessofrecording monetarytransactionsinthefinancialrecordsofabusiness.Originally,bookkeepingwasatime consumingmanualprocess.However,itisnowlargelymechanisedthroughthewiderangeofbookkeepingsoftwareprogrammes.(See

AuditingPracticesBoard (APB) Auditor

Authorisedsharecapital

Averagecost

Baddebt

Balancesheet

Balancedscorecard

Bankingcovenants

Batchcosting Bookkeeping

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Accounting and Finance Glossary 2005 Term Breakeven Breakevenchart Description doubleentrybookkeeping) Breakevenreferstothequantityofoutputorvalueofsalesnecessarytocoverfixedcosts. Abreakevenchartisagraphonwhichabusiness'totalcosts,analysedintofixedcostsandvariablecosts,aredrawnoveragivenrangeof activity,togetherwiththesalesrevenueforthesamerangeofactivity.Thepointatwhichthesalesrevenuecurvecrossesthetotalcost curveisknownasthebreakevenpoint(expressedeitherassalesrevenueorproduction/salesvolume).Thebreakevenchart,likebreakeven analysis,mayalsobeusedtodeterminetheprofitorlosslikelytoarisefromanygivenlevelofproductionorsales,theimpactonprofitability ofchangesinthefixedorvariablecosts,andthelevelsofactivityrequiredtogeneratearequiredprofit. Abudgetisaquantifiedfinancialstatementthatcoversadefinedperiodoftime.Abudgetwillnormallyincludeplannedsalescostsassets, liabilitiesandassociatedcashflows. Budgetarycontrolisthewayinwhichfinancialcontrolismaintainedwithinabusinessbyusingbudgetsforincomeandexpenditurefor eachmainfunctionofthebusiness.Duringthecourseofafinancialperiod,thesebudgetsarecomparedwithactualperformanceto establishanyvariances.Individualmanagerswhoareresponsibleforthecontrollableactivitieswithintheirbudgetsareexpectedtotake correctiveactiononadversevariances(e.g.wherecostsaregreaterthanbudgetorwheresalesorincomearelessthanbudget) Businessangelsarewealthyentrepreneurswhoprovidecapitalinreturnforbeingpartofagrowingsuccessfulbusiness.Forbusinesses requiringfundsofupto500,000,businessangelsareimportantsourcesoffinance. Abusinessangelwillusuallyexpecthandson involvementwiththebusinessesintowhichheorsheinvests. ABusinessAngelNetwork(BAN)isagroupofbusinessangels,whoarewealthyindividualslookingforinvestmentopportunitiesin businesses,andbusinessesseekingfinance. Theconceptthatfinancialaccountingandreportingrelatestotheactivitiesofaspecificbusinessentityandnottotheactivitiesoftheowners ofthatentity. TheEnterpriseInvestmentScheme(EIS)wasintroducedon1January1994withtheaimofencouragingnewequityinvestmentintrading companiesbyprovidinggeneroustaxincentivestoinvestorsotherthanthosealreadyconnectedwiththecompany.Aninvestormayqualify forbothincometaxreliefandcapitalgainstaxreliefinrespectofanEISinvestment.Thecapitalgainstaxreliefinparticularcanbe extremelyvaluable,asitcanmeanthatthelargegainthatmaypotentiallybemadebyinvestorsinhightechcompanieswhentheyrealise theirinvestment,maybeexemptfromtaxation. Adetailedplansettingouttheobjectivesofabusinessoverastatedperiodusually15years.Abusinessplan isdrawnupbymany businesses.Fornewbusinessesitisanessentialdocumentforraisingcapitalorloans.Theplanshouldquantifyasmanyoftheobjectives aspossible,providingmonthlycashflowsandproductionfiguresforatleastthefirsttwoyears.Itmustalsooutlineitsstrategyandthe tacticsitintendstouseinachievingitsobjectives.Foragroupofcompaniesthebusinessplanisoftencalledacorporateplan. Acalloptiongivestheholderoftheoptiontherighttobuyashare(orotherasset)attheexercisepriceatsomefuturetime. (Seealsoput option) Ataxallowanceforbusinessesoncapitalexpenditureonparticularitems.Theseincludemachineryandplant,industrialbuildings, agriculturalbuildings,minesandoilwells,andscientificequipment. Capitalemployedisessentiallytheunderlyingassetbaseabusinessneedstogenerateitsprofitsandturnover. Itisusuallydefinedasfixed assetsplusworkingcapital,althoughalternativedefinitionsarepossible.Itcanalsobecalculatedbyaddingtogethershareholders'funds

Budget Budgetarycontrol

Businessangel

Businessangelnetwork Businessentityconcept EnterpriseInvestmentScheme

Businessplan

Calloption Capitalallowances Capitalemployed

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Accounting and Finance Glossary 2005 Term Description andlongtermliabilities.Havingcalculatedcapitalemployed,itispossibletoassessthelevelofreturnthatthisinvestmentisproducingby usinganaccountingratiosuchas returnoncapitalemployed. Capitalexpenditure Capitalexpenditureisthatexpenditurebyabusinessthatresultsintheacquisitionoffixedassetsoranimprovementintheirearning capacity.Capitalexpenditureisnotchargedasanexpenseintheprofitandlossaccounttheexpenditureappearsasafixedassetinthe balancesheet.Theconsumptionoruseofthefixedassetovertimeisreflectedintheprofitandlossaccountbycalculatingtheamountof depreciationthathasoccurred.(Seedepreciation) CGTisataxoncapitalgains.Mostcountrieshaveaformofincometaxunderwhichtheytaxtheprofitsfromtradingandadifferenttaxto taxsubstantialdisposalsofassetseitherbytradersforwhomtheassetsarenottradingstock(e.g.atrader'sfactory)orbyindividualswho donottrade(e.g.salesofsharesbyaninvestor).Thelattertypeoftaxisacapitalgainstax. Amarketinwhichlongtermcapitalisraisedbyindustryandcommerce,thegovernment,andlocalauthorities.Themoneycomesfrom privateinvestors,insurancecompanies,pensionfunds,andbanksandisusuallyarrangedbyissuinghousesandmerchantbanks.Stock exchangesarealsopartofthecapitalmarketinthattheyprovideamarketforthesharesand loanstocksthatrepresentthecapitalonceit hasbeenraised Capitalrationingdescribesasituationinwhichabusinesshasonlyalimitedamountofcapitaltoinvestinpotentialprojects.Asaresult, the differentpossibleinvestmentsneedtobecomparedwithoneanotherinordertoallocatethecapitalmosteffectively.Thisisdoneby evaluatingthepotentialreturnsthateachinvestmentmightachieve,andallocatingcapitaltotheprojectswiththebestprojectedreturns. (Seealsopayback,netpresentvalue,investmentappraisal) Thecapitalstructureofabusinessreferstothewayinwhichitisfinanced.Inmostcasesthecapitalstructurewillcompriseacombinationof longtermcapital(e.g.ordinaryshares,reserves,preferenceshares,debentures,longtermbankloansetc)andshorttermliabilities(suchas abankoverdraftandtradecreditors).Itisimportantthatabusinessisfinancedbyanappropriatecapitalstructurethatreflectsthenatureof thebusinessanditsabilitytogenerateprofitsandcashflow.Forexample,abusinessatthestartuporgrowthstagemaynotbeprofitable andmayalsohavesignificantinvestmentrequirements.Inthisexample,theappropriatecapitalstructurewouldmainlycompriseequity financesuchasordinarysharesratherthanbankdebt(wherethebusinesswouldneedtofinanceinterestcharges). Cashisanassetofabusinessandrepresentscashinhand, anddepositsrepayableondemandwithanybankorotherfinancialinstitution. Thecashflowbudgetsummarisestheexpectedcashinflowsandtheexpectedcashoutflowsofabusinessoverabudgetperiod.Itis usuallypreparedonamonthlybasis,butcanbeforshorterorlongerperiodsdependingontheneedsofmanagement.Themainpurposeof acashflowbudgetistodeterminewhencashsurplusesarelikelytobeavailableforinvestmentorwhencashdeficitsarelikelytoarise requiringadditionalfinance. Thecashflowbudgetisalsoreferredtoasthecashflowforecast. Thecashflowstatementisanhistoricalrecordofthecashflowsofabusiness,distinguishingbetweendifferentcategoriesofcashreceipts andpayments.FinancialReportingStandardFRS1(Cashflowstatements)requiresmostcompaniestopublishacashflowstatementas partoftheirannualaccounts.Thepurposeofthisstatementistorevealtousershowcashwasgeneratedandthenappliedbythecompany duringtheperiodunderreview. Atermusedinrelationtotheinsolvencyofabusiness.Chargereferstosecuritywhichistakenbyacreditoroverpropertyorclassesof propertyownedbyacreditortoprotectagainstnonpaymentofadebt(frequentlybyamortgageorotherfixedcharge).Theadvantageofa chargeisthatitplacesthechargeholderaheadofothercreditorsintheeventofthedebtor'sinsolvency.

