Glossary for CMA Part 2 Balance sheet structure showing assets on the left, liabilities and stockholders' equity

on the right. The alternative form, called the Report Form, positions assets above liabilities and stockholders' equity. Ground rules of accounting that are (or should be) followed in preparation of all accounts and financial statements. The four fundamental concepts are (1) Accruals concept: revenue and expenses are taken account of when they occur and not when the cash is received or paid out; (2) Consistency concept: once an entity has chosen an accounting method, it should continue to use the same method, except for a sound reason to do otherwise. Any change in the accounting method must be disclosed; (3) Going concern: it is assumed that the business entity for which accounts are being prepared is solvent and viable, and will continue to be in business in the foreseeable future; (4) Prudence concept: revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is a reasonable 'possibility' of incurring them. Also called conservation concept. Other concepts include (5) Accounting equation: total assets of an entity equal total liabilities plus owners' equity; (6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period; (7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value; (8) Entity: accounting records reflect the financial activities of a specific business or organization, and not of its owners or employees; (9) Full disclosure: financial statements and their notes (footnotes) should contain all pertinent data; (10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower) to reflect the effects of obsolescence; (11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level; (12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period; (13) Materiality: relatively minor events may be ignored, but the major ones should be fully disclosed; (14) Money

Account Form

Accounting concepts

Accounting Profit

Accounts Payable Turnover Ratio

Accounts receivable (A/R) turnover Accounts Receivable Turnover

Accrual basis accounting

measurement: accounting process records only those activities that can be expressed in monetary terms (with some exceptions, as in cost-accounting); (15) Monetary measurement: only the activities measurable in terms of money should be recorded; (16) Objectivity: financial statements should be based only on verifiable evidence, comprising an audit trail; (17) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off (discharged); (18) Unit of measurement: financial data should be recorded with a common unit of measure (dollar, pound sterling, yen, etc.). Also called accounting conventions, accounting postulates, or accounting principles. A company's total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes. A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. Ratio that shows the relationship between unpaid credit sales to total credit sales. It indicates, in general, the effectiveness (or lack of it) of a firm's credit policies and cash collection efforts. Formula: Outstanding accounts receivable (in an accounting period) credit sales revenue (in the same period). Degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an Opportunity Cost of tying up funds in receivables for a longer period of time. System of accounting based on 'accrual principle' under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Totals of revenues and expenses are shown in the financial statements (prepared at the end of an accounting period), whether or not cash was received or paid out in that period. Accruals basis accounting conforms to the provisions of GAAP in preparing financial statements for external users, and is employed by all firms except the very small ones (which use cash basis accounting). Also called accrual

Accrued expenses Accumulated Earnings Tax Activity ratios

Aging schedule

American Depository Receipt (ADR)

Arbitrage pricing theory (APT) Articulate Asset allocation

accounting. See also modified accrual basis accounting. Expenses (such as wages, salaries, and utility charges) which are incurred but for which no payment is made during an accounting period. They are shown in the balance sheet as a current (short term) liability. Also called accrued liabilities. A tax imposed by the federal government upon companies with retained earnings deemed to be unreasonable and in excess of what is considered ordinary. Financial ratios which measure how effectively a firm is using its assets. Examples include accounts receivable turnover, asset turnover, and inventory turnover ratios. Table that classifies accounts payable or accounts receivable according to their dates. It helps in analyzing which payments are behind their due date, and by how many days. See also accounts payable aging and accounts receivable aging. Certificate issued by a US bank for the common stock (ordinary shares) of a non-US corporation, held by the bank in a custodial-account. Denominated in US dollars, it is a negotiable-instrument and gives its holder the benefits and privileges of a stockholder. ADRs can be traded on the US stock exchanges (and in over-the-counter markets) just like the securities issued by the US corporations. One of the two leading capital market theories of 1960s and 1970s, it is based on the law of one price: two identical assets cannot sell at different prices. It states that the market price (which reflects the associated risk factors) of an asset represents the value that prevents an investor from exploiting it to make a risk-free profit. Also, if the market price is more or less than this value, arbitrage by investors should cancel the difference. APT (like its contemporary theory, capital asset pricing model or CAPM) works only in a market in equilibrium and makes other restrictive assumptions such as equal access to information, no information or transaction costs, and rational investors. See also capital market theories. To describe interrelationship between elements of any operating financial statements that have a common basis. Technique to get the best of a risk/reward tradeoff by dividing investments among different alternatives. A

Automated clearing house Average collection period Average fixed cost Average variable cost

firm has to decide, for example, which products to manufacture, whether to buy or lease a machine, or how much to invest in an advertising campaign. Similarly, an individual is faced with the choice of putting savings in stocks (shares), bonds, precious metals, real estate, etc. In all such cases, the strategy to allocate funds is based on balancing the investor's objectives regarding income with the corresponding risks. Computerized facility used by banks to exchange (clear and settle) credit card and other electronic payments drawn on one another. Average number of days for which receivables are outstanding during an accounting period. Total fixed cost divided by number of units of production (total product). Variable cost divided by number of units produced. Formula: Variable costs total output Countersigning (endorsement) of a bill of exchange by the buyer's (or importer's) bank. Bankers acceptance establishes that payment of the bill on its maturity date is now guaranteed by the endorsing bank. Banks agree to countersign a bill of exchange when they are comfortable with the buyer's financial strength and stability, and on payment of the acceptance fee. Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets. Bankruptcy can be brought upon itself by an insolvent debtor (called 'voluntary bankruptcy') or it can be forced on court orders issued on creditors' petition (called 'involuntary bankruptcy'). Two major objectives of a bankruptcy are (1) fair settlement of the legal claims of the creditors through an equitable distribution of debtor's assets, and (2) to provide the debtor an opportunity for fresh start. Bankruptcy amounts to a business-failure, but voluntary winding up does not. See also insolvency. Bond whose owner's name is not on record with the bond issuer. Interest accrued on bearer bonds is paid to whoever presents the attached coupons, and the principal is paid to whoever presents the bond for redemption. Ownership (title) of this type of bond can pass from hand to hand by simple delivery, just like a currency note or a bearer check. See also registered bond.

Bankers' acceptance

Bankruptcy

Bearer bond

Bond ratings

Breakup value

Bretton Woods system

Bonds are ranked on the basis of the degree of risk associated with timely payment of their interest and principle. Bond rating agencies (such as Standard & Poor's) use a grading system as follows (1) AAA: highest quality (called 'gilt edged'). (2) AA: high quality. (3) A: upper medium grade. (4) BBB: medium grade. (5) BB: has speculative elements. (6) B: speculative. (7) CCC: speculative with possibility of default. (8) CC: most speculative. (9) C: lowest gradable quality. (10) DDD: in default with possibility of recovery. (11) DD: in default and arrears. (12) D: in default, with little or no value. Bonds rated 'BBB' or higher are considered investment grade suitable for financial institutions with fiduciary responsibilities. Bonds rated below 'B' are considered speculative grade and are called high yield or junk bonds which, due to greater likelihood of their default, must pay higher interest rates to attract investors. Net asset value of a business, computed on the basis of it being sold as a 'gone concern.' It is the most conservative method of business valuation because the assets are priced individually (as disparate pieces, and not as functional units together with other assets) at their forced liquidation ('fire sale') value. Also called breakup basis. Set of multilateral agreements on international economic relations, negotiated at the UN Monetary and Financial Conference held in July 1944 (in the aftermath of second world War) attended by the finance ministers of the UK, US, and other Allied countries. The major objectives of this conference included (1) financing the reconstruction of the postwar Europe, and (2) avoiding unstable exchange rates and competitive-devaluations of pre-Second World War Western economies by instituting fixed exchange rates. World Bank (then called International Bank for Reconstruction & Development or IBRD) was established to serve the first objective, and International Monetary Fund (IMF) for the second. The System, however, collapsed in 1971 when the US suspended the Dollar's convertibility ($20.67 per ounce) to gold in August, devalued it in December, and thereafter opted for a floating exchange rate. Despite the demise of the System, both World Bank and IMF continue to play important (albeit altered) roles in today's international finance. Bretton Woods is the

Business process reengineering (BPR)

Buying Power

Callable bond

Capital adequacy

Capital asset pricing model (CAPM)

name of the township in the US state of New Hampshire where the negotiations were conducted. Thorough rethinking of all business processes, job definitions, management systems, organizational structure, work flow, and underlying assumptions and beliefs. BPR's main objective is to break away from old ways of working, and effect radical (not incremental) redesign of processes to achieve dramatic improvements in critical areas (such as cost, quality, service, and response time) through the in-depth use of information technology. Also called business process redesign. The money an investor has available to buy securities. In a margin account, the buying power is the total cash held in the brokerage account plus maximum margin available. Bond that can be called back (redeemed) by the issuer on payment of a call premium over the par value to the bondholder. Issuers often choose this option when (1) the market interest rate falls below the bond's interest rate, or (2) the issuer's ratings is raised by the bond rating agencies and, therefore, the issuer can raise funds at lower cost. Ordinarily, bonds cannot be redeemed before a certain period (usually 10 years), and are callable only at certain dates given in the bond indent. If any call date is missed, the bond may not be callable until the next call date. Percentage ratio of a financial institution's primary capital to its assets (loans and investments), used as a measure of its financial strength and stability. According to the Capital Adequacy Standard set by Bank for International Settlements (BIS), banks must have a primary capital base equal at least to eight percent of their assets: a bank that lends 12 dollars for every dollar of its capital is within the prescribed limits. One of the two leading capital market theories of 1960s and 1970s, it is based on the idea of risk aversion. It states (1) whatever the rate of return on an investment, it should be achieved with the lowest possible level of risk, and (2) a high-level of risk should be accompanied by a correspondingly high-level of return. CAPM (like its contemporary theory, arbitrage pricing theory or APT) works only in a market in equilibrium and makes other restrictive assumptions such as equal access to information, no information or transaction costs, and rational investors. See also capital market theories.

