Glossary
Accelerated depreciation a form of depreciation allowing more write-off in the early years and less in later years; a faster rate of depreciation than under the straight-line method.
Accumulated depreciation a reduction of the fixed asset classification on the balance sheet, representing all depreciation claimed over the period that assets are owned.
Accumulated value of a series of deposits the ending value of a fund based on the amount of periodic deposit, interest rate, compounding method, and total period.
Acid test alternative name for the quick assets ratio.
After-tax income the dollar amount of net income after all deductions have been taken, including provisions for income taxes.
After-tax return the rate of return of the net income after all deductions, calculated by multiplying the operating (pre-tax) profit by the rate of after-tax income (the net after deducting the rate of federal and state taxation).
Amortization an expense similar to depreciation, used to expense intangible assets or to write off prepaid assets into the proper accounting year.
Annual compounding a method of compounding in which the calculation of interest is performed only once per year.
Annual percentage rate (APR) the overall interest based on calculation of the periodic rate compounded for a full year, plus applicable expenses or charges associated with a loan.
Annualized return a return expressed as if the holding period were exactly one full year, useful for comparing investments held for different periods.
Area of a circle the area, calculated by multiplying radius2 by pi.
Area of a square or rectangle the length multiplied by the width.
Area of a triangle the base (size of the bottom length) multiplied by the altitude (height from base to highest point), the sum of which is then divided by two. Assets properties owned by companies or individual, contrasted with liabilities (debts) owned. The net difference between assets and liabilities is the equity or net worth.
Assumption (budgeting) the underlying facts taken into account in preparation of itemized budget levels for each expense, such as number of employees, square feet of departments, or contractual obligations.
Balance sheet a financial statement prepared as of a specified date, usually the end of a fiscal quarter or year. It contains the ending balances of all asset, liability and net worth accounts. The sum of all assets is equal to the sum of all liabilities plus net worth accounts.
Book value per share the value of a corporation on a per-share basis. The total book value (assets minus liabilities) is divided by the number of common shares of stock outstanding.
Breakeven return the rate of return needed to break even after allowing for both inflation and taxes. To calculate, the estimated inflation rate is divided by the after-tax earnings rate, and the answer is expressed as a percentage.
Budget an annual or semiannual estimate of future expenses, based on assumptions and expected changes within the organization; used as a means for monitoring internal controls and maintaining expected levels of profitability.
Capital assets properties owned by a company and subject to depreciation over several years, contrasted with annual operating expenses. The net value of capital assets is equal to the original purchase price or basis, minus accumulated depreciation.
Capital stock the stock issued and outstanding by a corporation representing investors’ initial interest in the company.
Capitalization the means of financing an organization, consisting of equity capitalization (capital stock) and debt capitalization (liabilities including notes and bonds).
Cash flow the level of cash coming into an organization and leaving, used as a measure of management’s ability to fund current operations.
Cash income a calculation of income without non-cash items (depreciation).
Cash-on-cash return a calculation of return in which net cash flow per year is divided by the initial cash investment.
Circumference of a circle the length of the outer edge of a circle, calculated by multiplying pi by the diameter.
Class lives the number of years over which assets can be depreciated, based on estimated useful lives of each asset class.
Comparative financial statement a financial statement in which two periods are reported together. These periods should be identical in length (month, quarter or year) in order to make a comparison meaningful; or should extend a current period to a year-to-date period.
Compounding method the calculation of compound interest. Methods include daily (using either 360 or 365 days); monthly; quarterly; semiannually; or annually.
Consolidated financial statement a financial statement including all segments and divisions of an organization.
Consumer Price Index (CPI) the most commonly used expression of the rate of inflation, published by the U.S. Bureau of Labor Statistics. The current rate of inflation is calculated by dividing the change in the index by the past index level (the index is based on price values in 1983 when the index value was identified as 100.
Contingent liability a liability that does not yet exist and may or may not exist in the future. For example, a company currently being sued may incur a contingent liability equal to the estimated damages it may have to pay in the future.
Conversion a change from one numerical expression to another. Conversion is needed to make functions easier between percentage, decimal and fractional forms of expression.
Cost of merchandise the cost factor used on the income statement. It consists of the beginning balance of inventory, plus merchandise purchased, minus the ending balance of inventory.
Cost of goods sold the dollar value of all costs, including merchandise, direct labor and other direct costs. The cost of goods sold is deducted from revenue to report gross profit.