CapitalGainsTax(CGT)

Capitalmarkets

Capitalrationing

Capitalstructure

Cash Cashflowbudget

Cashflowstatement

Charge

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Accounting and Finance Glossary 2005 Term CompaniesActs Consistencyconcept Description TheUKactsofparliamentconcernedwithcompanies. MuchofUKcompanylawisnowinfluencedbyEuropeanlegislation. Theconsistencyconceptisoneofthefundamentalaccountingconceptsthatunderpinthepreparationofaccounts. Withtheconsistency concept,theprincipleappliedisthatthereisuniformityofaccountingtreatmentoflikeitemswithineachaccountingperiodandfromone periodtothenext. Consolidatedaccountsarethefinancialstatementsofagroupofcompaniesaggregatedtoshowtheoverallfinancialresultsandposition ofthegroup. Acontingentliabilityisapossibleliabilityofabusinessthatarisesfrompastevents.Thereasonwhytheliabilityiscontingentisthatits existence(andfinalamount)canonlybebytheoccurrenceofoneormoreuncertainfutureeventsnotwhollywithinthecontrolofthe business. Forexample,abusinessmaybesubjecttoalegalclaimofsomekindwhichmayresultinthebusinesshavingtopaycostsor damages.Theoutcomeofthe legalclaimmaybeuncertainasmightthepossiblecostsarising.Inthiscase,thebusinesshastotakea prudentviewastothelikelyoutcome.Wheretheamountandoutcome ofacontingentliabilitycanbepredictedwithreasonablelikelihood, theprudenceconceptsuggeststhatthebusinessshouldmakeprovisionfortheliabilityinitsaccountsassoonaspossible.(Seealso provisions,prudenceconcept) Acostingtechniqueappliedtolongtermcontracts inwhichthecostsarecollectedbycontract. Contributionistheamountundermarginalcostingprinciplesofprofitthathasbeenearnedbeforetakingaccountoffixedcostsor expensesofabusiness. Aconvertiblesecurityisasecuritythat,attheoptionoftheholder,maybeexchangedforanotherasset,generallyafixednumberofshares ofcommonstock.Convertibleissuesfrequentlyarefixedincomesecuritiessuchasdebenturesandpreferredstock. Corporategovernancedescribesthewaycompaniesaredirectedandcontrolled.Boardsofdirectorsareresponsibleforthegovernanceof theircompanies.Theshareholdersroleingovernanceistoappointthedirectorsandtheauditorsandtosatisfythemselvesthatan appropriategovernancestructureisinplace. Corporationtaxisthetaxationpayablebycompaniesontheirprofits. Aswithotherdirecttaxes(suchasincometax)therearedifferent ratesofcorporationtaxpayable(dependingonthelevelofprofitsachieved).Companiesalsoreceivetaxallowanceswhichtheycanuseto reducetheamountofcorporationtaxpayable.Themainkindofallowancecapitalallowancesprovidesataxincentivetoinvestinfixed assets.Smallercompaniesalsobenefitfromlowercorporationtaxrates. Thecorporationtaxrateistherateatwhichcompaniespaycorporationtax.Theratevariesdependingonthesizeofthebusiness.Asmall businessfortaxpurposespayscorporationtax,currently20%.Asmallbusinessfortaxpurposesisdefinedasabusinesswithtaxable profitsof300,000orless.Thenormalrateofcorporationtaxiscurrently30%andispaidbycompanieswithtaxableprofitsof1.5millionor more.Companieswithprofitsbetweenthesetwolimitspaycorporationtaxatataperingratebetween20%and30%[checkthesenumbers] Acostcentreisaproductionorservicelocation,function,activityoritemofequipmentforwhichcostsareaccumulatedandtowhichthey arecharged. Creativeaccountingisthetermusedtodescribethedeliberatemanipulationof reportedaccountinginformationwiththeintentiontomislead usersoftheaccounts. Creativeaccountingtriestotakeadvantageoftheuseofsubjectivejudgementusedinpreparingaccounts.The abilitytousecreativeaccountinghasbeensignificantlyreducedinrecentyearsfollowingtheissueofarangeofmoreprescriptiveand

Consolidatedaccounts Contingentliability

Contractcosting Contribution Convertiblesecurities Corporategovernance

Corporationtax

Corporationtaxrates

Costcentre Creativeaccounting

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Accounting and Finance Glossary 2005 Term Creditors Description detailedaccountingstandards.(Seeaccountingstandards,windowdressing). Creditorsformpartofabusinesssliabilitiesandrepresentamountsduetothirdparties.Creditorsareanalysedinthebalancesheetinto thoseduewithinoneyearandthosedueaftermorethanoneyear. Formostbusinesses,themaincreditoristradecreditorsamounts owedtoprovidersofgoodsandservicesoncredittermstothebusiness.(Seecurrentliabilities) Thecreditordaysratioprovidesanindicatoroftheaveragenumberofdays'credittakenbyabusinessbeforeitstradecreditorsarepaid.It iscalculatedbythefollowingformula:(Tradecreditors365)/annualpurchasesoncredit. Currentliabilitiesarethoseshorttermliabilitieswhichareintendedtobeconstantlyreplacedinthenormalcourseoftradingactivity.Current liabilitiestypicallycomprise:tradecreditors,accrualsandbankoverdrafts. Thecurrentratioisanaccountingratio.Itisusuallydefinedascurrentassetsdividedbycreditorsfallingduewithinoneyear.Theratiois designedtoassessthesolvencyofabusinessintheshortterm.Ifthecurrentratioexceedsone,thenthevalueofcurrentassetsisgreater thanthevalueoftheshorttermcreditors,indicatingthatthebusinessisabletopayitsshorttermdebtsastheyfalldue.Notethatthis interpretationisfairlysimplisticandtheresultingratiodependsonthenatureofthemarketinwhichthebusinessoperates.Forexample, supermarketsusuallyhaveacurrentratiooflessthanonesincetheydonotsellgoodsoncredit(i.e. minimaltradedebtors)yethavelarge ongoingbalancesowedtotradecreditors.Themostimportantjudgementappliedtothisratio(andothersimilarliquidityratios)isin understandingthereasonsforanysignificantdeteriorationintheratio. Adebentureisaformofloan.Itisawrittenacknowledgementofadebtbyabusinessthatnormallycontainingprovisionsastopaymentof interestandthetermsofrepaymentofprincipal.Adebenturemaybesecuredonsomeoralloftheassetsofthebusinessoritssubsidiaries. Thedebtordaysratioisanaccountingratiothatprovidesinsightintotheeffectivenessofworkingcapitalmanagement.Thecalculationof debtordays(averagetradedebtorsdividedbyaveragedailysalesoncreditterms)indicatestheaveragetimetaken,incalendardays,to receivepaymentfromcreditcustomers. Anincreaseindebtordayswouldsuggestthatcreditcustomersarebeingallowedtotakelongerto payamountsduewhichhasadverseeffectsonbusinesscashflow.(Seealsocreditordays) Debtorsrepresentamountsowedtoabusinessbyitscustomersandotherthirdparties.Debtorsareshownaspartofcurrentassetsin the balancesheet. Adeepdiscountbondisa longtermdebtsecuritythat,becauseofalowcouponrateofinterestcomparedwithcurrentratesofinterest,sells atasubstantialdiscountfromfacevalue.Bondsofthistype,ifnotoriginalissuediscounts,arepreferredbysomeinvestorsbecausethey areunlikelytobecalledbeforematurity. Depreciationisthenamegiventotheamountchargedtotheprofitandlossaccounttoreflectthewearingoutofafixedassetoveritsuseful life.Thepurposeofdepreciationistocomplywiththeaccrualsconcept.Sincethebenefitofafixedassetisreceivedoverseveralperiods, thecostofacquiringtheassetischargedagainstprofitsoverthoseperiods.Thereareseveralmethodsavailabletocalculatedepreciation. Thetwomostpopularapproachesarethestraightlineandreducingbalancemethods.Itshouldbenotedthat thedepreciationchargein theprofitandlossaccounthasnoeffectonthecashflowsofabusiness.Itissimplyasubjectiveestimateoftheamountbywhichthevalue ofafixedassethasfallenbelowitsoriginalpurchasecost.Note:notallfixedassetsaredepreciated.Forexample,thevalueoflandis rarelydepreciatedbecauseitsvalueuslalygrows,notfallsovertime. Thedepreciationprovisionistheamountofdepreciationthathascumulativelybeenchargedtotheprofitandlossaccount,relatingtoafixed asset,fromthedateofitsacquisition.Fixedassetsarestatedinthebalancesheetattheirnetbookvalue(orwrittendownvalue)whichis usuallytheirhistoricalcostlessthecumulativeamountofdepreciationatthebalancesheetdate.(Seealsonetbookvalue)