Capital lease

Capital market

See also dividend capitalization model. Fixed-term (and usually non-cancelable) lease that is similar to a loan agreement for purchase of a capital asset on installments. The lessor's services are limited to financing the asset, the lessee pays all other costs including insurance, maintenance, and taxes. Capital leases are regarded as essentially-equivalent to a sale by the lessor, and a purchase by the lessee (even though the title remains with the lessor). Therefore, leased assets must be capitalized and shown in the lessee's balance sheet as a fixed asset with a corresponding non-current liability (lease payable). The lessee acquires all the economic benefits (such as depreciation) and risks (such as the possibility of the loss of the leased asset) of ownership but can claim only the interest-portion (not the entire amount) of the lease payment as an expense. To be considered a capital lease, a lease must meet one or more of these four criteria: (1) title of the asset passes automatically from the lessor to the lessee at end of the lease term, (2) lease contains a bargain purchase option under which the lessee may acquire the leased-asset at less than its fair market value at the end of lease term, (3) lease term is for a period longer than the 75 percent of the estimated economic life of the asset, or (4) the present value of the lease payments is greater than 90 percent of the fair market value of the asset at the beginning of the lease term. A capital lease is a 'full payment lease' because the lease payments pay back (amortize) the full cost (including financing costs, overheads, and profit margin) of the leased asset to the lessor, with little or no dependence on the residual (or salvage) value of the asset. Called also finance lease or financial lease. See also operating lease and sale and leaseback. Financial market that works as a conduit for demand and supply of (primarily) long-term debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments (bonds, notes, stocks) called securities. A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares.

Capital rationing

Carrying cost

Cash budget

Cash Conversion Cycle - CCC

Cash cycle

Cash Flow Ratios

Cash Management

Management's approach to allocating available funds among competing investment proposals; only the proposals that maximize the total net present value (NPV) of the investment are selected. In marketing, carrying cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishibility, shrinkage and insurance. Financial plan that is a summary of estimated receipts (cash inflows) and payments (cash outflows) over a stated period. Two common methods of cashbudgeting are (1) Adjusted net income approach and (2) Cash receipts and disbursements approach. A metric that expresses the length of time, in days, a company takes in order to convert resource inputs into actual cash flows. It attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sale to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Also known as "cash cycle". Flow of cash that begins with payment for raw materials and ends with receipt of cash on goods sold. Shorter the number of days in this cycle, more the amount of available cash, and lesser the need to borrow. Also called cash conversion cycle or cash flow cycle. See also cash turnover. Ratios showing the cash position or change in cash of the business. Higher levels of cash flow indicate improved cash earnings and liquidity. Earnings are of higher quality if they are backed up by cash because cash can be used to pay debt, purchase fixed assets, and so on. Some cash flow ratios are (1) cash flow from operations/net income, (2) cash flow coverage equal to cash flow from operations/cash expenses, and (3) cash reinvestment ratio equal to cash used/cash obtained. A high cash reinvestment ratio indicates that more cash is being used in the business. Financial management technique used by corporate treasurers to accelerate the collection of receivables, control payments to trade creditors, and efficiently manage cash. Large corporations collect funds from many different accounts into a singleConcentration

Cash ratio

Certificate of deposit (CD)

Coefficient of variation

Commercial paper

CommodityBacked Bond

Common stock

Account and invest excess funds in the Money Market. The local accounts are frequently drawn down to zerofunds every day. In disbursing payments to trade creditors, treasurers attempt to control the outflow of funds by timing payments with the receipt of invoices from trade creditors. A frequently used tool in cash management is Controlled Disbursement of corporate payments to match the collection of accounts receivables against disbursements to trading partners. Comparison of cash plus cash equivalents to current liabilities. Also called liquidity ratio, it is a refinement of quick ratio and indicates the extent to which the readily available funds can pay off the current liabilities. Formula: (Cash + cash equivalents) Current liabilities. Receipt issued by a depository institution (such as a bank, credit union, or a finance or insurance company) to a depositor who opens a certificate account or time deposit account. Issued in a negotiable or nonnegotiable form, it states the (1) amount deposited, (2) rate of interest, and (3) minimum period for which the deposit should be maintained without incurring early withdrawal penalties. Ratio of standard deviation to mean, it is a rough measure of relative dispersion in probability distribution and serves as a measure of relative risk. Also called Pearson's coefficient of variation after its formulator Karl Pearson. Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually, 2 to 30 days, and not more than 270 days), and secured only by the reputation of the issuer. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash, and is offered generally at a discount instead of on interest bearing basis. Also called paper. See also government paper. Bond tied to the price of an underlying commodity. An investor whose bond is tied to the price of silver or gold receives interest pegged to the metal's current price, rather than a fixed dollar amount. Such a bond is meant to be a hedge against inflation, which drives up the prices of most commodities. Type of security that serves as an evidence of proportionate ownership, imparts proportionate voting rights, and gives its holder unlimited proportionate claim on the assets and income of the firm (after the

Common stock

claims of lenders, and other obligations, are satisfied). Common stock constitutes the equity capital (also called risk capital) of the firm which is never paid back (redeemed), and is lost if the firm fails. Common stock usually has a par value (amount for which each share is sold for when first issued) but has no guaranteed value afterwards. In bad years, common stock holders may receive little or no income (dividends) at all. But, in good years, there is no limit to the amount they may receive except the limits imposed by the government, the lenders, or the financial position of the firm. Common stock holders elect directors of the firm and thus participate in determining its policies and direction. But their claim on the firm's assets are subordinate to those of debenture holders, preferred stock (preference share) holders, creditors, and statutory agencies (such as tax authorities). On the winding up of the business, the surplus of the assets over liabilities is divided among common stockholders in proportion to their stockholding. Called ordinary shares in UK and most British Commonwealth countries. Type of security that serves as an evidence of proportionate ownership, imparts proportionate voting rights, and gives its holder unlimited proportionate claim on the assets and income of the firm (after the claims of lenders, and other obligations, are satisfied). Common stock constitutes the equity capital (also called risk capital) of the firm which is never paid back (redeemed), and is lost if the firm fails. Common stock usually has a par value (amount for which each share is sold for when first issued) but has no guaranteed value afterwards. In bad years, common stock holders may receive little or no income (dividends) at all. But, in good years, there is no limit to the amount they may receive except the limits imposed by the government, the lenders, or the financial position of the firm. Common stock holders elect directors of the firm and thus participate in determining its policies and direction. But their claim on the firm's assets are subordinate to those of debenture holders, preferred stock (preference share) holders, creditors, and statutory agencies (such as tax authorities). On the winding up of the business, the surplus of the assets over liabilities is divided among common stockholders in proportion to their stockholding. Called ordinary shares in UK and most British Commonwealth countries.

