accounting imp terms

8/6/2019 accounting IMP Terms

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HEDGING

A risk managementstrategy used in limiting or offsettingprobability ofloss from fluctuations intheprices ofcommodities, currencies, orsecurities. In effect, hedging is a transferofriskwithout

buying insurance policies.

Hedging employs various techniques but, basically, involves taking equal and oppositepositionsin two different markets (such as cash and futures markets). Hedging is used also in protecting

one's capitalagainsteffects ofinflation through investing in high-yieldfinancial instruments(bonds, notes, shares), real estate, orprecious metals.

DEFENSIVE RESPONCE

Management's admission of some errors and taking of only legally requiredsteps to solve socialand environmental problems caused by a firm'sactivities. It is one of the fourways in which an

organization may choose to respond. For the other three see accommodating response,

obstructive response, andproactive response

AMORTIZATION

1. Accounting: Preferred term for the apportionment (charging orwritingoff) of the cost of an

intangible asset as an operational cost over the asset'sestimated useful life. It is identical to

depreciation, the preferred term fortangible assets. The purpose of both terms is to (1) reflect

reduction in thebook value of the asset due to usage and/orobsolescence, (2) spread a large

expenditure proportionately over a fixedperiod, and thereby (3) reduce the taxable income (not

the actual orcashincome) of a firm. In effect, it is aprocess by which invested capital of a firm

is recovered by gradualsale of the firm's asset(s) to its customers over the years.

2. Banking: Gradual repayment of a loan in equal (or nearly equal) installments which include

portions ofinterest andprincipal amounts. See also level payment amortization.

FINANCAIL MANAGEMENT

Theplanning, directing, monitoring, organizing, and controlling of the monetaryresources of an

organization.

GAP ANALYSIS

A technique for determining the steps to be taken in moving from a current state to a desiredfuture-state. Also called need-gap analysis, needs analysis, and needs assessment.


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Gap analysis consists of (1) listing ofcharacteristicfactors (such as attributes, competencies,performancelevels) of thepresent situation ("what is"), (2) cross listing factors required to

achieve the futureobjectives ("what should be"), and then (3) highlighting the gaps that exist andneed to be filled.

CAPITALISM

Economic system based (to a varying degree) onprivate ownership of the factors of production (capital, land,

and labor) employed in generation ofprofits. It is the oldest and most common of all economic systems and, in

general, is synonymous with free market system.

PAYMENT TERMS

The conditions under which a sellerwill complete a sale. Typically, these termsspecify the

period allowed to abuyertopay offthe amount due, and may demandcash in advance, cash on

delivery, a deferred payment period of 30 days or more, or other similarprovisions.

LINE OF CREDIT

1. Banking: Alternative term foroverdraft.

2. Trading: Extent to which a sellerwill extendcreditpayment terms to abuyer. It is the total of the amounts

of (a) unpaid invoices, (b) goods in transit, and (c) orders confirmed but yet to be shipped.

DISTRIBUTION CHANNEL

Apath through which goods and servicesflow in one direction (from vendorto the consumer),

and thepayments generated by them that flow in the opposite direction (from consumer to thevendor).

A marketing channel can be as short as being direct from the vendor to the consumer or may

include several interconnected intermediaries such as wholesalers, distributors, agents, retailers.Each intermediary receives the item at one pricing point and moves it to the next higher pricing

point until it reaches the finalbuyer. Also called channel of distribution ormarketing channel.

INTERCHANNEL CPMPETITION

Market situation where the members of the samedistribution channel have to compete with each

other for the same customer. For example, independentretailers having to compete with amanufacturer'sown outlets.


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MORTGAGE

A legalagreement that conveys the conditionalright ofownershipon an asset orproperty by itsowner(the mortgagor) to a lender (the mortgagee) as security for a loan. The lender'ssecurity

interest is recorded in the registeroftitle documents to make itpublicinformation, and is voided

when the loan is repaid in full.