Creditordaysratio Currentliabilities Currentratio

Debenture Debtordays

Debtors Deepdiscountbonds

Depreciation

Depreciationprovision

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Accounting and Finance Glossary 2005 Term Directcost Director Description Adirectcostisacostthatcanbedirectlyrelatedtoproducingspecificgoodsorperformingaspecificservice.Forexample,thewagesofan employeeengagedinproducingaproductcanbeattributeddirectlytothecostofmanufacturingthatproduct. AdirectorisapersonelectedunderacompanysArticlesofAssociationtoberesponsiblefortheoveralldirectionofthecompanysaffairs. DirectorsusuallyactcollectivelyasaboardandcarryoutsuchfunctionsasarespecifiedinthearticlesofassociationortheCompanies Acts,buttheymayalsoactindividuallyinanexecutivecapacity. TheDirectorsReportformspartofacompanysannualreportandaccounts.Itisalegalrequirementthatthedirectorswriteareport summarisingthecompanysperformanceoverthe financialperiodcoveredbytheaccounts,commentonthecompanysfutureprospects, andprovideotherrequireddisclosures. Discountedcashflowisamethodofinvestmentappraisal.Itinvolvesthediscountingoftheprojectednetcashflowsofaprojecttoascertain itspresentvalue. Atermusedininvestmentappraisaltorefertothe hurdlerateofinterestorcostofcapitalrateappliedtothediscountfactorsusedina discountedcashflowappraisalcalculation.Thediscountratemaybebasedonthecostofcapitalrateadjustedbyariskfactorbasedonthe riskcharacteristicsoftheproposedinvestmentinordertocreateahurdleratethattheprojectmustearnbeforebeingworthyof consideration.Alternatively,thediscountratemaybetheinterestratethatthefundsusedfortheprojectcouldearnelsewhere. Thedividendcoverratioisanaccountingratiothatisconcernedwiththelevelofreturnsthataregiventoshareholderscomparedwiththe abilityofthecompanytodeliverprofits.Thedividendcoverratioisdefinedasnetearningspersharedividedbynetdividendpershare.The purposeoftheratioistoidentifyhowmuchofabusinesssprofitsarebeingdistributedtoshareholdersandhowmuchisbeingretainedto financefutureexpansionofthebusiness.Generallyabusinesswithalowdividendcoverispayingoutmostofitsearningsasdividendsand isunlikelytoachievehighgrowthinthefuture,comparedtoabusinesswithhighdividendcover. Dividendcoverisusuallyonlyrelevantto companiesthatarequotedonarecognisedstockexchange.Itisrarethattheratiowouldbecalculatedforaprivatecompany. Dividendpolicyreferstothedecisionsmadebyacompanyastohowmuchprofitshouldbedistributedbywayofdividendstoshareholders asopposedtobeingreinvestedinthebusiness Dividendsrepresentamountspaidtoshareholdersoutoftheprofitsofabusiness.Dividendsareusuallypaidannuallyorsemiannually, andrepresentpartof returnonashareholdersinvestmentinabusiness.Preferencesharesreceiveafixeddividendwhileforequityshares thelevelofdividenddependsontheprofitabilityofthebusiness.Dividendsareeffectivelydeclaredandpaidnetofincometax.(seealso dividendcover) Amethodofrecordingandprocessingaccountingtransactionsbasedupontheconceptthateachtransactionhasadualaspectadebit entryandacreditentry Adoubtfuldebtisadebtorbalancewherethereissomeuncertaintyastowhetherornotitwillbesettled,andforwhichthereisapossibility thatitmayeventuallyprovetobebad. Adoubtfuldebtprovisionmaybecreatedforsuchadebtbychargingitasanexpensetotheprofit andlossaccount.(Seealsobaddebts) Duediligenceisaninvestigationnormallyconductedbyanindependentaccountantorconsultantofthecurrentfinancialand/ormarket positionandfutureprospectsofabusinesspriortoastockexchangeflotationoramajorinvestmentofcapital.Forexample,venture capitalistundertakeextensiveduediligenceonpotentialinvestmentsbeforecompletingthedeal. Earningspershare(usuallyshortenedtoeps) isameasureofshareholderreturn.Itmeasuresabusinesssprofitabilityfromthepointof

Directorsreport

Discountedcashflow Discountrate

Dividendcover

Dividendpolicy Dividends

Doubleentrybookkeeping Doubtfuldebt

Duediligence

Earningspershare

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Accounting and Finance Glossary 2005 Term Description viewofequityshareholders.Itisdefinedasearningsattributabletoequityshareholdersdividedbythenumberofequitysharesinissueover theyear. EBITDA Economicorderquantity (EOQ) Usefuleconomiclife EBITDAisanacronymforacalculationofabusinessprofitthatexcludesfinancingcosts,taxationanddepreciation.Itiscalculatedas operatingprofitbeforeinterest,tax,depreciation,andamortisation. Theeconomicorderquantity(EOQ)representstheoptimalorderingquantityforanitemofstockwhichwillminimisestockholdingcosts. Theperiodforwhichthepresentownerofanassetwillderiveeconomicbenefitsfromitsuse.