Compensating Balance

Competitive bidding

Comprehensive income

Concentration Banking Contribution Margin

Deposit that a bank can use to offset an unpaid loan. No interest is earned on the compensating balance, which is stated as a percentage of the loan. The compensating balance increases the Effective Interest Rate on the loan. The compensating balance is usually 10%. Assume a company borrows $50,000 from the bank at a 10% interest rate with a 5% compensating balance. The loan is on a discount basis meaning interest is deducted immediately. The compensating balance is calculated at $2500. Transparent' procurement method in which bids from competing contractors, suppliers, or vendors are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated. Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism. In (1) open competitive bidding (also called open bidding), the sealed bids are opened in full view of all who may wish to witness the bid opening; in (2) closed competitive bidding (also called closed bidding), the sealed bids are opened in presence only of authorized personnel. See also competitive negotiation. Change in equity (net assets) arising from either transactions or other occurrences with nonowners. It excludes investments and withdrawals by owners. Comprehensive income is comprised of two elements: net income and other comprehensive income. Other comprehensive income relates to all items of comprehensive income except for net income. Other comprehensive income includes foreign currency translation gain or loss; unrealized loss or gain on available-for-sale securities; excess of additional pension liability over unamortized prior service cost; and changes in market value of a futures contract that is a hedge of an asset reported at fair value. Acceleration of cash collections from customers by having funds sent to several geographically situated regional banks and transferred to a main concentration account in another bank. The transfer of funds can be accomplished through the use of depository transfer checks and electronic transfers. Consider a situation in which a business manager determines that a particular product has a 35% contribution margin, which is below that of other

Convertible bond Convertible security

Corporate finance

Corporate governance

Cost benefit analysis (CBA)

products in the company's product line. This figure can then be used to determine whether variable costs for that product can be reduced, or if the price of the end product could be increased. Bond that can be exchanged for the issuing company's other securities (common stock or ordinary shares, for example) under certain terms and conditions. Corporate bond or debenture (debt security) or preferred stock that may be exchanged for the common stock (equity security) of the issuing corporation in a certain proportion, within or after a specified period. Acquisition and allocation of a corporation's funds or resources, with the goal of maximizing shareholder wealth (i.e., stock value). Funds are acquired from both internal and external sources at the lowest possible cost and may be obtained through equity (e.g., sale of stock) or debt (e.g., bonds, bank loans). Resource allocation is the investment of funds; these investments fall into the categories of current assets (such as cash and inventory) and fixed assets (such as real estate and machinery). Corporate finance must balance the needs of employees, customers, and suppliers against the interests of the shareholders. Traditionally defined as the ways in which a firm safeguards the interests of its financiers (investors, lenders, and creditors). The modern definition calls it the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). This framework consists of (1) explicit and implicit contracts between the firm and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances. Also called corporation governance. See also Cadbury rules and governance. Process of quantifying costs and benefits of a decision, program, or project (over a certain period), and those of its alternatives (within the same period), in order to have a single scale of comparison for unbiased evaluation. Unlike the present value (PV) method of investment appraisal, CBA estimates the net present

Cost of capital Cost recovery

Cost-Volume-Profit (CVP) Analysis

Covariance Covered option

Credit Default Swap

Credit risk Crown jewels

value (NPV) of the decision by discounting the investment and returns. Though employed mainly in financial analysis, a CBA is not limited to monetary considerations only. It often includes those environmental and social costs and benefits that can be reasonably quantified. 1. Opportunity cost of funds employed in a business; the rate of return investors could earn if an alternative investment avenue (usually time deposit) was chosen. Recoupment of the purchase price of a capital or qualified asset through depreciation over a prescribed period. Analysis that deals with how profits and costs change with a change in volume. More specifically, it looks at the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions. For example, CVP analysis attempts to answer the following questions: (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits? (5) How would a change in the mix of products sold affect the breakeven and target volume and profit potential? Degree to which the value of a dependent variable and an associated independent variable moves in tandem. Positive covariance means they move together (vary directly), negative covariance means they move in opposite directions (vary inversely). Call or put option backed by ownership of the underlying asset. Opposite of naked option. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. Probability of loss from a debtor's default. In banking, credit risk is a major factor in determination of interest rate on a loan: longer the term of loan, usually higher the interest rate. Also called credit exposure. The divisions or products within a diversified corporation which are the most valuable in terms of

Currency swap Currency swap

Current ratio

Debenture

Debt/Equity Ratio

Deep discount bond

Default risk Deferred charge

sales, revenues and assets. Similar to the crown jewels of royalty, companies pay close attention to these divisions or products because they often are responsible for a sizeable portion of the company's earnings. Agreement to exchange one currency with another, at a specific rate of exchange. Agreement to exchange one currency with another, at a specific rate of exchange. Indicator of a firm's ability to meet short-term financial obligations, it is the ratio of current assets to current liabilities. Though every industry has its range of acceptable current-ratios, a ratio of 2:1 is considered desirable in most sectors. Since inventory is included in current assets, acid test ratio is a more suitable measure where salability of inventory is questionable. Formula: Current assets Current liabilities. 1. Charge, claim, or lien on asset or property, usually as a result of a loan. See fixed charge and floating charge. 2. Promissory note or a corporate bond which (in the US) is backed generally only by the reputation and integrity of the borrower and (in the UK) by the borrower's specific assets. When unsecured, it is called a bare debenture or naked debenture; when secured by a charge on a specific property, it is called a mortgage debenture. A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Bond trading at a discount of 20 percent or more of its par value. It is a common occurrence with zero-coupon bonds, but may also happen with interest bearing bonds for reasons such as too low an interest rate or a sudden plunge in the bond issuer's credit rating. Deep discount bonds appreciate faster than other types of bonds when market interest rates fall, and depreciate faster when the rates rise. Exposure to loss due to non-payment by a borrower of a financial obligation when it becomes payable. Default risk is related to the credit worthiness of the borrower and is taken into account when setting interest rate on the requested loan. Cost that is accounted-for in the future (and not in the

Degree Of Financial Leverage - DFL

Degree Of Operating Leverage - DOL

Degree Of Operating Leverage - DOL Depository Transfer Check (DTC) Depreciable Life Diluted earnings

accounting period in which it is incurred) because of its anticipated future benefit, or to comply with the requirement of matching costs with revenues. Deferred charges include start up costs, financing costs for longterm debt, costs of advertising campaigns, etc., and are carried as a non-current asset on the balance sheet pending amortization. in contrast to prepaid expenses (such as insurance, interest, rent) deferred charges usually extend over a long period (often five years or more) and occur infrequently. Since they have no physical substance (cash realizability) and cannot be used in reducing total liabilities, deferred charges are subtracted from the total assets of the firm when computing financial ratios. A leverage ratio summarizing the affect a particular amount of financial leverage has on a company's earnings per share (EPS). Financial leverage involves using fixed costs to finance the firm, and will include higher expenses before interest and taxes (EBIT). The higher the degree of financial leverage, the more volatile EPS will be, all other things remaining the same. A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. Preprinted Demand Draft used by corporations to make transfers of cash from a checking account at one bank to a Concentration Account at another bank. This nonnegotiable instrument requires no signature. Also called a depository transfer draft. For tax / book purposes, the number of years over which the cost of an Asset may be spread. Per-share earnings computation in which preferred

per share

Direct Financing Lease

Divestiture

Dividend payout ratio

Dividend Policy Dividend reinvestment plan (DRIP)

DuPont analysis

Earnings per share (EPS)

stock, unexercised stock options, and convertible debt is also taken into account in addition to the common stock. Method used by lessors in capital leases when both of the following criteria for the lessor are satisfied: (1) collectibility of minimum lease payments is assured and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property only for the purpose of leasing it. Selling of, or otherwise disposal of, a firm's assets to achieve a desired objective, such as greater liquidity or reduced debt burden. In accounting, divestiture transactions are recorded as a one time, non-recurring gain or loss. The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. In the U.K. there is a similar ratio, which is known as dividend cover. It is calculated as earnings per share divided by dividend per share. The policy a company uses to decide how much it will pay out to shareholders in dividends.Lots of research and economic logic suggests that dividend policy is irrelevant (in theory). Investment plan that allows stockholders to purchase additional stock of the firm from dividends and capital gains distributed to them, without incurring brokerage charges. Also called dividend re-investment program. DuPont analysis (also known as the DuPont identity, DuPont Model or the DuPont method) is an expression which breaks ROE (Return On Equity) into three parts. The name comes from the DuPont Corporation that started using this formula in the 1920s. Net income of a firm divided by the number of its outstanding shares the shares held by the stockholders (shareholders). Primary earnings per share (also called fully diluted EPS) takes into account all shares currently outstanding, plus the number of shares that would be outstanding if all convertible bonds and convertible preferred stock (preference shares) were exchanged for common stock (ordinary shares). Also called net income per share. Formula: (Total revenue Total expenses) Number of outstanding shares.