Virtually any legally owned property can be mortgaged, although real property (land and

buildings) are the most common. Whenpersonal property (appliances, cars, jewelry, etc.) ismortgaged, it is called a chattel mortgage. In case ofequipment, real property, and vehicles, the

right of possession and use of the mortgaged item normally remains with the mortgagor but(unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take its

possession (by following the prescribed procedure) at any time toprotect his or her securityinterest. Inpractice, however, the courts generally do not automaticallyenforce this right when it

involves a dwellinghouse, and restrict it to a few specific situations. In the event of a default, themortgagee can appoint a receiverto manage the property (if it is abusiness property) orobtain a

foreclosure orderfrom a court to take possession and sell it. To be legally enforceable, themortgage must be for a definiteperiod, and the mortgagor must have the right of redemption on

payment of the debton or before the end of that period. Mortgages are the most common type ofdebt instruments for several reasons such as lowerrate of interest (because the loan is secured),

straight forward and standardprocedures, and a reasonably long repayment period. Thedocument by which this arrangement is effected is called a mortgage bill of sale, or just a

mortgage.

WHITE ELEPHANT

Abusiness orinvestment that is unprofitable and is likely to remain unprofitable. In the case of a

business, a business usually becomes known as a white elephant if it is unable to turn aprofitbecause it is so expensive to operate and maintain. Very few people are interested in owning or

purchasing something considered to be a white elephant. The term is derived from a traditionalAsianpractice of a monarch owning a white elephant; the elephant was considered sacred, but it

was very costly and impractical to own.

LIEN

Creditor'sconditionalright ofownership (called security interest) against a debtor's asset or

property thatbars its sale ortransferwithoutpayingoffthe creditor. In a contractualarrangement, a lien is the right of a contracting-party to takepossession of a specific asset of the

othercontracting party, in case the contract is not performed according to its terms. A mortgageagreement is a lien on the mortgaged property and abond is a lien on the bond issuer'sassets.

Liens are also granted by the courts to satisfy ajudgment against a losing defendant. All liens arefor a limitedperiod (which varies with thejurisdiction), apply only to the asset or property that

forms part of an express orimplied contract, and (ifattached to a real property) must be properlyregistered to be valid and enforceable. In case of a default, theparty holding the lien (called

lienholderorlienor) generally does not except in the case of a special lien have an automatic


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right to seize and sell the asset or property, but must obtain a foreclosure orderafter giving areasonablenotice to the debtor orobligor(called lienee).

GDP PER CAPITA

An estimate of how much an individualspends as a consumercompared to the totalpopulationspending onproducts and services.

SOCIAL SECURITY TAX

This tax was created under the Federal Insurance Contributions Act (FICA). The amount taken

from a contributor's earningscoverssupport forretiredworkers, those ondisability, andindividuals who are entitled to survivorship benefits, whichprovidefinancial support for

individuals of a deceased family member who was theprimary breadwinner.

SWAP

Exchange of one type ofasset, cash flow, investment, liability, orpayment for another. Common

types of swap include: (1) Currency swap: simultaneous buying and selling of a currency toconvertdebtprincipal from the lender's currency to the debtor's currency. (2) Debt swap:

exchange of a loan (usually to a third world country) betweenbanks. (3) Debt to equity swap:exchange of a foreign debt (usually to a Third World country) for a stake in the debtorcountry's

national enterprises (such aspoweror waterutilities). (4) Debt to debt swap: exchange of anexisting liability into a new loan, usually with an extendedpayback period. (5) Interest rate

swap: exchange ofperiodicinterest payments between twoparties (called counterparties) asmeans of exchanging futurecash flows.

SKIMMING PRICE

Highprice aimed at higherincome groups forluxury orstatusgoods, or at extracting maximumreturns from a

market for a new technologyproduct before competitors emerge.

OBSOLESCENCE

Significantdecline in the competitiveness, usefulness, orvalue of an article orproperty. Obsolescence occurs

generally due to the availability of alternatives thatperform better or are cheaper or both, or due to changes in

userpreferences, requirements, orstyles. It is distinct from fall in value (depreciation) due tophysical

deterioration or normal wear and tear. Obsolescence is a majorfactorin operating risk, and may requirewrite

offof the value of the obsolete item againstearnings to comply with the accountingprinciple of showing

inventory at lower of cost or market value. Insurance companiestake obsolescence into account to reduce the

amount ofclaim to bepaidon damaged or destroyed property. See alsoplanned obsolescence.