Employeeshareownershipplan Amethodofprovidingtheemployeesofacompanywithsharesinthecompany.TheESOPbuyssharesinitssponsoringcompany,usually (ESOP) withassistancefromthecompanyconcerned.Thesharesareultimatelymadeavailabletotheemployees,usuallydirectors,whosatisfy certainperformancetargets. Environmentalreporting PubliclyquotedbusinessesintheUKarerequiredtoprovideastatementincludedwithintheirannualreportandaccountsthatsetsoutthe environmentalpoliciesofthebusinessandanexplanationofitsenvironmentalmanagementsystemsandresponsibilities.Theenvironmental reportmayincludereportingontheperformanceofthebusinessonenvironmentalmattersinqualitativetermsregardingtheextenttowhich itmeetsnationalandinternationalstandards.Itmayalsoincludeaquantitativereportontheperformanceofthebusinessonenvironmental mattersagainsttargets,togetherwithanassessmentofthefinancialimpact. Alsoreferredtoasordinarysharesor(intheUSA)commonstock.Equitysharesrepresenttherighttoparticipateintheresidualassetsofa businessandtypicallyhavevotingrights.Equityshareholderswillusuallyreceiveadividend,thelevelofwhichdependsonthelevelof achievedprofitsandtheextenttowhichthedirectorswishtoreinvestprofitsbackintothebusiness.Ifthebusinessiswoundup,equity shareholderswillbeentitledtoanyassetsleftoverafterallotherinvestorshavebeenpaidoff.Equityshareholdershavelimitedliability, whichmeansthattheirliabilitytocontributemoneytothebusinessislimitedtotheamounttheyhavealreadyinvested. Exceptionalitemsareseparatelyreportedinabusinesssprofitandlossaccount.Exceptionalitemsarethosewhicharematerial,derived fromeventsortransactionswithinabusinesssordinaryactivitiesandwhichneedtobedisclosedseparatelytoensurethatthebusinesss accountsgiveatrueandfairview.(Seealsoextraordinaryitems) Exportcreditinsuranceisinsurancetakenoutagainsttheriskofnonpaymentbyforeigncustomersforexportdebts. Extraordinaryitemsareseparatelydisclosedinabusinesssprofitandlossaccount.Itemswhicharematerial,possessahighdegreeof abnormality,arenotexpectedtorecurandarederivedfromeventsortransactionsoutsideoftheordinaryactivitiesofabusiness.Notethat, becausethedefinitionofordinaryactivitiesisextremelywide,itisextremelyunlikelythatabusinesswillshowanextraordinaryiteminits accountsinanyoneyear.(seealsoexceptionalitems). Factoringdescribesanarrangementwherebythedebtsofabusinessarecollectedbyafactorbusiness,whichadvancesaproportionofthe moneyitisduetocollect.(Seealsoinvoicediscounting). Afinanceleaseisaleasewherethelessortransferssubstantiallyalltherisksandrewardsofownershipoftheassettothelessee.(Seealso operatingleases) Financialaccountingisthefunctionresponsibleforthe reportingrequiredbycompanylegislationforshareholders.Italsoprovidessuch similarinformationasrequiredforGovernmentandotherinterestedthirdparties,suchaspotentialinvestors,employees,lenders,suppliers,

Equityshares

Exceptionalitems

Exportcreditinsurance Extraordinaryitems

Factoring Financelease Financialaccounting

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Accounting and Finance Glossary 2005 Term Financialintermediary Financialmanagement FinancialReportingCouncil Description customers,andfinancialanalysts. Afinancialintermediaryisapartythatbringstogetherprovidersandusersoffinance,eitherasabrokerorasprincipal. Financialmanagementisthegeneraltermthatdescribesthemanagementofalltheprocessesassociatedwiththeraisinganduseof financialresourcesinabusiness. TheFinancialReportingCouncil(FRC)isthebodywhichprovidesthestrategicdirectionbehindthedevelopmentofAccountingStandards intheUK.Ithastwomainoperations theAccountingStandardsBoardandtheFinancialReportingReviewPanel,whichissueandenforce AccountingStandardsintheUK.<addlinks> TheFinancialReportingReviewPanelisthebodyresponsibleforensuringthatcompaniesin theUKfollowAccountingStandards.<add link>(SeealsoAccountingStandardsBoardandFinancialReportingCouncil) FinancialReportingStandards(FRSs)areissuedbytheAccountingStandardsBoard.TheuseofFRSsreplacedthepreviousformof accountingstandardsintheUKwhichwerenamedStatementsofStandardAccountingPractice.(seealsoAccountingStandards). Productsthathavecompletedthemanufacturingprocessandareavailablefordistributiontocustomers. Comparefinishedgoodswith workinprogress. Firstinfirstoutisamethodusedtocalculatethecostifstocksorinventories.Itassumesthattheoldestitemsorcostsarethefirsttobe used.Itiscommonlyappliedtothepricingofissuesofmaterials,basedonusingfirstthecostsoftheoldestmaterialsinstock,irrespective ofthesequenceinwhichactualmaterialusagetakesplace.Closingstocksarethereforevaluedatrelativelycurrentcosts. Afixedassetisdefinedasanyasset,tangibleorintangible,acquiredforretentionbyanentityforthepurposeofprovidingaservicetothe business,andnotheldforresaleinthenormalcourseoftrading.Thisincludes,forexample,equipment,machinery,furniture,fittings, computers(seealsodepreciation) Afixedcharge isheldbythechargeholderoverspecificassets(typicallyamortgageinrespectofproperty)whichpreventsadebtorfrom sellingorotherwisedealingwiththechargedpropertywithoutpaymentinsettlementofthedebtduetothechargeholder Afixedcostisonewhich,withincertainoutputorturnoverlimits,tendstobeunaffectedbyfluctuationsinthelevelsofactivity(outputor turnover). Agoodexamplewouldbetherentandrateschargeforanoffice,ortheemploymentcostsofstaffwhoprovideservicesnot directlyrelatedtoproductionoroutput(e.g.theaccountingdepartment). Aforwardcurrencytransactionisatransactionwherearateofexchangeisagreedtodaybutdeliveryoccursonanagreeddateinthefuture. Therateofexchangeisknownastheforwardexchangerate. Forwardexchangeratesaremainlyusedasawayofcreatinggreater certaintyaboutwhat theactualcostofatransactionwillbeinthelocalcurrencyofthebusiness.Theuseofforwardcurrencytransactionsis oftenreferredtoascurrencyhedging. Gearingreferstotheuseofdebtaspartofthefinancialstructureofabusiness.Theuseofdebtasasourceoffinancereducestheamount ofequityfundingthatisrequired.However,abusinesspartlyfinancedbydebtneedstobesatisfiedthatitwillbeableto meettheinterest paymentobligationsofthedebtproviders. IntheUKtheconceptofgenerallyacceptedaccountingprinciplesistakentomeanaccountingstandardsandtherequirementsof companylegislationandthestockexchange.

FinancialReportingReview Panel FinancialReportingStandards Finishedgoods Firstinfirstout(FIFO)

Fixedassets

Fixedcharge Fixedcost

Forwardcurrencytransaction

Gearing

Generallyacceptedaccounting principles(GAAP)

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Accounting and Finance Glossary 2005 Term Gearingratio Description Thegearingratioisanaccountingratiowhichmeasuresthelevelofdebtfinanceabusinesshasraisedrelativetoitslevelofshareholders funds.Thegearingratioisalsoknownasthe debttoequityratio.Itisusuallydefinedastotaldebtdividedbyshareholdersfunds, expressedasapercentage.Theprecisedefinitionwillvary,however,fromsituationtosituation.Thehigherthepercentagefromthe calculation,themorehighlygearedabusinessis.Itispossibletocalculatethenetgearingratio,wherecashbalancesaredeductedfrom debtinthecalculation.(Seealsointerestcoverandgearing) Goingconcernisoneofthefundamentalaccountingconcepts(theothersbeingprudence,accrualsandconsistency).Underthegoing concernconceptitisassumedthatabusinesswillcontinueinoperationalexistencefortheforeseeablefuture.Thisassumptionhas significantimplicationsforthevaluationofassetsinthebalancesheetwhichcanbestatedattheirnetbookvalue.Iftherewasadoubt abouttheabilityofthebusinesstooperateasagoingconcern,thencertainassetswouldhavetobevaluedattheirdisposalvalue(whichis likelytobelowerthannetbookvalue).(Seealsoaccountingconcepts) Goodwill,intheaccountingsense,referstothedifferencebetweenthetotalvalueofabusinessandthevalueofitsnetassetsinitsbalance sheet.Itrepresentstheabilityofthebusinesstogenerateprofitsandcashinthefuture. Thevalueofgoodwillisoftenonlydeterminedwhen abusinessisboughtorsold. Acquiredgoodwill(thedifferencebetweenthepurchasepriceforabusinessanditsnetassets,isamortised throughtheprofitandlossaccount. Grossmarginisaprofitabilityratiocalculatedasgrossprofitdividedbysales.Theratiofocusesontheabilityofthebusinesstomaintain tradingmargins.(Seealsogrossprofit). Grossprofitisthedifferencebetweensalesandthetotalcostofsales.(Seealsogrossmargin). Hirepurchaseisamethodofbuyinggoodsinwhichthepurchasertakespossessionofthegoodsassoonasaninitialinstalmentoftheprice (adeposit)hasbeenpaid.Thepurchaseronlyobtainsownershipofthegoodswhenalltheagreednumberofsubsequentinstalmentsare paid. ThehistoricalcostconceptisabasisofaccountingprescribedbytheCompaniesActforpublishedaccounts.Underthissystemof accounting,allvaluesarebasedonthehistoricalcostsincurred. Indirectcostsarethosecosts thatareuntraceabletoparticularunitsorcostcentres.Itisexpenditureonlabour,materialsorserviceswhich cannotbeeconomicallyidentifiedwithaspecificsaleablecostunit.Inordertodeterminethetotalcostofproductiononafullyabsorbed basis)suchcostshavetobeallocated,thatisassignedtoasinglecostunit,costcentre,orcostaccountortimeperiod. Businessesareplacedintoinsolvencywhentheyareunable topaycreditorsdebtsinfullafterrealisationofalltheirassets. Thedecisionto placeabusinessintoinsolvencyisnormallytakenbythecreditorsofabusinessusuallyabank.Thereareseveraldifferentformsof insolvencythemainonesbeingadministration,receivershipandliquidation. Interestcoverisanaccountingratio.It measuresthelevelofabusinesssprofitsrelativetoitsinterestchargeintheprofitandlossaccount. Itisusuallydefinedasprofitsbeforeinterestandtaxdividedbyinterestcharges,buttheprecisedefinitionwillvarydependingonthe circumstances.Thehighertheratio,thelessgearingabusinesshas.The interestcoverratioisparticularlyimportantforlenders,inthatit helpsthemdeterminethevulnerabilityofinterestpaymentstoadropinprofit. (Seealsogearingandgearingratio) Internalauditisthenamegiventoanindependentappraisalfunctionestablishedwithinabusinesstoexamineandevaluateitsactivitiesasa servicetothebusiness.Theobjectiveofinternalauditingistoassistmembersofthebusinessintheeffectivedischargeoftheir responsibilities.Tothisend,internalauditingfurnishesthemwithanalyses,appraisals,recommendations,counselandinformation