Earnings quality

Earnings yield

EBITDA Economic order quantity (EOQ) Economic Profit (or Loss)

Earnings quality, in accounting, refers to the overall reasonableness of reported earnings.[1] It is an assessment criterion for how "repeatable, controllable and bankable"[2] a firm's earnings are, amongst other factors. It recognizes the fact that the economic impact of a given transaction will vary across firms as a function of their fundamental business characteristics [3], and has variously been defined as the degree to which earnings reflect underlying economic effects, are better estimates of cash flows, are conservative, or are predictable. Firm's earnings per share (EPS) expressed as a percentage of its current share price, used in comparing shares with other shares and shares with bonds. Also called earnings to price ratio, it is the inverse of price to earnings ratio. (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become widely used in high tech and other industries whenever it is desired to disclose more favorable numbers to the public at the moment. Size of an order at which the total of procurement cost and inventory carrying cost is at minimum. The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA). Early 1990's capital market theory that it is impossible to earn abnormal capital gains or profit on the basis of the market information. It states that the price of a financial instrument (bond, share, etc.) reflects all the information currently available and, if the price is rumored to increase in the near future, investors or traders will buy the instrument now thus driving its price up and negating the anticipated increase. And that it is impossible to predict movement of prices with any degree of certainty because prices follow a random walk and therefore, on average, no one is likely to beat the market. The critics of this theory point out that only a few individuals are as rational as it presumes them to be, and that information gathering is expensive and tedious enough to make it unlikely to be reflected in the prices. Basis of the capital asset pricing model (CAPM),

Efficient market hypothesis

Efficient portfolio

Employee stock ownership plan (ESOP)

Enterprise risk management (ERM)

Equity Equity carve out Ex dividend (ex div)

it was developed by Professor Eugene Fama (born 1939) of the University of Chicago in early 1960s, it has been superseded by the coherent market hypothesis (CMH). That yields the highest return for a given level of risk. Also called optimal portfolio. Employee benefit scheme intended to motivate employees by giving them a stake in the firm's success through equity participation. Purchase of shares by employees is funded by a loan (usually from a bank) guaranteed by the employer. This plan costs little or nothing to the employer because the loan principal is paid-off from the dividend payment to the employees, and the loan interest is a tax-deductible expense. Moreover, this plan raises the firm's capital to asset ratio by bringing in capital from new stock issue (share issue). See also employee profit sharing plan (ESPS) Defined by the US 'Committee Of Sponsoring Organizations Of Treadway Commission' (COSO) as, "a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives." COSO divides ERM process into eight components: (1) internal environment, (2) objective setting, (3) event identification, (4) risk assessment, (5) risk response, (6) control activities, (7) information and communication, and (8) monitoring. General: (1) Fairness and impartiality towards all concerned, based on the principles of evenhanded dealing. It implies giving as much advantage, consideration, or latitude to one party as it is given to another. Along with economy, effectiveness, and efficiency, Equity is essential for ensuring that extent and costs of funds, goods and services are fairly divided among their recipients. See also equitable. (2) Any right to an asset or property, held by a creditor, proprietor, or stockholder (shareholder). Diluting the ownership rights of original or existing stockholders (shareholders) by issuing new common stock (ordinary shares) of a firm to new investors. Stockmarket designation of a share indicating that the quoted price does not include entitlement to the forthcoming or accrued dividend. If the entitlement

Exchange rate risk

Exercise price

Federal Agency Security

Financial intermediary

Financial Lease

Financial leverage Financial statement analysis

exists, the share is called cum div. Exposure or uncertainty that is inherent in dealing with two or more currencies that do not have fixed-parity values. Also called currency risk. Price at which an option is exercisable. In a call option, it is the price that the buyer must pay to the writer of the option. In a put option, it is the price the writer of the option must pay to the holder of the option. Also called strike price. Debt instrument issued by an agency of the federal government such as the Federal National Mortgage Association, Federal Farm Credit Bank, and the Tennessee Valley Authority (TVA). Though not general obligations of the U.S. Treasury, such securities are sponsored by the government and therefore have high safety ratings. Financial institution (such as a bank, credit union, finance company, insurance company, stock exchange, brokerage company) which acts as the 'middleman' between those who want to lend and those who want to borrow. Lease in which the service provided by the Lessor to the Lessee is limited to financing the property. All other responsibilities related to the possession of property, such as maintenance, insurance, and taxes, are borne by the lessee. A financial lease is likely to be treated by the IRS as though it were a loan. Use of borrowed money to increase production volume, and thus sales and earnings. It is measured as the ratio of total debt to total assets; greater the amount of debt, greater the financial leverage. Since interest is a fixed cost (which can be written off against the firm's revenue) a loan allows a firm to generate more earnings without a corresponding increase in the equity capital requiring increased dividend payments (which cannot be written off against the earnings). However, while high leverage may be beneficial in boom periods, it may cause serious cash flow problems in recessionary periods because there might not be enough sales revenue to cover the interest payments. Called gearing in UK. See also investment leverage and operating leverage. Method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm. Ratio analysis is the most common form of

Financial structure

Foreign Corrupt Practices Act

Foreign Currency Translation

Foreign-Exchange Risk

financial analysis. It provides relative measures of the firm's conditions and performance. Horizontal Analysis and Vertical Analysis are also popular forms. Horizontal analysis is used to evaluate the trend in the accounts over the years, while vertical analysis, also called a Common Size Financial Statement discloses the internal structure of the firm. It indicates the existing relationship between sales and each income statement account. It shows the mix of assets that produce income and the mix of the sources of capital, whether by current or long-term debt or by equity funding. When using the financial ratios, a financial analyst makes two types of comparisons: Framework of various types of financing employed by a firm to acquire and support resources necessary for its operations. Commonly, it comprises of stockholders' (shareholders') investments (equity capital), long-term loans (loan capital), short-term loans (such as overdraft), and short-term liabilities (such as trade credit) as reflected on the right-hand side of the firm's balance sheet. Capital structure, in comparison, does not include short-term liabilities. Legislation enacted in 1977 to amend the Securities Exchange Act of 1934. It provides penalties for certain corrupt practices, such as bribes made to foreign officials, and defines standards relating to internal accounting controls. Management must submit to external audit procedures so the SEC can verify that such internal controls are in place. Process of expressing amounts denominated in one currency in terms of a second currency, by using the exchange rate between the currencies. Assets and liabilities are translated at the current exchange rate at the balance sheet date. Income statement items are typically translated at the weighted-average exchange rate for the period. Cumulative (total) translation gains and losses are reported separately as a component of Stockholders' Equity under "Accumulated Other Comprehensive Income." They are not included in net income unless there is a sale or liquidation of the investment in the foreign entity. This risk usually affects businesses that export and/or import, but it can also affect investors making international investments. For example, if money must be converted to another currency to make a certain investment, then any changes in the currency

Functional Currency

Gold standard

Golden Parachute

Greenmail Gross Profit Margin

exchange rate will cause that investment's value to either decrease or increase when the investment is sold and converted back into the original currency. Legal tender of the primary economic environment in which a company operates. Usually, it is the country where a company generates and expends most of its cash. For example, if a company in Italy (as an independent entity) generated its cash and incurred related expenses in Italy, the Italian currency would be the functional currency. However, if the Italian company was an extension of a Greek parent company, the functional currency would be the Greek currency. System of backing a country's currency with its gold reserves. Such currencies are freely convertible into gold at a fixed price, and the country settles all its international trade transactions in gold. Between 1900 and 1914 world's major economic powers were on gold standard, but could not maintain it during first World War (1914-18) and, except the US, finally abandoned it in 1931 during the Great Depression (1930-40). The US too abandoned it in 1971 to join the floating exchange rate system which is the international monetary-system as it exists today. The gold standard has never worked satisfactorily in controlling inflation or maintaining equilibrium in international transactions. Its major drawback is that it restricts a government's ability to control money supply, and makes a healthy economy highly susceptible to the conditions of inflation or depression of its trading partners. Lucrative contract given to a top executive to provide lavish benefits in case the company is taken over by another firm, resulting in the loss of the job. A golden parachute might include generous severance pay, stock options, or a bonus. The Tax Reform Act of 1984 eliminated the deductibility of "excess compensation" and imposed an excise tax. The Tax Reform Act of 1986 covered matters of clarification. Payment of a premium to a raider trying to take over a company through a proxy contest or other means. Also known as Bon Voyage Bonus, it is designed to thwart the takeover. By accepting the payment, the raider agrees not to buy any more shares or pursue the takeover any further for a specified number of years A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods

Hazard Insurance

Hedging Idle capacity

Implicit cost

income bond

Indenture

sold. Gross profit margin serves as the source for paying additional expenses and future savings. Insurance that protects a property owner against damage caused by fires, severe storms, earthquakes or other natural events. As long as the specific event is covered within the policy, the property owner will receive compensation to cover the cost of any damage incurred. Typically, the property owner will be required to pay for a year's worth of premiums at the time of closing, but this will depend on the exact details of the policy. Risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. It employs various techniques but, basically, involves taking equal and opposite positions in two different markets (such as cash and futures markets). Hedging is used also in protecting one's capital against effects of inflation through investing in high-yield financial instruments (bonds, notes, shares), real estate, or precious metals. Ratio of a rated capacity to its actual utilization, expressed as a percentage. The costs associated with an action's tradeoff. It is related to explicit costs, which represent the actual costs of an activity, and represents a cost that is not recorded but instead implied. For example, an employee could take a vacation and travel. The explicit costs would include travel expenses, the cost of a hotel room, and costs related to entertainment. The implicit costs relate to the tradeoff, namely the wages that the employee could have earned if the vacation was not taken. UK: National savings bond that offers monthly interest income.US: Bond which is sold flat (without accrued interest) and whose interest payment is not fixed but varies according to the issuer's level of earnings. Income bonds are often issued by firms in dire straits in an attempt to quickly raise funds to avoid bankruptcy. See also flat bond. Deed or mortgage document signed (executed) by two parties (such as a seller and a buyer) as opposed to a deed poll which is executed generally by only one party. Its name comes from the old practice in which such instruments (in contrast to deed poll) used to have