Current assets all assets in the form of cash or convertible to cash within 12 months.
Current liabilities the value of all liabilities payable within 12 months, including 12 payments due on long-term liabilities.
Current ratio a calculation of working capital. Current assets are divided by current liabilities and the answer is expressed as a single numerical value.
Current yield on a bond a calculation in which the nominal (stated) yield is divided by the current value of the bond. Current value may be at a discount below or a premium above the bond’s face value (par).
Daily compounding a method of compounding interest performed daily. The annual rate is divided by either 360 or 365 and accumulated on a daily basis.
Days’ sales outstanding a ratio testing the trend in collections of receivables. The current balance of accounts receivable is divided by a full year’s credit-based sales to find the average number of days’ an account is outstanding.
Debt capitalization a form of capitalization in which the company borrows money and promises to repay the principal plus interest.
Debt coverage ratio a test of how effectively the current net income provides for payments of debts. The net income is divided by total annual payments to calculate the ratio.
Debt ratio a balance sheet ratio comparing debt capitalization to total capitalization (long-term liabilities plus equity capitalization). To calculate, divide long-term debt by total capitalization. The answer is expressed as a percentage.
Debt service the monthly payments required by the terms of a loan, including principal, interest and any additional payments required (for insurance, taxes, or loan processing).
Declining balance depreciation a method of depreciation in which the write-off during the earlier years is higher than in later years. The two most widely used methods are calculated at 150% and 200% of the straight-line depreciation rate.
Deferred credits items listed in the liability section of the balance sheet, representing future income not yet earned, to be reversed and booked as income in the applicable year.
Degrees of a circle the calculated degrees, used for preparation of a pie chart. The segments are first calculated on a percentage basis, and each is multiplied by 360 (degrees).
Denominator the lower portion of a fraction.
Depreciation a non-cash expense representing each year’s write-off of a capital asset. The expense is offset by an increase to the accumulated depreciation account on the balance sheet.
Direct costs all costs directly attributed to revenue generation, including merchandise purchased, direct labor, and the freight cost to move goods.
Direct labor a form of direct cost for payments of wages and salaries, which are attributed directly to generating revenues and are expected to rise or fall in proportion to changes in the volume of revenues.
Dispersion (also called spread) in statistics, the degree of difference between the values in a field, and the average of the field.
Dividend yield the annual dividend to be paid, divided by the current price per share of stock, expressed as a percentage.
Earnings per share (EPS) the annual earnings reported by a corporation, divided by the total average number of common shares outstanding during the year.
EBITDA earnings before certain expenses; a calculation of net income adjusted by subtracting interest expense, taxes, depreciation, and amortization.
Equity capitalization shareholders’ interest in the company, capitalization generated by investment rather than through debt capitalization.
Equivalents in multiplication logical statements drawing a logical conclusion. For example, when three values are considered (A, B, and C), if A is equal to B and A is equal to C then B must be equal to C.
Expenses non-cost and non-capital spending of a company during the year. Expenses are written off as necessary to the operation of the business. In comparison, costs are related directly to sales; and capital investments have to be written off through depreciation over several years.
Exponent (used in EMA) a calculated factor used in a weighted moving average, calculated by dividing 2 by the number of values in the average.
Exponential moving average (EMA) a weighted moving average that is easy to calculate and does not require adjusting the field each time to drop the oldest value and add the newest value.
Favorable variance in budgeting, the difference between the actual expense and the budgeted expense, when the actual is lower than the budgeted amount.
Field in statistics, a range of values. For example, a field of seven values is averaged by adding them together and dividing by the total of the field (7).
Financial section (report) in a report, a section or sections devoted primarily to numbers and dollar values. Examples include financial reports, productivity summaries, and budgets.
Financial statement a statement prepared to summarize current status (balance sheet) or the results of operations (income statement) and cash flow (statement of cash flows). The three statements are prepared as of the same date. The period covered by the income statement and statement of cash flows ends on the same date as the balance sheet’s report of account balances.
Fixed asset turnover a ratio comparing annual sales to the average value of longterm (fixed) assets during the year. Sales are divided by the average and the results are expressed as the number of “turns” during the year.
Forecast a budget of revenues, in which assumptions are used to develop an estimate of revenues expected to be generated during the coming year.
Fraction conversion to decimal a calculation in which the numerator of a fraction is divided by its denominator to find the equivalent decimal expression of the same value.
Gross margin a percentage calculated by dividing gross profit by revenues.