Goingconcern

Goodwill

Grossmargin Grossprofit Hirepurchase

Historicalcostconcept Indirectcost

Insolvency

Interestcover

Internalaudit

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Accounting and Finance Glossary 2005 Term Internalcontrol Description concerningtheactivitiesreviewed.(Seealsoaudit) Aninternalcontrolisafinancialorotherformof managementcontrolthathelpsprovideabusinesswithmoreeffective,efficientoperation,or toenablethebusinesstocomplywithlawsandregulations. Manyinternalcontrolsareconcernedwiththeapplicationofauthorityand approvallevels(forexample,whocanauthorisepurchasesormakepayments).Othersareconcernedwiththecompleteandaccurate maintenanceofbusinessrecords.Thesystemofinternalcontrolsisusuallymonitoredbytheinternalauditfunction(ifoneexists)andis reviewedbytheauditorsofabusinessaspartoftheirauditofthefinancialstatements. Theinternalrateofreturn(IRR)istheannualpercentagereturnachievedbyaproject,atwhichthesumofthediscountedcashinflows overthelifeoftheprojectisequaltothesumofthediscountedcashoutflows. Abusinessthatusesdiscountedcashflowtechniquesasa methodofinvestmentappraisalwilloftenuseatargetIRRasadiscountrateinevaluatingpotentialinvestmentsorprojects. Investmentappraisalisaprocesswherebythelikelyrevenuesandcostsgeneratedbyaninvestmentareevaluatedoverthelifeofthe project..Suchappraisalincludestheassessmentoftherisksof,andthesensitivityoftheproject'sviabilityto,forecastingerrors.The appraisalenablesajudgementtobemadewhethertocommitresourcestotheproject. Invoicediscountingisusedbysomebusinessesasawayofraisingworkingcapital.Itinvolvesthepurchase(bytheproviderofthe invoice discountingservice)oftradedebtorsatadiscounttotheirbookvalue.Invoicediscountingenablesthebusinessfromwhichthedebtsare purchasedtoraiseworkingcapitalbyswappingtradedebtorsintocash.(Seealsoinvoicefactoring). Jobcostingisamethodofcostingwhichidentifiestheindividualcostsofperformingeachjob. Lastin,firstout(LIFO)isamethodofvaluingstocks(inventory).LIFOassumesthatthelastitemofstockreceivedisthefirsttobeused. Leasingrelatestoacontractbetweenalessorandalesseeforhireofaspecificassetselectedfromamanufacturerorvendorofsuch assetsbythelessee.Thelessorhasownershipoftheassets.Thelesseehaspossessionoftheassetonpaymentofspecifiedleaserentals overaperiod.(Seealsofinanceleaseandoperatinglease) Liabilitiesrepresentamountsowedbyabusinesstothethirdpartyprovidersoffinanceotherthantheequityshareholders. Themain examplesofliabilitiesincludetradecreditors(supplierswhosellgoodstothebusinessoncredit)andbankloansandoverdrafts.Liabilities thatareduetoberepaidwithinoneyearareshowninthebalancesheetundertheheadingCreditorsduewithinoneyear.Similarly, liabilitiesthatarenotdueformorethanoneyearareseparatelydisclosed. Alimitedliabilitycompanyisoneinwhichtheliabilityofshareholdersforthecompanysdebtsislimitedtotheamountpaidand,ifany, unpaidonthesharestakenupbythem.Theimportantpointaboutalimitedliabilitycompanyisthattheshareholdersareprotectedagainst claimsagainstthecompany,whichistreatedbylawasaseparatelegalpersonality. Inthepreparationofbudgets,accountshouldbetakenoflimitingfactors.Alimitingfactorisaconstraintwhichlimitsbusinessactivities,for example,labourormaterialswhichareinshortsupply. Budgetsshouldbearlimitingfactorsinmind. Liquidationistheformalprocedureforclosingdownacompanyorpartnershipincludingrealisationanddistributionofassets AliquidatoristheOfficialReceiveroraninsolvencypractitionerwhoisappointedtoattendtotheliquidationofacompanyorpartnership. Liquidresourcesarealternativetermsfortheliquidassetsofabusiness.Thesearethecashbalancesandotherassetsreadilyconvertible intocash,forexampleshortterminvestments.

Internalrateofreturn(IRR)