Information asymmetry Inherent risk

Initial public offering (IPO)

Intangible asset

jagged edges because they (together with their copies) were torn to match them later for authentication. See also bond indenture. Situation that favors the more knowledgeable party in a transaction. In most markets (especially where the goods being traded are of uncertain quality, such as used equipment), a seller's is usually in a more advantageous position because his or her store of information is based on numerous sales conducted over the years. A buyer's information, however, is based usually on an experience of only a few purchases. A similar situation exists between a commercial lender and a borrower. Probability of loss arising out of circumstances or existing in an environment. First offering of a firms' stock (shares) on the stockmarket, at the time it 'goes public.' Because a stockmarket usually values the stock on the expectations of the firm's future growth and income, IPOs are typically an opportunity for the founders and other early investors to make high profits by cashing their stockholdings. Reputation, name recognition, and intellectual property such as knowledge and know how. Intangible assets are the long-term resources of an entity, but have no physical existence. They derive their value from intellectual or legal rights, and from the value they add to the other assets. Intangible assets are generally classified into two broad categories: (1) Limited-life intangible assets, such as patents, copyrights, and goodwill, and (2) Unlimited-life intangible assets, such as trademarks. In contrast to tangible assets, intangible assets cannot be destroyed by fire, hurricane, or other accidents or disasters and can help build back destroyed tangible assets. However, they normally cannot be used as collateral to raise loans, and some intangible assets (goodwill, for example) can be destroyed by carelessness, or as a side effect of the failure of a business. Whereas tangible assets add to an entity's current market value, intangible assets add to its future worth. An approximation of the monetary value of a firm's intangible-assets is computed by deducting the net value of its tangible assets from its market value. In some cases (such as the Coca Cola trademark), the value of a firm's intangible assets far outweighs the value of its tangible assets.

Interest rate risk

Interest rate swap

Internal rate of return (IRR)

International Accounting Standards Board (IASB)

Probability that the market interest rates will rise significantly higher than the interest rate earned on investments such as bonds, resulting in their lower market value. This risk is higher on long-term bonds. Contractual agreement under which two parties exchange interest payments of differing nature on an imaginary amount of principal (called notional principal) for a certain period. Actually, it is an exchange of different cash flows; one generated by a fixed interest rate on a sum, the other by a floating interest rate on the same sum. For example, a party (such as a depository institute) that earns a steady stream of income may prefer one which matches (fluctuates with) the market interest rates. It may agree to exchange its interest income on a certain sum (say ten million dollars of principal) for a certain period (say one year) with another party (such as a mutual fund) which earns a fluctuating interest income but prefers a steady one. Such swaps are considered derivatives because the underlying asset (the notional principle) is not exchanged in the transaction. One of the two discounted cash flow (DCF) techniques (the other is net present value or NPV) used in comparative appraisal of investment proposals where the flow of income varies over time. IRR is the average annual return earned through the life of an investment and is computed in several ways. Depending on the method used, it can either be the effective rate of interest on a deposit or loan, or the discount rate that reduces to zero the net present value of a stream of income inflows and outflows. If the IRR is higher than the desired rate of return on investment, then the project is a desirable one. However, it is a mechanical method (computed usually with a spreadsheet formula) and not a consistent principle. It can give wrong or misleading answers, especially where two mutuallyexclusive projects are to be appraised. Also called dollar weighted rate of return. A London-based organization which seeks to set and enforce standards for accounting procedures. Over 100 countries currently require or permit companies to comply with IASB standards. It is responsible for maintaining the International Financial Reporting Standards (IRFS). The organization was preceded by the International Accounting Standards Committee (IASC). See also Generally Accepted Accounting

International Accounting Standards Committee (IASC)

International Financial Reporting Standards (IFRS)

Inventory management

Inventory turnover Investment-grade bond

Principles (GAAP). An international organization formed in 1973 by an agreement between the accounting bodies of 140 countries that developed and promoted the use of the International Accounting Standards (IAS). It was succeeded by the International Accounting Standards Board (IASB). Guidelines and rules set by the International Accounting Standards Board (IASB) that companies and organizations can follow when compiling financial statements. The creation of international standards allows investors, organizations and governments to compare the IFRS-supported financial statements with greater ease. Over 100 countries currently require or permit companies to comply with IFRS standards. The International Financial Reporting Standards were previously called the International Accounting Standards (IAS). Organizations in the United States are required to use the Generally Accepted Accounting Principles (GAAP). Policies, procedures, and techniques employed in maintaining the optimum number or amount of each inventory item. The objective of inventory management is to provide uninterrupted production, sales, and/or customer-service levels at the minimum cost. Since, for many firms, inventory is the largest item in the current assets category, inventory problems can and do contribute to losses or even business failures. Also called inventory control. See also inventory analysis. Number of times a firm's investment in inventory is recouped during an accounting period. Normally a high number indicates a greater sales efficiency and a lower risk of loss through un-saleable stock. However, an inventory turnover that is out of proportion to industry norms may suggest losses due to shortages, and poor customer-service. The preferred method of computing inventory turnover is to compare the cost of sales (also called Cost Of Goods Sold or COGS) to average inventory (Cost of sales Average inventory). Another method, which compares net sales revenue to the inventory (Net sales revenue Inventory) is also used but it introduces the distortion of sales markup that is not documented in the inventory records. Also called inventory turns or stock turnover A bond which is relatively safe, having a high bond rating such as BBB or above.

Just In Time - JIT

Kanban

Lead time

Leveraged buyout (LBO)

Leveraged lease

Liability insurance

Line of credit Liquidity index Liquidity Ratios

An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. Materials requirement planning technique developed by Toyota Corporation (as a part of just-in-time inventory system) in which work-centers signal with a card when they wish to withdraw parts from feeding operations or the supply bins. Kanban means a visible record (such as a billboard, card, label, or sign) in Japanese. Number of minutes, hours, or days that must be allowed for the completion of an operation or process, or must elapse before a desired action takes place. See also manufacturing lead time. Acquisition of a firm by raising its purchase price mainly through borrowing secured by the same firm's assets. After the purchase, the loan is paid from the firm's cash flow and/or by selling off its assets (called 'asset stripping'). Three-party lease contract under which a lessor borrows some or most of the funds to finance the asset to be leased to a lessee. In this arrangement, (1) financing provided by the lender is without recourse to the lessor, (2) the lender holds the title to the leased asset, and (3) the lessee's payments are assigned to the lender who can repossess the leased asset in case of a default. Leveraged leases are true (tax oriented) leases because the lessor enjoys all the tax benefits of ownership (such as depreciation) whereas the lessee can claim the full amount of lease payment as expenses. Policy that covers civil liabilities to third parties, arising from bodily injury, property damage, or other wrongs due to the action or inaction of the insured. It covers only civil liabilities and not criminal liabilities. Banking: Alternative term for overdraft.Trading: Extent to which a seller will extend credit payment terms to a buyer. It is the total of the amounts of (a) unpaid invoices, (b) goods in transit, and (c) orders confirmed but yet to be shipped. Guideline showing the number of days in which current assets are removed from cash. The fewer the days removed, the better the entity's liquidity A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio,

Liquidity risk

Long hedge

Managed float regime Management Discussion and Analysis - MD&A Market risk

the larger the margin of safety that the company possesses to cover short-term debts. Probability of loss arising from a situation where (1) there will not be enough cash and/or cash equivalents to meet the needs of depositors and borrowers, (2) sale of illiquid assets will yield less than their fair value, or (3) illiquid assets will not be sold at the desired time due to lack of buyers. Transaction that secures an advantage or protection against a possible increase in the price of a traded item (commodity, financial instrument, security, etc.) that will be bought or sold in the future. For a buyer or consumer, it provides at least a partial protection by securing future supply at a fixed ceiling price. For a seller it locks in an advantageous floor price. Also called buy hedge, buying hedge, or purchasing hedge. See also short hedge. Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies. It is also known as a dirty float.[1] A section of a company's annual report in which management discusses numerous aspects of the company, both past and present. The day-to-day potential for an investor to experience losses from fluctuations in securities prices. This risk cannot be diversified away. In asset management, the coordination of an organization's cash inflows with cash outflows by matching the maturity of income generating assets (such as certificates of deposit) with the maturity of interest incurring liabilities (debts). Network of banks, discount houses, institutional investors, and money dealers who borrow and lend among themselves for the short-term (typically 90 days). Money markets also trade in highly liquid financial instruments with maturities less than 90 days to one year (such as bankers' acceptance, certificates of deposit, and commercial paper), and government securities with maturities less than three years (such as treasury bills), foreign exchange, and bullion. Unlike organized markets (such as stock exchanges) money markets are largely unregulated and informal where most transactions are conducted over phone, fax, or