Gross profit the dollar value calculated by subtracting the cost of goods sold from revenues.
Half-year convention in calculating depreciation, the first-year basis in which all assets within a specific class are depreciated as if they had all been purchased exactly half way through the year.
Home office expense the expense of operating an office in the home, including depreciation, utilities, insurance, taxes, and utilities. The calculation is based on proration of the full-time and exclusive use of the office space as a percentage of total floor space of the home.
Income statement a summary of activity during a specified period. It consists of revenue minus the cost of goods sold (resulting in gross profit), minus expenses (resulting in operating profit), plus or minus non-operating income or expenses (resulting in pre-tax net profit), minus provision for income taxes (resulting in after-tax net profit).
Income taxes a provision on the income statement located after the net pre-tax profit, used to calculate the “bottom line” or after-tax net profit.
Inflation the loss of purchasing power, expressed as a percentage change in an index from one period to another (Consumer Price Index).
Intangible assets those assets without physical value, including the assigned value of goodwill, covenants, and brands.
Interest coverage the calculation of the EBITDA divided by interest expense, as a means of identifying how well debt expenses are covered by income.
Inventory turnover an estimate of efficiency in inventory levels. It is calculated by dividing the cost of goods sold by the year’s average inventory levels. The result is expressed as a number of turns during the year.
Liabilities debts and obligations of a company, divided between current (payable within 12 months) and long-term.
Liability-to-asset ratio a test of the relationship between assets and liabilities, calculated by dividing total liabilities by total assets.
Liquidity the level of cash available to fund current operations; working capital needed to fund expansion or to pay current expenses.
Loan amortization the process of repaying a loan, in which a monthly payment is calculated based on the loan amount, interest rate, compounding method and time to repay the debt; the calculation identifies the monthly payment needed to fully pay off the loan by the end of the period.
Long-term liabilities all liabilities payable beyond the next 12 months.
Lowest common denominator in a fraction, the lowest expression of the value. For example, ½ is the lowest common denominator for any fraction in which the numerator is exactly half of the denominator.
Margin of profit the percentage calculated by dividing net profit by revenue.
Mean in statistics, the average of a field of values.
Mean absolute deviation the absolute difference between an element and a given point. Typically, the point from which the deviation is measured is a measure of “central tendency,” or the likelihood that outcomes will tend to be close to the mean or median of the field.
Median in statistics, the exact mid-point in a field of values. If there are an odd number of values, the median is the middle value. If an even number then it is the average of the two middle numbers in the sorted field.
Mid-month convention in depreciation, the method used for first-year depreciation. The assumption is that assets purchased during any given month were purchased exactly half way through that month.
Mid-quarter convention in depreciation, the method used for first-year depreciation. The assumption is that assets purchased during any given quarter were purchased exactly half way through that quarter.
Mode in statistics, the value that occurs most often in a field.
Monthly compounding a method of compounding in which the nominal annual rate is divided by 12, and the periodic rate is used to calculate monthly interest.
Moving average a calculation in which a set number of values are averaged in a changing trend. For example, a moving average of the most recent 10 months is calculated by adding values together and dividing by 10. The following month, the oldest value is dropped, and the newest value added to calculate a new moving average.
Narrative section (report) the report’s section devoted to explanation rather than to financial or other numerical sections.
Negative cash flow the condition when more cash is being paid out than received, creating a drain on reserves.
Net after-tax profit the calculation of profits after all adjustments, including the provision for taxes; the “bottom line” of the income statement.
Net operating profit the profit before adjusting for non-operating income or expenses or provision for income taxes; gross profit minus operating expenses. Net return the percentage of net profits divided by revenue; the best-known ratio based on the income statement.
Net return on equity a calculation of return to investors; net profit is divided by the net of the equity balance minus redeemable preferred stock, and the result is expressed as a percentage.
Nominal rate the stated rate of interest per year before calculating the periodic rate based on compounding method to be used.
Non-operating income or expense items added to or subtracted from profits that are not attributable to operations, including interest income or expenses, capital gains or losses, and currency exchange profits or losses.
Numerator in a fraction, the top half of the expression.
Payback ratio a ratio comparing investment to cash flow. The initial cash investment is divided by the annual net cash flow.
Percent of expense variance in budgeting, the calculated degree of variance. The dollar amount of the variance is divided by the budget amount, and the result is expressed as a percentage.