Investmentappraisal

Invoicediscounting

Jobcosting Lastinfirstout(LIFO) Leasing

Liabilities

Limitedliabilitycompany

Limitingfactor Liquidation Liquidator Liquidresources

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Accounting and Finance Glossary 2005 Term Liquidityratios Loanstock Longtermcapital Managementaccounting Managementbuyout(MBO) Marginalcost Marginalcosting Description Therearevariousaccountingratiosthatrelatetothefinancialresourcesofabusiness.Theseareknownasliquidityratios.Themaintwo statisticsare thecurrentratioandtheacidtestratioswhichmeasuretherelationshipbetweencurrentassetsandcurrentliabilities. Loanstockislongtermbusinessfinanceonwhichinterestispaid,usuallyatafixedrate.Holdersofloanstockare,therefore,longterm creditorsofabusiness. Capitalinvestedorlentandborrowedforaperiodoffiveyearsormore Managementaccountingisabroadtermtodescribethetechniquesusedtocollect,process,andpresentfinancialandquantitativedata withinabusinesstoenableeffectivescorekeeping,costcontrol,planning,pricing,anddecisionmakingtotakeplace. Theacquisitionofabusinessbyitsexistingmanagement.MBOsareusuallyfundedbyventurecapitalists Thevariablecostsperunitofproduction.Thevariablecostsareusuallyregardedasthedirectcostsplusthevariableoverheads.Marginal costrepresentstheadditionalcostincurredasaresultoftheproductionofoneadditionalunitofproduction Marginalcostingisacosting methodwherebyeachunitofoutputischargedwithonlythedirectlyattributablevariableproductioncosts. Usingthismethod,fixedproductioncosts (suchasthefactoryrentandrates)arenotconsideredtoberealcostsofproduction,butcosts whichprovidethefacilitiesforanaccountingperiodthatenableproductiontotakeplace. Thematchingconceptisanalternativetermfortheaccrualsconceptoneofthefundamentalaccountingconcepts(Seealsoaccruals concept) Materialityistheconceptthatisusedtoevaluatewhetheraccountinginformationissufficientlysignificanttousersofaccountssuchthat it shouldnotbeomittedormisstatedintheaccounts. Materialitydependsonthesizeoftheitemorerrorjudgedintheparticular circumstancesofitsomissionormisstatement.Theconceptofmaterialityisparticularlyimportantforauditorswhomustassesswhether errorstheyfindinaccountsneedtobeadjustedbeforetheaccountsarefinalised.(Seealsoaudit) TheMemorandumofAssociationisaconstitutionaldocumentofacompanythatdealswithmatterssuchasthecompanyname,registered office,thefactthatithaslimitedliability,itstradingobjectsandotherrelevantfacts.Theothermainconstitutionaldocumentofabusiness aretheArticlesofAssociation. Merchantbanksarefinancinginstitutionsthatcarryoutavarietyoffinancialservices,includingtheacceptanceofbillsofexchange,theissue andplacingofloansandsecurities,portfolioandunittrustmanagementandsomebankingservices. Mezzaninedebtisakindofloanfinancewherethereislittleornosecurityleftafterthe mainbankloandebthasbeensecured.Toreflectthe higherriskofmezzaninefunds,thelenderwillchargearateofinterestofperhapsfourtoeightpercentoverbankbaserate,maytakean optiontoacquiresomeequityandmayrequirerepaymentoverashorterterm. Minorityinterestsarisewhenacompanyhasasubsidiarycompany inwhichitdoesnotownalloftheshares.Theshareholdersapartfrom theholdingcompanyarereferredtoastheminorityinterests.Forexample,whereaholdingcompanyowns80%ofthesharesina subsidiarycompany,theremaining20%ofshareholdersaretheminorityinterests. Netassetsaredisclosedaspartofthebalancesheet.Netassetsequalstotalassetsonthebalancesheetlesstotalliabilities. Netassetspershareisanaccountingratio.Itisdefinedasnetassetsdividedbythenumberofsharesinissue.Itisalsoknownasnet worthpershare.Thepurposeoftheratioistocomparethenetassetspersharewiththeshareprice.Thesharepricewilleitherbeata

Matchingconcept Materiality

Memorandumofassociation

Merchantbanks Mezzaninedebt

Minorityinterests

Netassets Netassetspershare

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Accounting and Finance Glossary 2005 Term Netcurrentassets Description premiumtonetassetvalueoradiscount. Netcurrentassetsaredisclosedaspartofthebalancesheet.Netcurrentassetsequaltotalcurrentassetslesstotalcreditorsfallingdue withinoneyear.Itisalso morecommonlyknownasworkingcapital.Whenshorttermcreditorsexceedcurrentassets,itisreferredtoasnet currentliabilities. Netbookvalueisthedifferencebetweentheoriginalpurchasecostofafixedassetlessthecumulativeamountofdepreciationthathas beenchargedtotheprofitandlossaccountinrelationtothatasset. Forexample,ifapieceofmachineryhadapurchasecostof75,000 anddepreciationof50,000hadbeenchargedonthatasset,thenetbookvalueofthemachineryinthebalancesheetwouldbe25,000. Netpresentvalueisthevalueobtainedbydiscountingallcashoutflowsandinflowsofacapitalinvestmentbyachosentargetrateofreturn orcostofcapital Anewissuerelatestothelistingofacompanyssharesontothestockexchangeforthefirsttime Anonexecutivedirectorispartofacompanysboardofdirectors.However,thenonexecutivedirectordoesnothaveanyexecutive responsibilityinthebusiness.Inotherwords,heorshedoesnotgetinvolvedinthedaytodaymanagementofthebusiness.Thepurpose ofnonexecutivesistoactasanindependentrevieweroftheactivitiesoftheexecutivedirectorsandtosafeguardtheinterestsofthe shareholders. Theoperatingcycle,orworkingcapitalcycle,iscalculatedbydeductingcreditordaysfromstockdaysplusdebtordays.Itrepresentsthe periodoftimewhichelapsesbetweenthepointatwhichcashbeginstobeexpendedontheproductionofaproductandthecollectionof cashfromthecustomer. Anoperatingleaseisaleasewherethelessorretainsmostoftherisksandrewardsofownership.(Seealsofinancelease) Operatingmarginisanaccountingratiothatisconcernedwiththelevelofprofitability.Itiscalculatedbydividingoperatingprofitbytotal salesandexpressingtheresultasapercentage. Operatingprofitisthenetprofitthatisearnedbyabusinessbeforeanyexceptionalitems,financecostsortaxcharges.Itcanbecalculated bytakinggrossprofit(orgrossmargin)plus/lessalloperatingrevenuesandcosts. Operationalgearingreferstotherelationshipoffixedcoststototalcosts.Thegreatertheproportionoffixedcosts,thehighertheoperating gearing,andthegreatertheadvantagetothebusinessofincreasingsalesvolume.Ifsalesdrop,abusinesswithhighoperatinggearingmay faceaproblemfromitshighleveloffixedcosts. Opportunitycostisanimportantconceptparticularlyinthecontextofinvestmentorprojectappraisal.Theopportunitycostisthevalueof thebenefitsacrificedwhenonecourseofactionischosen,inpreferencetoanalternative.Theopportunitycostisrepresentedbythe forgonepotentialbenefitfromthebestrejectedcourseofaction. Optionsarefoundinmostareasoffinance.Forexample,optionsareusedinconvertiblesharesandwarrants,insurance,currency arrangementsandinterestratemanagement.Thetwomaintypesofoptionarecalloptionsandputoptions. Ordinarysharesarepartoftheequityfinanceofabusiness.Ordinarysharesentitletheholderstotheremainingdivisibleprofits(and,ina liquidation,theassets)afterpriorinterests,forexamplecreditorsandpriorchargecapital,havebeensatisfied Overdraftfinancingisprovidedwhenbusinessesmakepaymentsfromtheirbusinesscurrentaccountexceedingtheavailablecash