Maturity matching

Money market

Monte Carlo method

Mortgage Bond

Naked option Negotiable certificate of deposit (CD)

Noncurrent Asset

online. Long-term borrowing and lending markets are called capital markets. Computation intensive forecasting technique applied where statistical analysis is extremely cumbersome due to the complexity of a problem (such as queuing or waiting line probabilities, or inventories involving millions of items). Used only where the problem has a chance (random) component, and is subject to unpredictable influences, it simulates (models) a situation on the basis of current and past (historical) data. In the simulation process, it computes an equation (mathematical model) thousands or millions of times, each time injecting random numbers to come up with a range of possibilities or outcomes of possible actions. Larger the number of computations, the greater the probability (according to the law of large numbers) of approximating the future events-provided the maximum-amount of known-data is incorporated into the model. Named after the Mediterranean resort of Monte Carlo in Monaco (famous for its gambling casinos) where sophisticated betters employ scientific methods to enhance their chances to win. A bond secured by a mortgage on one or more assets. These bonds are typically backed by real estate holdings and/or real property such as equipment. In a default situation, mortgage bondholders have a claim to the underlying property and could sell it off to compensate for the default. Uncovered option for which the buyer or seller does not own the underlying asset. It is either a long position by the writer of a call option (right to buy) or a short position by the writer of a put option (right to sell). Naked options carry a chance of huge profit as well as of great risk, depending on the market's direction. Opposite of covered option. Also called uncovered option. Short-term (2 to 52 weeks) large denomination ($100,000 minimum) CD that is issued at a discount on its par value, or at a fixed interest rate payable at maturity. Negotiable CDs issued by large banks are freely traded in secondary markets. Asset not expected to be converted into cash, sold, or exchanged within the normal operating cycle of the firm, usually one year. Examples of noncurrent assets include Fixed Assets, such as real estate, machinery, and other equipment; Leasehold Improvements;

Notes payable

Notional principal

Operating Cycle

Operating lease

Intangible Assets, such as goodwill, patents, and trademarks; notes receivable after one year; other investments; miscellaneous assets not meeting the definition of a Current Asset. Prepaid expenses (also called Deferred Charges or deferred expenses), which include such items as rent paid in advance, prepaid insurance premiums, and subscriptions, are usually considered current assets by accountants. Credit analysts, however, prefer to classify these expenses as noncurrent assets, since prepayments do not represent asset strength and protection in the way that other current assets do, with their convertibility into cash during the normal operating cycle and their liquidation value should operations be terminated. Written promises to pay stated sums of money at future dates, classified as current (if due within 12 months) or non-current (if due after 12 months) of the balance sheet date. In interest rate swap transactions, the amount of principal of the underlying debt security. When this principal is separated from the obligation to pay interest, it becomes the notional or fictitious principal that generates the cash flow traded in the swap arrangement. Also called notional amount. Average time period between buying inventory and receiving cash proceeds from its eventual sale. It is determined by adding the number of days inventory is held and the Collection Period for accounts receivable. Some industries, such as distillery and lumber, have a long operating cycle. Cancelable short-term (a period shorter than the economic life of the leased asset) lease written commonly by landlords and equipment manufacturers who expect to take back the leased asset after the lease term and re-lease it to other users. The lessor gives the lessee the exclusive right to possess and use the leased asset for a specific period and under specified conditions, but retains almost all risks and rewards of the ownership. The full amount of lease payments is charged as an expense on the lessee's income statement but no associated asset or liability (other than the liability of the accrued lease payment or rent) appears on the lessee's balance sheet. For this reason, operating leases are also called off balancesheet financing. And, since the maintenance of the leased asset is usually the responsibility of the lessor,

Operating leverage

Optimal Capital Structure

Option Price Ordering Costs

they are called also maintenance leases or service leases. An operating lease does not meet any of the criteria for a capital lease. Extent to which a firm commits itself to high levels of fixed operating costs (which vary with time, such as insurance, rent, salaries but not interest) as compared with the levels of variable costs (which vary with volume, such as for energy, labor, material). Firms with high operating leverage have high breakeven points but (when the breakeven point is crossed) they show a greater increase in operating income with every increase in sales revenue (and greater losses with every drop in sales revenue) in comparison with firms with low operating leverage. Also called operation gearing, it is one of the major components of operating risk. See also financial leverage and investment leverage. Capital structure with a minimum weighted-average cost of capital and thereby maximizes the value of the firm's stock, but it does not maximize earnings per share (Eps). Greater leverage maximizes EPS but also increases risk. Thus, the highest stock price is not reached by maximizing EPS. The optimal capital structure usually involves some debt, but not 100% debt. Ordinarily, some firms cannot identify this optimal point precisely, but they should attempt to find an optimal range for the capital structure. The required rate of return on equity capital (R) can be estimated in various ways, for example, by adding a percentage to the firm's long-term cost of debt. Another method is the Capital Asset Pricing Model (CAPM). Market price at which an option contract is trading at any particular time. The price of an option on a stock reflects the fact that it covers 100 shares of a stock. So, for example, an option that is quoted at $7 would cost $700, because it would be an option for 100 shares of stock at a $7 cost per share covered. The option price is determined by many factors, including its Intrinsic Value, time to expiration, volatility of the underlying stock, interest rates, dividends, and marketplace adjustments for supply and demand. Options on indices, debt instruments, currencies, and commodities also have prices determined by many of the same forces. Options prices are published daily in the business pages of many newspapers. All costs associated with preparing a purchase order.

Over the counter (OTC)

Overdraft protection Paid-in capital

Payable Through Draft

Peak-load pricing

Political risk Portfolio insurance Portfolio management

These include the cost of preparing a purchase invoice, telephone, salaries of purchasing clerks, and stationery. Retailing: Non-prescription drug or medicine sold by non-pharmaceutical retailers.Securities: US securities that are not traded (listed) on a stock exchange because the issuer cannot meet the exchange's listing qualifications. Also called unlisted securities. Credit arrangement under which a bank automatically extends a short-term loan to cover a check's amount that exceeds the check writer's (drawer's) account balance. This arrangement ensures the check is not returned (bounced) due to not sufficient funds (NSF) which may call for a criminal charge. Capital contributed by the stockholders (shareholders) as distinct from the capital reserves generated by the firm as profits (earnings). Draft payable through a designated bank, drawing funds from the issuer's own account. The bank, whose name is printed on the face of the draft, verifies neither the signature nor the endorsement, which is the responsibility of the issuer. Payable through drafts are used by corporations to pay freight bills, or by insurance companies to settle claims. A credit union Share Draft a check-like negotiable instrument, also is a payable-through draft, often cleared through a correspondent bank. Peak-load pricing is a pricing technique applied to public goods, which is a particular case of a Lindahl equilibrium. Instead of different demands for the same public good, we consider the demands for a public good in different periods of the day, month or year, then finding the optimal capacity (quantity supplied) and, afterwards, the optimal peak-load prices. Probability of loss due to political instability in the buyer's country that may result in cancellation of a license or otherwise affect the buyer's ability to make payments. Political risks are insurable risks, and overlap with the political component of force majeure risks. Method of protecting (hedging) the value of a stock portfolio by selling stock index futures contracts when the stockmarket declines. Administration of a pool of investments vehicles, selected on the basis of clearly articulated investment objectives (such as asset protection, capital