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LIQUIDITY

1. A measure of the extent to which aperson ororganization has cash to meet immediate and short-term

obligations, orassets that can be quickly converted to do this.

2. Accounting: The ability ofcurrent assets to meet current liabilities.

3. Investing: The ability to quickly convert an investment portfolio to cash with little or no loss in value.

RETURN ON EQUITY

Ratio measuring stockholders' (shareholders')profitability, expressed as a percentage of the

firm'snet worth. ROEindicates a firm's efficiency in applying common-stockholders' (ordinary-

shareholders') money. Formula:Net income Net worth.

DEBENTURE

Apromissory 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 theborrower's specific assets.

When unsecured, it is called abare debenture ornaked debenture; when secured by a chargeon aspecificproperty, it is called a mortgage debenture.

NON RECURRING COST

Unusual charge, expense, orloss that is unlikely to occur again in the normal course of a

business. Non recurring costsincludewrite offs such as design, development, and investment

costs, and fire ortheft losses, lawsuitpayments, losses onsale ofassets, and moving expenses.

Also called extraordinary cost.

INCOME

1. The flow ofcash orcash-equivalents received from work(wage orsalary), capital (interest orprofit), orland

(rent).

2. Accounting: (1) An excess ofrevenue overexpenses for an accounting period. Also called earnings orgross

profit. (2) An amount by which total assetsincrease in an accounting period.

3. Economics: Consumption that, at the end of aperiod, will leave an individual with the same amount of

goods (and the expectations offuture goods) as at the beginning of that period. Therefore, income means the


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maximum amount an individual can spend during a period without being any worse off. Income (and not the

GDP) is the engine that drives an economy because only it can createdemand.

4. Law: Money or otherforms ofpayment (received periodically or regularly) from commerce, employment,

endowment, investment, royalties, etc.

NON RECURRING INCOME

Gain of an infrequent or unique nature that is unlikely to occur again in the normal course of a

business. Such incomeincludesgain on sale of assets, insurancesettlement, one-time sale, etc.

Also called extraordinary income.

REVENUE

The income generated from sale ofgoods orservices, or any other use ofcapital orassets,

associated with the mainoperations of an organization before any costs orexpenses are

deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from

which all charges, costs, and expenses are subtracted to arrive atnet income. Also called sales, or

(in the UK) turnover.

CASH COW

Well establishedbrand,business unit,product, orservice, that generates a large, regular,

predictable, andpositive cash flow. Cash cows are often 'milked' for developing, promoting, or

supporting new or struggling counterparts. See alsoportfolio planning matrix.

CASH FLOW

Incomings and outgoings ofcash, representing the operating activities of an organization.

In accounting, cash flow is the difference in amount of cash available at the beginning of aperiod (opening balance) and the amount at the end of that period (closingbalance). It is called

positive if the closing balance is higher than the opening balance, otherwise called negative.Cash flow is increased by (1) selling more goods orservices, (2) selling an asset, (3) reducing

costs, (4) increasing the selling price, (5) collecting faster, (6)paying slower, (7) bringing inmore equity, or (8) taking a loan. The level of cash flow is not necessarily a good measure of

performance, and vice versa: highlevels of cash flow do not necessarily mean high or even anyprofit; and high levels of profit do not automatically translate into high or evenpositive cash

flow.


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CHART OF ACCOUNTS

System ofaccounting recordsdeveloped by every organization to be compatible with its particularfinancial

structure, and in agreement with the amount of detail required in its financial statements. It consists of a list of

ledger accountnames and numbers showing classifications and sub-classifications, and serves as an index to

locate a given account within the ledger. See also class of accounts.

COMPREHENSIVE INCOME

Income that has been recognized after economicchanges have been deducted. For example,,after a

companyreports a loss, the loss is deducted from the revenue.

COMPOUNDING PERIOD

The length of time from one interest payment to the next.

PRESENT VALUE (PV)

Estimated current value of a futureamount to be received orpaid out, discounted (see discounting) at an

appropriaterate, usually at the cost of capital rate (the currentmarket interest rate). PVprovides a common

basis for comparing investment alternatives. Also calledpresent worth. See also net present value, discounted

cash flow, and future value.