Netbookvalue

Netpresentvalue(NPV) Newissues Nonexecutivedirector

Operatingcycle

Operatinglease Operatingmargin Operatingprofit Operationalgearing

Opportunitycost

Options Ordinaryshares Overdraftfinancing

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Accounting and Finance Glossary 2005 Term Description balance.Anoverdraftfacilityenablesbusinessestoobtainshorttermfundingalthoughintheorytheamountloanedisrepayableon demandbythebank. Overhead Anoverheadisacostthatisnotdirectlyrelatedtotheproductionofaspecificgoodorservicebutthatisindirectlyrelatedtoavarietyof goodsorservices.Forexample,thecostofmaintainingandinsuringalargefactoryisanindirectproductioncostthatmustbespreadovera numberofproductsorservices. Theoverheadabsorptionrateprovidesameansofattributingoverheadtoaproductorservice,based,forexample,ondirectlabourhours, directlabourcostormachinehours. Overheadabsorptionratesarerequiredbythefullcostmethodofpricingproductsandservices.(See alsomarginalcosting) Overtradingoccurswhenabusinessexpandstoorapidly,puttingastrainonitsfinancialresources.Thiscanleadtoliquidityproblems. Paybackisamethodofinvestmentappraisal.Thepaybackperiodrepresentsthenumberofyearsittakesthecashinflowsfromacapital investmentprojecttoequalthecashoutflows.Abusinessmayhaveatargetpaybackperiod,abovewhichprojectsarerejected. Themain drawbackwiththepaybackmethodisthatitdoesnotreflectthetimevalueofmoney.Accordingly,itdoesnotdiscriminatebetween receivingcashnowascomparedwithreceivingthesameamountofcashinseveralyearstime.Anothercriticismofthepaybackmethodis thatitignorescashflowsthatariseafterthepaybackhasbeencompleted. Postbalancesheeteventsarethosefavourableandunfavourableevents,whichoccurbetweenthebalancesheetdateandthedateon whichthefinancialstatementsareapprovedbytheboardofdirectors. Thedirectorsmustdecidewhetherthefinancialstatementsshould eitherreflectpostbalancesheeteventsorwhethertheysimplyneedtobementioned(withoutadjustingtheaccounts).Aneventwhich mightrequiretheaccountstobeadjustedwouldbeonewhichprovidesevidenceaboutconditionsexistingatthebalancesheetdate.For example,theinsolvencyofamajortradedebtorwouldsuggestthatthedebtorbalanceattheyearendshouldbeprovidedforasabaddebt. Preferencesharesarepartoftheequityfinanceofacompany.Preferencesharesusuallyreceiveafixeddividendeachyearandwhich,if redeemed,areredeemedatparvalue.Althoughthedividendisfixed,itisnotguaranteed.However,ifthecompanyfailstopay('passes')the preferencedividendfortheyeartoordinaryshareholders.Wherethepreferencesharesarecumulative,anyarrearsofpreferencedividend willalsohavetobepaidpriortotheordinarydividendbeingpaidinanyyear.Preferencesharesmayberedeemable,whentheywillbe redeemedatasetdate.Theymayalsobeconvertible.Finally,theymaybeparticipating,whichmeansthatinadditiontothefixeddividend, theywillreceiveavariabledividenddependentontheperformanceofthecompany.(Seealsoordinaryshares) Apreferentialcreditorisacreditorwhoisentitledtoreceivecertainpaymentsinprioritytootherunsecuredcreditors.Suchcreditorsinclude governmentdepartments,occupationalpensionschemesandemployees. Prepaymentsareclassifiedascurrentassetsinthebalancesheet. Prepaymentsincludeprepaidexpensesforservicesnotyetused,for examplerentinadvanceorelectricitychargesinadvance,andalsoaccruedincome.Accruedincomerelatestosalesofgoodsorservices thathaveoccurredandhavebeenincludedintheprofitandlossaccountforthetradingperiodbuthavenotyetbeeninvoicedtothe customer. Presentvalueisthecashequivalentnowofasumofmoneyreceivableorpayableatstatedfuturedate,discountedataspecifiedrateof return.(Seealsonetpresentvalue) Thepriceearnings(p/e)ratioisanaccountingratiothatisconcernedwithmeasuringtheoverallprofitabilityofabusinessbasedinrelation totheequityshareholderswhowillshareinthatprofit.Thep/eratioisdefinedasthesharepricedividedbytheearningspershare.Broadly speaking,thehigherabusinesssP/Eratio,themoreexpensivethebusinessandthemorehighlyrateditis.(Seealsoearningspershare)

Overheadabsorptionrate

Overtrading Payback

Postbalancesheetevents

Preferenceshares

Preferentialcreditor Prepayments

Presentvalue Pricetoearningsratio(p/e ratio)

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Accounting and Finance Glossary 2005 Term Profitandlossaccount Description Theprofitandlossaccountisoneoftheprimaryfinancialstatements.Itshowsabusinesssincomeandexpenditureoveraperiodoftime, usuallyoneyear.Thetermprofitandlossaccountisalsousedintheshareholdersfundspartofthebalancesheet.Inthiscontext,the termrepresentsaccumulatedprofitswhichabusinesshasgeneratedsinceitsincorporation. Profitbeforetaxisaseparatelineintheprofitandlossaccount.Itiscalculatedbytakingoperatingprofitplusorminusnetinterest. Aprofitcentreisapartofthebusinessthatisaccountableforbothcostsandrevenuesthemanagerisresponsibleforrevenuesandcosts. Provisionsareliabilitieswherethebusinessisuncertainastotheamountortimingoftheexpectedfuturecosts.Forexample,ifabusiness issubjecttoalawsuit,itmayprovidenowfortheexpectedliabilityonlossofthelawsuit.Thisisanexampleoftheprudenceconcept.(See alsoliabilities) Theprudenceconceptisoneofthefundamentalaccountingconcepts.Itisimportantthatfinancialstatementsarepreparedonaprudent basis.Revenuemustnotbeshownintheaccountsuntilthecashrealisationoftherevenueisreasonablycertain.Ontheotherhand,costs arisingasaresultofpastactionsshouldbeprovidedforimmediately,evenifthecashwillnotbepaidoveruntilthefuture. Apubliclimitedcompanyplc)isacompanywhich,byregisteringasaplcandadheringtostrictlegalrequirementsasaresult,hasthe abilitytoissuesharestothepublic.ContrastthiswithaPrivateLimitedCompany,whichisnotpermittedtoissuesharestothepublic.A publiclimitedcompanyshouldnotbeconfusedwithaListedCompany.Alistedcompanyisapubliclimitedcompanywhichhasobtaineda listingfromtheUKListingAuthorityandnotallpubliclimitedcompaniesdothis. Aputoptiongivestheholderoftheoptiontherighttosellashare(orotherasset)attheexercisepriceatsomefuturetime.(Seealsocall option) Ameasureofliquidity,similartothecurrentratioexceptthatstocksareexcludedfromthecalculationofnetcurrentassets(sinceitmaybe sometimebeforestockscanbeconvertedbackintocash). Ratioanalysisisthestudyoftherelationshipsbetweenfinancialvariables.Ratiosofonebusinessareoftencomparedwith thesameratios ofsimilarbusinessesorofalloperatorsinasingleindustry.Thiscomparisonindicatesifaparticularbusinessfinancialstatisticsaresuspect. Likewise,aparticularratioforabusinessmaybeevaluatedoveraperiodoftimetodetermineifanyspecialtrendexists. Reservesarepartofshareholdersfundsonthebalancesheet.Allpartsofshareholdersfundsapartfromsharecapitalarereserves,such asthesharepremiumaccount,theprofitandlossaccountandtherevaluationreserve. Theresidualvalueofanassetistheexpectedproceedsfromthesaleoftheasset,netofthecostsofsale,attheendofitsestimateduseful life.Residualvalue isusedforcomputingthestraightlinemethodanddiminishingbalancemethodofdepreciation,andalsoforinclusionin thefinalyear'scashinflowinadiscountedcashflowappraisal. Retainedprofitsarethoseprofitsthathavenotbeenpaidoutasdividendstoshareholders,butretainedforfutureinvestmentbythe company. Returnoncapitalemployed(ROCE)isanaccountingratiodesignedtoassesstheprofitgeneratingcapacityofcapitalemployed.Itis definedasprofitsbeforeinterestandtaxdividedbycapitalemployed,expressedasapercentage.Broadlyspeaking,thehigherthereturnon capitalemployed,themoresuccessfulthebusiness. Returnonequity(usuallyshortenedtoROE)isameasureofinvestmentreturnthatcomparestheprofitearnedbyabusinesswiththe

Profitbeforetax(PBT) Profitcentre Provisions

Prudence

Publiclimitedcompany(PLC)

