Dictionary - Accounting
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10-K

The objective of the 10-K and other SEC-required forms is to provide shareholders and prospective shareholders with accurate, relevant, and timely information about the financial and operating performance of the company. The 10-K is just one of many forms a company that is publicly traded in the U.S. Read more

10-Q

A 10-Q is a report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission (SEC) A 10-Q contains similar information as a 10-K, but is not as comprehensive.A 10-Q must be submitted at the end of the first 3 quarters of a company's fiscal year, while a 10-K is submitted at the end of the 4th quarter. Read more

Abandonment Value

Abandonment value refers to the value of a project or investment were it to be liquidated presently. Also called liquidation value, the abandonment value of a project or investment is the immediate value in cash that would be generated from liquidating a project or selling an investment.  A given project's abandonment value can be an important consideration for a company. Read more

Abatement Cost

An abatement cost refers to the cost associated with the voluntary or compulsory removal of an undesirable result of a production process. In many instances, companies produce goods or services that directly or indirectly result in a byproduct that may be medically or environmentally dangerous. Read more

Above Water

Above water is a term to describe being financially stable.In accounting, the term often refers to assets whose market value is higher than book value. Read more

Accelerated Depreciation

Accelerated Depreciation is a form of depreciation used for accounting or tax purposes to reduce the book value of an asset faster than traditional straight-line depreciation.  Read more

Account History

An account history is a statement of all the activity that has occurred in an account for a given period of time. Monthly bank statements for common checking accounts often are account histories. Read more

Accountant

An accountant is trained to compile, inspect, interpret, and/or report financial statements and tax returns that comply with governmental and regulatory authority requirements. Accountants often work in a company's accounting department, at an auditing firm, or in a private practice. Read more

Accountant's Letter

An accountant's letter, also called an auditor opinion, is a written statement describing an auditor’s independent, unbiased and qualified evaluation of the accuracy and completeness of a company’s financial statements and practices, as well as an evaluation of a company’s compliance with Generally Accepted Accounting Standards (GAAP). When an auditor feels that a company’s financial statements are fair and accurate, it issues an unqualified opinion and does so using a standard reporting template (this is why many opinions read the same way). Read more

Accountant's Opinion

An accountant's opinion is a concise written statement by a certified accountant concerning the accuracy of a company's financial records. An accountant's opinion is the first document in a company's financial report. Read more

Accounting

One can define accounting as the process of systematic recording, measuring, and communicating information about financial transactions.It’s a system that provides quantitative information about a business or a person’s financial position.  An even simpler definition of accounting is that it’s the process of tracking assets, liabilities, expenses, revenue, and equity. Read more

Accounting Conservatism

Accounting conservatism is one of the four accounting conventions, which are standards, customs or guidelines regarding the application of accounting rules. There are four widely recognized accounting conventions that guide accountants: Be conservative. Read more

Accounting Convention

Accounting conventions are standards, customs or guidelines regarding the application of accounting rules. There are four widely recognized accounting conventions that guide accountants: 1.  Be conservative. Read more

Accounting Earnings

Accounting earnings, or net income, represent the amount of money gained or lost after all costs, depreciation, interest , taxes and expenses have been deducted from a company's total sales. A simple formula for calculating accounting earnings is: Accounting Earnings = Revenue - Cost of Goods Sold (COGS) - General & Administrative Expenses - Depreciation - Interest Expense + Internet Income - Taxes - Preferred Dividends Let's assume that Company XYZ delivered the following financial results last year:   Revenue $1,000,000 Cost of Goods Sold $500,000 General Expenses $300,000 Depreciation $100,000 Interest Expense $5,000 Interest Income $1,000 Taxes $10,000 Preferred Dividends $10,000   Using the formula and the example information above, we can calculate Company XYZ's accounting earnings as follows: $1,000,000 -$500,000-$300,000-$100,000-$5,000+$1,000-$10,000-$10,000 = $76,000 In general, negative or low earnings might suggest a myriad of problems, ranging from insufficient gross profit margins to inadequacies in customer or expense management to unfavorable accounting methods. Read more