PRESENT VALUE FACTORS

Multipliers given in present valuetables to help in computing the present value of one dollar,

discounted (see discounting) at various interest rates and for various periods.

PRESENT VALUE OF FUTURE AMOUNTS

Sum ofmoney that must be invested today, at a given rate of interest to grow to the desired amounton

a specific future date.

PRESENT VALUE METHOD

The amountcalculated to representfutureincomedue to an investor.


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SPECULATION

Deliberate assumption of above average (but analyzed, measured, and usually hedged) short-

termriskoffinancialloss, in expectation of above average gain from an anticipated change in

prices. Organized speculation (as conducted through commodity and stock exchanges) addscapital and liquidity to financial markets, and helps dampen wild fluctuations in prices in normal

times. In times ofspeculative hysteria or economic/political crises, however, speculation

exacerbates price swings and may swamp usualtradingactivity. In terms ofdegree of risk

assumed, speculation (short-term acquisition ofassets) falls between investment (long-term

acquisition of assets forincome and/orcapital appreciation) and gambling (wagering onrandom

outcomes without acquisition of assets). See also arbitrage.

S-CURVE

A type ofcurve that shows the growth of a variable in terms of another variable, often expressedas units of time.

For example, an S curve of the growth ofcompanysales for a newproduct would show a rapid,

exponential increase in sales for aperiod time, followed by a tapering or leveling off. Thetapering occurs when thepopulation of new customersdeclines. At this point growth is slow or

negligible, and is sustained by existing customers who continue tobuy the product.

MONEY MARKET INSTRUMENTS

Short-term, lowriskfinancial instruments such asbankers' acceptance, certificates ofdeposit,

commercial paper, ortreasury bills.

NAIVE FORECASTING

Estimating technique in which the lastperiod'sactuals are used as this period's forecast, without adjusting them

or attempting to establishcausalfactors. It is used only forcomparison with the forecasts generated by the

better (sophisticated) techniques.

PRUDENCE CONCEPT

An accountingprinciple that requiresrecordingexpenses and liabilitiesas soon as possible, but

the revenues only when they are realized orassured.


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MATCHING PRINCIPLE

Accounting: A fundamentalconcept ofaccrual basis accounting that offsetsrevenueagainst

expenseson the basis of their cause-and-effect relationship. It states that, in measuring net

income for an accounting period, the costsincurred in thatperiod should be matched against therevenue generated in the same period.

MARGINAL COST

The increase ordecrease in the total cost of aproduction run for making one additionalunit of anitem. It is computed in situations where thebreakeven point has been reached: the fixed costs

have already been absorbed by the already produced items and only the direct (variable) costshave to be accounted for.

Marginal costs are variable costs consisting oflaborand material costs,plus an estimated portion

of fixed costs (such as administrationoverheads and sellingexpenses). In companies whereaverage costs are fairly constant, marginal cost is usually equal to average cost. However, in

industries that requireheavycapital investment (automobileplants, airlines, mines) and havehigh average costs, it is comparatively very low. The concept of marginal cost is critically

important in resource allocation because, foroptimumresults, management must concentrate itsresources where the excess ofmarginal revenue over the marginal cost is maximum. Also called

choice cost, differential cost, orincremental cost.

MARGINAL PROFIT

The excess ofmarginal revenue overmarginal cost. In the best-case scenario, marginalprofit isequal to zero.

If, at a given outputlevel marginal revenue is equal to the marginal cost (MR = MC), the

marginal profit is zero. This is the most profitablerate of output because all opportunities tomake marginal profit have been exhausted. If at an output level the marginal revenue is less than

the marginal cost, there will be marginal loss and total profit will be reduced.

CAPITAL ADEQUACY

Percentage ratio of a financial institution'sprimary capital to its assets (loans and investments),

used as a measure of its financialstrength 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 eightpercent of their assets: a bank that lends 12 dollars for every dollar of its

capital is within the prescribed limits.


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CARRYING COST

1. Financial and operational expenseassociated with an investment.

2. Finance, insurance, security, spoilage, storage, and other such charges associated with warehousing ofgoods.

3. Interest and lenderimposed charges such as negotiationfee,processing fee,penalties, associated with a

loan.

4. Interest and other charges associated with goods orservicessoldoncredit. Also called carrying charge or

holding cost.