Putoption Quickratio Ratioanalysis

Reserves Residualvalue

Retainedprofits Returnoncapitalemployed

Returnonequity

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Accounting and Finance Glossary 2005 Term Revenueexpenditure Rightsissue Riskcapital Saleandleaseback Description amountinvestedinthebusinessbyshareholders. Revenueexpenditureischargedtotheprofitandlossaccount.Itisexpenditurethatisincurred(1)forthepurposeofthetradeofthe business(e.g.sellingcosts,administrationcosts)or(2)tomaintaintheexistingearningcapacityoffixedassets Arightsissueisanissueofsharesforcashbyacompanytoitsexistingshareholdersonabasisproratatotheirexistingshareholdings.The rights issuewillnormallybeatasubstantialdiscounttothecurrentshareprice(oftenbetween20%and40%discount). Analternativetermforventurecapital Thesaleofafixedassetthatisthenleasedbytheformerownerfromthenewowner.Asaleandleasebackpermitsafirmtowithdrawits equityinanassetwithoutgivingupuseoftheasset. Saleandleasebacksarepopularmethodsofraisingcashbybusinessesthatown propertyassets. Ascripdividendisanissueofsharestoaninvestorinlieuofacashdividend.Thevalueoftheshareswillbedesignedtoequalthevalueof thecashdividendforegone.Thismaybeusefulforinvestorswhowishtoincreasetheirinvestmentinacompanywithoutincurringthecosts ofbuyingsharesinthemarket. Asecuredcreditorisacreditorwhoholdssecurity,suchasamortgage,overadebtor'sassets Theinclusioninabusinesssreportandaccountsofanalysisofturnover,profitsandnetassetsbyclassofbusinessandbygeographical segments(CompaniesActs1985/89andSSAP25). Amodellingandriskassessmenttechniqueinwhichchangesaremadetosignificantvariablesinordertodeterminetheeffectofthese changesontheplannedoutcome.Particularattentionisthereafterpaidtovariablesidentifiedasbeingofspecialsignificance. Capitalisthenumberofexistingsharesinthebusiness multipliedbythenominalvalueoftheshares. Ashareholderisanownerofsharesinalimitedcompanyorlimitedpartnership.Ashareholderisamemberofthecompany. Shareholdervalueisanapproachtobusinessvaluationandmanagementthatfocusesonmaximisingthevalueofashareholder'sequity aboveotherbusinessobjectives.Normally,shareholdervaluecanbeincreasedinthreeways:dividendpayments,appreciationinthevalue oftheshares,andcashrepayments. Partofshareholders'fundsinabusinesssbalancesheet.Ariseswhensharesareissuedatapremiumtotheirnominalvalue.Forexample, ifshareswithanominalvalueof100pareissuedatapriceof150p,thesharecapitalofthebusinesswillincreasebythenominalvalueof 100ppershareandthesharepremiumaccountwillincreaseby50ppershare.Thetotalofsharecapitalplussharepremiumaccount thereforerepresentsthetotalcashraisedfromshareholdersbythebusinessinthepast. Capitalthatislentorborrowedforaperiodwhichmightrangefromasshortasovernightuptoaboutoneyear Anapproachtobusinessthatincorporatesalltheinterestsofstakeholdersinabusiness.Itwidenstheviewthatafirmisresponsibleonlyto itsownersinsteaditincludesotherinterestedgroups,suchasitsemployees,customers,suppliers,andthewidercommunity,whichcould beinfluencedbyenvironmentalissues.Itthusattemptstoadoptaninclusiveratherthananarrowapproachtobusinessresponsibility. Theplannedunitcostoftheproducts,componentsorservicesproducedinaperiod.Thestandardcostmaybedeterminedonanumberof bases.Themainusesofstandardcostsareinperformancemeasurement,control,stockvaluationandintheestablishmentofsellingprices.

Scripdividend

Securedcreditor Segmentalreporting Sensitivityanalysis Sharecapital Shareholder Shareholdervalue

Sharepremiumaccount

Shorttermcapital Stakeholdertheory

Standardcost

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Accounting and Finance Glossary 2005 Term Stocks Stockturnover Stockvaluation Description Goodspurchasedbyabusinesstoresellontoitscustomers.Includedaspartofcurrentassetsinthebusinesssbalancesheet.Alsoknown asinventoriesintheUSA. Analternativetermforinventoryturnover,measuringhowquicklystocksareconvertedintofinishedgoodsandsales. Stockvaluationreferstothevaluationofstocksofrawmaterial,workinprogress,andfinishedgoods.Accordingtogenerallyaccepted accountingpractice,stocksshouldbevaluedatthelowerofcostornetrealisablevalueandthecostsincurreduptothestageofproduction reached. AmethodofdepreciationthatchargesequalamountsofdepreciationtotheProfit&LossAccountduringtheusefullifeofanasset. Asubsidiarybusinessisabusinesswhichiscontrolledbyanotherbusiness,referredtoasitsholdingbusiness.Controlisusuallyachieved eitherbyowningshareswithmorethan50%ofthevotingrightsinthesubsidiary,orbyhavingtherighttoappointdirectorstotheBoardwho haveamajorityofvotingrightsontheBoard. Sunkcostsarethosecostswhichhavealreadybeenincurredandwhichcannotnowberecovered. Taxableprofitsaretheprofitsonwhichabusinesscalculatesitscorporationtaxchargeforayear.Notethatthedefinitionoftaxableprofitsis notthesameasaccountingprofitsbeforetax.Thereasonforthisisthatthebusinesshasconsiderableflexibilityinthewayitcalculatesits accountingprofitbeforetax.Asaresult,theInlandRevenuehasdifferentrulesinsomeareasforthecalculationoftaxableprofits. TherequirementforfinancialstatementspreparedincompliancewiththeCompaniesActtogiveatrueandfairviewoverridesanyother requirements.AlthoughnotpreciselydefinedintheCompaniesActthisisgenerallyacceptedtomeanthataccountsshowatrueandfair viewiftheyareunlikelytomisleadauseroffinancialinformationingivingafalseimpressionofthebusiness. Analternativetermforsalesorrevenue. TheUrgentIssuesTaskForce(UITF)isasubcommitteeoftheAccountingStandardsBoardwhichissetuptodealwithurgentaccounting issuesonanadhocbasis.ItproducesAbstracts,whichareessentiallyminiAccountingStandardsandmustbefollowedbycompanies whenpreparingtheiraccounts. (Seealsoaccountingstandards). Variablecostsarethosecoststhatvaryindirectproportiontothevolumeofactivity. Avarianceisthedifferencebetweenaplanned,budgetedorstandardcostandtheactualcostincurred.Thesamecomparisonsmaybe madeforrevenues. Varianceanalysisisaprocesswherethefinancialandoperationalperformanceofabusinessisevaluatedintermsofvariancesagainst budgetsorstandards.Thepurposeofanalysingvariancesistoensuretimely identificationofareasfor managerialaction.Thesevariances willbeeitherfavourablevariances(F)oradversevariances(A). VentureCapitalisaformof"riskcapital".Inotherwords,capitalthatisinvestedinabusinesswherethereisasubstantialelementofrisk relatingtothefuturecreationofprofitsandcashflows.Riskcapitalisinvestedasshares(equity)ratherthanasaloanandtheinvestor requiresahigher"rateofreturn"tocompensatehimforhisrisk.ThemainsourcesofventurecapitalintheUKareventurecapitalfirmsand "businessangels" privateinvestors. Awarrantisarightgivenbyacompanytoaninvestor,allowinghimtosubscribefornewsharesatafuturedateatafixed,predetermined price(theexerciseprice)

Straightlinedepreciation Subsidiarybusiness

Sunkcost Taxableprofits

Trueandfairview

Turnover UrgentIssuesTaskForce

Variablecost Variance Varianceanalysis

Venturecapital

Warrant

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Accounting and Finance Glossary 2005 Term Weightedaveragecostof capital(WACC) Windowdressing Workinprogress Workingcapital Workingcapitalcycle Zerobasedbudgeting Description Theweightedaveragecostofcapital(WACC)istheaveragecostofthebusinesssfinance.Thisiscalculatedbyapplyingaweightingto thedifferentcostsoffinanceaccordingtotherelativesizeofeachelementinthefinancialstructureofabusiness. Windowdressingisacreativeaccountingpracticeinwhichchangesinshorttermfundinghavetheeffectofdisguisingorimprovingthe reportedliquiditypositionofthebusiness. Workinprogressisatermusedtodescribeproductsorserviceswhichareintheprocessofcompletion. Workingcapitalisalsoknownasnetcurrentassets.Itisthecapitalavailableforconductingdaytodayoperationsofabusiness. Normally workingcapitalwillbepositivei.e.thereisanexcessofcurrentassetsovercurrentliabilitieswhichthereforeneedstobefunded. Theworkingcapitalcycleisanothertermfor thecashoperatingcycle.Itreferstotheperiodoftimewhichelapsesbetweenthepointat whichcashbeginstobespentontheproductionofaproductandthecollectionofcashfromacustomer. Zerobasedbudgetingisa methodofproducingabudgetwhichignoreswhathashappenedinthepast.Instead,eachelementofthebudget isbuiltupfromanewsetofassumptions.Thisprocessisinevitablymoretimeconsumingbutisoftenusedwherepreviousbudgetsina businesshaveprovedsignificantlydifferentfromactualresults.

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