Portfolio Theory

Predatory pricing

Preemptive right

Preferred stock

enhancement, income), by an advisor or broker on behalf of a client. More formally termed modern portfolio theory(MPT) a sophisticated investment decision approach that permits an investor to classify, estimate, and control both the kind and the amount of expected risk and return; also called portfolio management theory. Essential to portfolio theory are its quantification of the relationship between risk and return and the assumption that investors must be compensated for assuming risk. Portfolio theory departs from traditional security analysis in shifting emphasis from analyzing the characteristics of individual investments to determining the statistical relationships among the individual securities that comprise the overall portfolio. The portfolio theory approach has four basic steps: security valuation-describing a universe of assets in terms of expected return and expected risk; asset allocation decision-determining how assets are to be distributed among classes of investment, such as stocks or bonds; portfolio optimization-reconciling risk and return in selecting the securities to be included, such as determining which portfolio of stocks offers the best return for a given level of expected risk; and performance measurement-dividing each stock's performance (risk) into market-related (systematic) and industry/security-related (residual) classifications. Practice of temporarily selling below survival prices or giving goods away (as in software industry) to undermine or eliminate the existing competition. Predatory pricing is an abuse of dominant position, and is illegal in several countries. Compare with preemptory pricing. The right of certain stockholders to maintain ownership of a constant percentage of a firm's stock. Such stockholders have the first opportunity to purchase new stock in the firm proportionate to the percentage of shares already held. Class of stock (shares) that pays fixed and regular interest income, instead of a dividend (whose payment and amount depends on factors beyond stockholder's control). Holders of preferred stock have claim over the firm's earnings (and assets in case of liquidation) ahead of (senior to) the claim of holders of common stock (ordinary shares) but behind (junior to) the claims of bondholders and all other creditors. Depending on

Price elasticity of demand Primary market

Profit Maximization

Profitability index

Profitability ratios

the terms of the agreement under which preferred stock is issued, the degree of control of its holders over the firm's operations ranges from none to the same as that of the holders of common stock. Most preferred stock is cumulative; common stock holders cannot receive any dividend until all the unpaid interest owed to preferred stock holders is paid. For the issuing firm, preferred stock is an uneasy compromise between debt and equity, and is seen as capital with a tax advantage because interest is written off as expense against earnings. Also called preference shares. Price elasticity of demand is the quantitive measure of consumer behavior that indicates the quantity of demand of a product or service depending on its increase or decrease in price. Price elasticity of demand can be calculated by the percent change in the quantity demanded by the percent change in price. Market in which buyers and sellers negotiate and transact business directly, without any intermediary such as resellers. In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenuetotal cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost. Ratio of the present value of a project's cash flows to the initial investment. A profitability index number greater than 1 indicates an acceptable project, and is consistent with a net present value greater than 0. Measures that indicate how well a firm is performing in terms of its ability to generate profit. Formulae of some of the common ratios are as follows: (1) Book Value Per share: Total common (ordinary) equity Number of common (ordinary) shares issued and outstanding. (2) Dividends Per Share: Dividends paid Number of common (ordinary) shares issued and outstanding. (3) Earnings Per Share: (Net income - preferred stock or preference share interest) Number of common (ordinary) shares issued and outstanding. (4) Gross profit percentage: Total cost of sales in a period x 100 Total sales revenue for that period. (5) Net income

Property, Plant And Equipment PP&E

Put option

Put-Call Parity

Quantity Demanded

percentage: Net income for a period x 100 Total sales revenue for that period. (6) Operating profit percentage: Earnings before interest and taxes (EBIT) in a period x 100 Total sales revenue in the same period. (7) Return On Common equity: (Net income for a period Dividends) (Common equity - Preferred stock). (8) Return On Investment: Net income Total assets. A type of asset a company owns that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the assets, because even the longest-term assets become obsolete or useless after a period of time. Depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. Formal contract between an option seller (optioner) and an option buyer (optionee) which gives the optionee the right but not the obligation to sell a specific contract, financial instrument, property, or security, at a specified price (called exercise Price) on or before the option's expiration date. Inve1stors who buy put options believe the price of the underlying asset will go down and they will be able to purchase (for reselling) another option on the same asset at a price lower than the current exercise price. Opposite of call option. A principle referring to the static price relationship, given a stock's price, between the prices of European put and call options of the same class (i.e. same underlying, strike price and expiration date). This relationship is shown from the fact that combinations of options can create positions that are the same as holding the stock itself. These option and stock positions must all have the same return or an arbitrage opportunity would be available to traders. Any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist. A term used in economics to describe the total amount of goods or services that are demanded at any given point in time. The quantity demanded depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium. The quantity demanded is determined at any given point

Quick Ratio

Real accounts

Replicating portfolio

Report Form

Reporting Currency

Residual Interest Residual risk

Retained earnings

along a demand curve in a price vs. quantity plane. An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. Asset, liability, reserve, and capital accounts that appear on a balance sheet. The balances of real accounts are not cancelled out at the end of an accounting period but are carried over to the next period. Also called permanent accounts. See also nominal accounts. In the valuation of a life insurance company, the actuary considers a series of future uncertain cashflows (including incoming premiums and outgoing claims, for example) and attempts to put a value on these cashflows. There are many ways of calculating such a value (such as a net premium valuation), but these approaches are often arbitrary in that the interest rate chosen for discounting is itself rather arbitrarily chosen. Format of an income statement that reads from top to bottom. It begins with sales or revenues at the top leading to net income at the bottom, with significant totals in between. See also Form of Balance Sheet. All annual and quarterly reports state the currency in which their results are listed. This is particularly important for companies that issue American depositary receipts (ADRs) which sometimes report earnings in a foreign currency, leaving investors with the task of doing the conversions. Investors receive interest payments after all required regular interest has been paid to investors within higher priority tranches. Residual interest functions much like common shares in that preferred shareholders receive all required dividends before any amount remaining is divided among common shareholders. Exposure to loss remaining after other known risks have been countered, factored in, or eliminated. Profits generated by a firm that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay off a debt or purchase a capital asset). Balance sheet figure shown under the heading retained earnings is the sum of all profits retained since the firm's inception. Retained

Return on assets (ROA)

Return on equity (ROE)

Revenue bond

Reverse/Forward Stock Split

Risk and Return

earnings are reduced by losses, and are also called accumulated earnings, accumulated profit, accumulated income, accumulated surplus, earned surplus, Undistributed Earning, or undivided profits. See also retention ratio. Ratio measuring the operating profitability of a (nonfinancial) firm, expressed as a percentage of the operating assets. ROA indicates a firm's ability to efficiently allocate and manage its resources but (unlike 'return on equity') ignores the firm's liabilities. Formula: Operating income x 100 Operating assets. Ratio measuring stockholders' (shareholders') profitability, expressed as a percentage of the firm's net worth. ROE indicates a firm's efficiency in applying common-stockholders' (ordinary-shareholders') money. Formula: Net income Net worth. Debt obligation for which interest and principal payments are derived (directly and solely) from the revenue of the project being financed by that bond issue. Issued typically by municipalities for funding public works (bridges, roads, sewer system), these bonds collateralize the project's assets, and the bondholder has no claim on the issuer's assets. In contrast, a general obligation bond is secured by the government's full taxing power. A stock split strategy that includes the use of a reverse stock split followed by a forward stock split. A reverse/forward stock split is usually used by companies to cash out shareholders with a less-thancertain amount of shares. This is believed to cut administrative costs by reducing the number of shareholders who require mailed proxies and other documents. The term "risk and return" refers to the potential financial loss or gain experienced through investments in securities. An investor who has registered a profit is said to have seen a "return" on his or her investment. The "risk" of the investment, meanwhile, denotes the possibility or likelihood that the investor could lose money. If an investor decides to invest in a security that has a relatively low risk, the potential return on that investment is typically fairly small. Conversely, an investment in a security that has a high risk factor also has the potential to garner higher returns. Return on investment can be measured by nominal rate or real rate (money earned after the impact of inflation has

Risk avoidance

Risk Retention Risk sharing

Risk-Free Return

Sales Type Lease

Secondary market

Securities and Exchange Commission (SEC)

Selling Expense Serial bond

been figured into the value of the investment). Technique of risk management that involves (1) taking steps to remove a hazard, (2) engage in alternative activity, or (3) otherwise end a specific exposure. Method of Self-Insurance whereby the organization retains a reserve fund for the purpose of offsetting unexpected financial claims. See also Contingency Fund. Risk management method in which the cost of the consequences of a risk is distributed among several participants in an enterprise, such as in syndication. The theoretical rate of return attributed to an investment with zero risk. The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time. Accounting by Lessor in which one or more of the four criteria required for a capital lease are met and both of the following criteria are satisfied: (1) collectibility of minimum lease payments is predictable and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. Financial market where previously issued securities (such bonds, notes, shares) and financial instruments (such as bills of exchange and certificates of deposit) are bought and sold. All commodity and stock exchanges, and over-the-counter markets, serve as secondary markets which (by providing an avenue for resale) help in reducing the risk of investment and in maintaining liquidity in the financial system. US federal agency established in 1934 to help protect investors by enforcing securities-related laws, and by setting mandatory standards for disclosure of financial and other pertinent information about firms whose securities are traded over a stock exchange. Its five commissioners (appointed by the US President and confirmed by the Senate) serve for staggered five-year terms, and at any time no more than three of them may be from the same political party. Cost incurred to sell (e.g., advertising, salesperson commission) or distribute (e.g., Freight-Out) merchandise. It is one of the types of operating expenses and is a period cost. Bond issue in which the principal is repaid (retired) in regular installments over the life (maturity period) of the issue. Serial bonds are issued where the underlying