CAPITAL BUDGETING

The determination of how much manufacturingequipmentneeds to be utilized by the company.

CASHFLOW FORECAST

Estimate of the timing and amounts ofcash inflows and outflows over a specificperiod (usually one year). A

cash flowforecast shows if a firmneeds toborrow, how much, when, and how it will repay the loan. Also

called cash flow budget orcash flow projection.

CAPITAL INTENSITY

Measure of a firm'sefficiency in deployment of its assets, computed as a ratio of the total value

of assets to sales revenue generated over a givenperiod. Capital intensity indicates how much

money is invested toproduce one dollarofsalesrevenue. Formula: Total assets Sales revenue.

MORTGAGE INSURANCE

Policy thatprotectsmortgage lenders in the event of default. Mortgage insurance is sometimes

required as part of a loan agreement facilitated by governmentagencies. It ispaid forby theborrower/mortgagor. See also mortgage redemption insurance.

OPERATIONG PROFIT MARGINS

A way for a company to measure the amount ofrevenue that is left over after theiroperating costs, thus

helping to also determine an appropriatepricing strategy forproducts that are produced and offered.


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MORTGAGE

A legalagreement that conveys the conditionalright ofownershipon an asset orproperty by its

owner(the mortgagor) to a lender (the mortgagee) as security for a loan. The lender'ssecurityinterest is recorded in the registeroftitle documents to make itpublicinformation, and is voided

when the loan is repaid in full.

Virtually any legally owned property can be mortgaged, although real property (land andbuildings) are the most common. Whenpersonal property (appliances, cars, jewelry, etc.) is

mortgaged, it is called a chattel mortgage. In case ofequipment, real property, and vehicles, theright of possession and use of the mortgaged item normally remains with the mortgagor but

(unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take itspossession (by following the prescribed procedure) at any time toprotect his or her security

interest. Inpractice, however, the courts generally do not automaticallyenforce this right when itinvolves a dwellinghouse, and restrict it to a few specific situations. In the event of a default, the

mortgagee can appoint a receiverto manage the property (if it is abusiness property) orobtain a

foreclosure orderfrom a court to take possession and sell it. To be legally enforceable, themortgage must be for a definiteperiod, and the mortgagor must have the right of redemption onpayment of the debton or before the end of that period. Mortgages are the most common type of

debt instruments for several reasons such as lowerrate of interest (because the loan is secured),straight forward and standardprocedures, and a reasonably long repayment period. The

document by which this arrangement is effected is called a mortgage bill of sale, or just amortgage.

POOLING OF INTEREST

1. Accounting: Item by item addition of the assets and liabilities of acquired or merged firm(s) to thebalance

sheet of the surviving corporation. In contrast,purchase acquisitionmethod treats the acquisition as an

investment, andputsgoodwillon the balance sheet of the surviving corporation to reflect apremium (or

discount) on thebook value of the assets of the merged firms(s).

2. Management: Unification ofownership interests of two or more firms through exchange of voting shares

IMPUTED INTERESTS

Non-interest incometaxed as interest income.


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Cash equivalent doctrine

Taxationrule that a cash-basistaxpayermust report an income from a taxabletransaction in which instead of

cash a cash equivalent (such asproperty) is received.

INVENTORY TURNOVER

Numberoftimes a firm'sinvestment in inventory is recouped during an accounting period.

Normally a high numberindicates a greatersalesefficiency and a lowerrisk of loss through un-

saleable stock. However, an inventory turnoverthat is out of proportion to industrynorms may

suggest losses due to shortages, andpoorcustomer-service. The preferred method ofcomputing

inventory turnover is to compare the cost of sales (also called Cost Of Goods Sold or COGS) toaverage inventory (Cost of sales Average inventory). Another method, which compares net

salesrevenue 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

turnsor stockturnover.

OFF BALANCE SHEET

Accounting category not shown (recorded) on abalance sheet, such as an operating lease or a

deferred orcontingent asset orliability which is shown only when it becomes 'actual.' See alsooff balance sheet financing.

INVENTORY VELOCITY

Numberofhours ordays that elapse between receipt of inputs and dispatch of finishedproduct.


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accounting imp terms

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