Percent of the total a common formula used in proration and other processes. The value in a field is divided by the total of all the values in the field, and the result expressed as a percentage.
Percentage change a calculated change in which an old new base is subtracted from a new base value, and the difference is divided by the old base value. The result is expressed as a percentage.
Percentage of revenue income statement component ÷ revenue
Periodic interest rate the actual annual rate with compounding included; for example, the periodic rate for monthly compounding involves dividing the stated rate by 12 and accumulating interest at one-twelfth each month.
Pi circumference of a circle ÷ diameter of a circle D = π 3.1416
Positive cash flow condition when receipts are greater than payments.
Prepaid and deferred assets classification of assets assigned to a later accounting period. A prepaid asset includes portions of the payment assigned to a later year; a deferred asset is not recognized until later as an expense or cost.
Present Value of a single deposit amount needed today to reach future amt.
Present value per period the amount needed today to fall to zero at the end of the period, based on the amount of each withdrawal, the number of months, interest rate and compounding method.
Pre-tax net profit O +(–) N = P
Price/earnings ratio (PE) Current price per share divided by the latest published earnings per share, resulting in a multiple (the number of years’ net profits reflected in current price of the stock.
Projection an estimate of future revenues, costs or expenses, or of activity in cash flows.
Proof of proration prorated value of a + prorated value of b = known total
Proration division of a single value into two or more periods; for example, payment of an expense may be prorated between a seller and a buyer when a transaction is closed during the period applicable to the payment.
Quarterly compounding method of compounding over four periods per year, resulting in a higher annual interest rate than the stated rate; for example, 5% compounded quarterly results in annual interest of 5.0945%.
Quick assets ratio (A – I) ÷ L = R
Radius diameter ÷ 2
Recovery period the number of years over which a capital asset is depreciated.
Remaining balance the dollar amount at the end of each year remaining payable on a debt.
Retained earnings on a balance sheet’s net worth section, the accumulated equity from net profits or losses each year.
Return on cash invested (Sales price – Purchase price) ÷ I = R
Return on equity the investment return to shareholders or partners, based on net return as a percentage of net worth.
Return on net investment (Sales price – Purchase price – Costs) ÷ cash invested = R
Return on purchase price (Sales price – Purchase price) ÷ P = R
Revenue also called sales, the top line of the income statement; income before deducting costs or expenses.
Revised budget an annual budget adjusted based on variances, usually every six months.
Rule of 113 113 ÷ interest rate (triple)
Rule of 69 (69 ÷ interest rate) + .35
Rule of 72 72 ÷ interest rate
Semi-annual compounding a compounding method based on two periods per year.
Sigma the 18th letter of the Greek alphabet; lower-case Sigma, or σ is used in statistical formulas for the value of standard deviation.
Simple average an average without weighting or other adjustments, also called the mean.
Simple interest the calculated annual interest without compounding.
Sinking fund payment is a calculation of a series based on known assumptions. It answers the question, “How much money do I need to deposit per month, given a known rate of interest, compounding method, and time period, to accumulate a target amount in the future?”
Spread see dispersion
Square any number multiplied by itself and expressed as n2.
Square root the inverse value of the square, the number that, when multiplied by itself, equals the principal value, denoted by the symbol
Standard deviation the square root of variance, denoted by Greek letter sigma, or σ and denoted as
Statistics a set of information based on numbers. As a process, statistics is the method of analysis. As a set of numerical values, statistics are the conclusions you get from manipulating those values.
Straight-line depreciation method of depreciating a capital asset calling for deduction of the same amount each year.
Tangible book value the book value (assets minus liabilities) of a company, without including intangible assets such as goodwill or brand value.
Time value of money amount borrowed, repayment term, interest rate, and compounding method
Total capitalization the combined funds to finance operations, consisting of shareholders’ equity and long-term debt.
Unfavorable variance in a budget, an expense or direct cost higher than the amount budgeted or revenue lower than the amount budgeted.
Useful life the period of time in years, estimated for depreciation of a capital asset.
Variance (budget) B – E = V
Variance (statistics) square of each value in the field and then divide those results to find the average.
Volume of a cylinder radius2 × π × Height
Volume of a rectangular solid L × W × H
Weighted average a method of averaging in which more weight is given to the latest entries in the field.
Working capital the net difference between current assets and current liabilities.
Year-to-date budget current-month budget + prior year-to-date budget
Year-to-date expense current-month expense + prior year-to-date expense
Yield measurement of profitability, alt. for return