Share repurchase

Short hedge

Sinking fund

Solvency Ratio

Sovereign Risk

Special Purpose Entity (SPE)

asset (security) depreciates through use or obsolescence, and their principal repayments are so arranged that at any time the outstanding principal does not exceed the asset's current value. Buying of its own shares from the public by a firm whose management believes the shares are undervalued. Its objective is to increase the market value of the shares by reducing their number available for purchase. Transaction that secures an advantage or protection against a possible decline in the price of a traded item (commodity, financial instrument, security, etc.) that will be bought or sold in the future. For a buyer or consumer, it locks in an advantageous floor price. For a seller, it provides at least partial protection by securing an order at a fixed price. Also called selling hedge. See also long hedge. Reserved created by periodically setting aside certain sums in a custodial account (as cash or investment in marketable securities) for future replacement of an asset or repayment of a liability. One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. This is one of the many risks that an investor faces when holding forex contracts. Additionally an investor is exposed to interest-rate risk, price risk and liquidity risk amongst others. 1. -also known as special purpose vehicles, or variable interest entities, SPE's are finite life entities created by corporations, usually as subsidiaries but sometimes as partnerships, trusts, or other forms of unincorporated structures, for a single, well-defined, and narrow purpose, such as those (sometimes also called derivative products companies) established to issue Income Preferred Securities. SPEs got a bad name when they were used by Enron to conduct illegal OffBalance-Sheet Financing activities. SPEs are subject to complicated accounting rules designed to assure that if any risks taken by SPEs expose the parent company, financial disclosure must be made on a consolidated basis.

Spinoff Spot rate

Standstill Agreement

Stock split

Stock valuation Stockout costs

Corporate divestiture accomplished through (1) separation of a division or subsidiary from its parent firm to create a new corporate entity by issuing new shares. These shares are distributed to the current stockholders (shareholders) in proportion to their current shareholdings, and may also be sold to the public, or (2) a leveraged buyout by the management of the division or subsidiary. Foreign exchange market price at which a currency will be delivered on the spot date. Spot rate is the starting point for all foreign exchange transactions. Agreement whereby a lender makes no further collection efforts on an unpaid loan, acting in the belief that Foreclosure would jeopardize the ability of a borrower in financial difficulty to repay any portion of the debt. Such agreements are found most frequently in agriculture loans and loans secured by real estate, where both parties agree that a renegotiated loan is better than a defaulted borrower. The lender and borrower negotiate new credit terms that may include a lower interest rate and rescheduling of payment terms. See also Troubled Debt Restructuring; Workout Agreement. Division of already issued (outstanding) shares of a firm into a larger number of shares, to make them more affordable and thus improve their marketability while maintaining the current stockholders' proportional ownership of the firm. The aggregate value of the shares remains the same as before the split, but the price (and dividend) per share declines with the split ratio. For example, if the shares are split by a multiple of two (2:1 split), a share with a par value of $10 becomes two shares, each with a par value of $5. In financial markets, there are several methods used to calculate theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. Economic consequences of not being able to meet an internal or external demand from the current inventory. Such costs consist of internal costs (delays, labor time

Subordinated debenture

Swap

Swap spread

Synergy Term bond

wastage, lost production, etc.) and external costs (loss of profit from lost sales, and loss of future profit due to loss of goodwill). Also called shortages costs. Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors. Because subordinated debt is repayable after other debts have been paid, they are more risky for the lender of the money. It is unsecured and has lesser priority than that of an additional debt claim on the same asset. Exchange of one type of asset, cash flow, investment, liability, or payment for another. Common types of swap include: (1) Currency swap: simultaneous buying and selling of a currency to convert debt principal from the lender's currency to the debtor's currency. (2) Debt swap: exchange of a loan (usually to a third world country) between banks. (3) Debt to equity swap: exchange of a foreign debt (usually to a Third World country) for a stake in the debtor country's national enterprises (such as power or water utilities). (4) Debt to debt swap: exchange of an existing liability into a new loan, usually with an extended payback period. (5) Interest rate swap: exchange of periodic interest payments between two parties (called counter parties) as means of exchanging future cash flows. n finance, swap spread is a popular way to indicate the credit spreads in a market. It is defined as the spread paid by the fixed-rate payer of an interest rate swap over the rate of the on the run treasury with the same maturity as the swap. For example, if the fixed-rate of a 5-year swap is 7.26% and the 5-year Treasury is yielding at 6.43%, the swap spread is 7.26% - 6.43% = 83 bps. State in which two or more agents, entities, factors, processes, substances, or systems work together in a particularly fruitful way that produces an effect greater the sum of their individual effects. Expressed also as 'the whole is greater than the sum of its parts.' For example, two (or more) employees who excel together but are ordinary when working alone are said to have synergy. Debt security that (in contrast to serial bond) has a single maturity date, and is redeemed with one lump sum payment.

Treasury

Treasury bond)

Treasury note)

Treasury

Short-term (usually less than one year, typically three months) maturity promissory note issued by a national (federal) government as a primary instrument for regulating money supply and raising funds via open market operations. Issued through the country's central bank, T-bills commonly pay no explicit interest but are sold at a discount, their yield being the difference between the purchase price and the par-value (also called redemption value). This yield is closely watched by financial markets and affects the yield on municipal and corporate bonds and bank interest rates. Although their yield is lower than on other securities with similar maturities, T-bills are very popular with institutional investors because, being backed by the government's full faith and credit, they come closest to a risk free investment. Issued first time in 1877 in the UK and in bill (T-bill) 1929 in the US. Long-term (maturity over 10 years) fixed interest rate debt security issued by a national (federal) government backed by its 'full faith and credit.' Next to treasury bills (maturity less than one year), and treasury notes (maturity one to ten years) T-bonds are the safest form of marketable investment. They have an active bond (T- secondary market, and usually pay semi-annual interest. See also treasuries. Medium-term (maturity one to ten years) fixed interest rate debt security issued by a national (federal) government and backed by its full faith and credit. Next to treasury bills (maturity less than one year), T-notes are the safest form of marketable investment with an note (Tactive secondary market, and usually pay semi-annual interest. See also treasuries. US term for corporate stock reacquired by the issuing firm to (1) hold in its control to frustrate a takeover attempt, (2) reissue it to the public at a later date for a better price, (3) cancel (retire) it to reduce number of outstanding shares and thus increase earnings per share. When held by the issuing firm, treasury stock accrues no dividend and has no voting power. It is recorded in the issuer's books at its acquisition cost (called cost method) or at its par value (called par value method). In either case, retained earnings equal to its acquisition cost are appropriated. In the issuer's balance sheet, it is show as a deduction in arriving at stockholders' equity, and is ignored when computing stock the ratios that measure value per common stock. Also

Trend percentage

Unearned revenue

Unit Contribution Margin

Value at risk (VAR)

Voting right

Weighted average cost of capital Window dressing Wire transfer Zero Balance Account - ZBA

called reacquired stock or (in the UK) treasury shares. Method of analyzing information obtained over an extended period by choosing a baseline period (usually the earliest year) and stating the data associated with subsequent periods as a percentage of that period Payment received before a good is sold or a service is provided. Unearned revenue is classified as a current liability on the balance sheet until it is recognized as earned during the accounting cycle. Excess of the unit selling price over the unit variable cost. For example, if the sales price is $30 and the unit variable cost is $18, then the unit Contribution Margin (CM) is $12. This means that each unit sold contributes $12 toward the fixed cost or profit. Largest loss likely to be suffered on a portfolio position over a holding period (usually 1 to 10 days) with a given probability (confidence level). VAR is a measure of market risk, and is equal to one standard deviation of the distribution of possible returns on a portfolio of positions. Delegable right of a common stock (ordinary share) holder to take part in a firm's decision making process, by voting on matters of policy and to choose members of the board of directors. Such matters include issuance of additional stock, stock splits, and substantial changes in the firm's business. Most common shares have one vote each, and preferred stock (preference share) holders usually also have the right to vote when their dividends remain unpaid for a specified period. Cost of acquiring debt and/or equity capital, computed on the basis of interest rate, income tax rate, and return on equity goal. Expressed usually as a percentage, it is used as a discount rate to determine present value of specific investments. See also composite cost of capital. Specious (but usually legal) manipulation of a firm's accounting data to make its financial statements look better than they actually are. Electronic transfer of funds through the cable and wireless networks that unite the world's banking system. A zero balance account is used by corporations to eliminate excess balances in separate accounts and maintain greater control over disbursements.