Accounting Error

An accounting error is an error in the process of systematically recording, measuring and communicating information about financial transactions. Mary is an accountant at Company XYZ. Read more

Accounting Period

An accounting period is the time interval reflected by the data in a financial statement. Firms prepare financial statements for publication and tax reporting based on an accounting period. Read more

Accounting Principles

Accounting principles govern the rules of accounting and reflect the latest accounting methodologies.  Accounting principles govern how accountants calculate and present the details of a company's financial operations, such as net earnings, gross income, and net cash provided by operating activities.These details can be found in such places as quarterly balance sheets or income statements, 10-Q filings, or annual reports.  Accounting principles are the bases for the more specific Generally Accepted Accounting Principles (GAAP), which are established and administered by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB). Read more

Accounting Research Bulletins (ARB)

Accounting research bulletins (ARBs) are publications from the Accounting Principles Board of the American Institute of Chartered Public Accountants. ARBs recommend accounting procedures. Read more

Accounts Payable

Accounts payable (A/P) are amounts owed to suppliers and other creditors for goods and services bought on credit. Let's assume that Company XYZ orders $1,000,000 in widget parts from its supplier and has 60 days to pay for those parts. Read more

Accounts Payable Turnover Ratio

The accounts payable turnover ratio is a company's purchases made on credit as a percentage of average accounts payable.The formula for accounts payable turnover ratio is: Accounts Payable Turnover = Net Credit Purchases/Average Accounts Payable Let's assume Company XYZ buys $10 million of widget parts this year. Read more

Accounts Receivable (AR)

Accounts receivable (AR) are the amounts owed by customers for goods or services purchased on credit.The money owed to the company is called "accounts receivable" and is tracked as an account in the general ledger, and then reported as a line on the balance sheet.  Look for accounts receivable on the company’s balance sheet under the current assets category. Read more

Accounts Receivable Aging

Accounts receivable aging is a report showing the various amounts customers owe a company and the length of time the amounts have been outstanding. Here is sample of an aging report:   Notice that the report shows how much each customer owes in total ("Amount Receivable"), how much is owed for the current month, and how late any other previous months' payments are. Read more

Accounts Receivable Financing

Accounts receivable financing, also called factoring, is a method of selling receivables in order to obtain cash for company operations.Accounts receivable (A/R) are amounts owed by customers for goods and services a company has sold to those customers. Read more

Accounts Uncollectible

Accounts uncollectible, also called allowance for doubtful accounts (ADA), is a reduction in a company's accounts receivable.Accounts uncollectible equals the amount of those receivables that the company's management does not expect to actually collect. Read more

Accreting Principal Swap

An accreting principal swap is a swap in which the two parties to the contract agree to pay interest on a growing principal amount. In a swap, one party is reducing its exposure to risk while the other party is increasing its exposure to risk in the hopes of getting a higher return. Read more

Accrual Accounting

Accrual accounting is an accounting method whereby revenue and expenses are recorded in the periods in which they are incurred. Accrual accounting is the opposite of cash accounting, which recognizes economic events only when cash is exchanged. Read more

Accruals

Accruals are records of revenue and expenses in the periods in which they are incurred.They are a key component of the accrual method of accounting. Read more

Accrue

To accrue is to record revenue and expenses in the periods in which they are incurred.Accruals, the result of accruing, are key components of the accrual method of accounting. Read more

Accrued Expense

An accrued expense refers to any expense incurred and reported during an accounting period, but for which payment has not yet been made. There are certain expenses which a company may incur over the course of an accounting period (usually a quarter), but which may not actually be paid until a later time. Read more

Accrued Interest

Accrued interest refers to interest that builds up on a company's outstanding payables and receivables. This interest has been accounted for, but not yet transacted. Read more

Accrued Liability

Accrued liabilities are records of revenue and expenses in the periods in which they are incurred.They are a key component of the accrual method of accounting. Read more

Accrued Revenue

Accrued revenue is revenue recorded in the periods in which it is incurred. Let's assume Company XYZ is a widget consultancy that bills $100 an hour. Read more

Accumulated Depreciation

Accumulated depreciation is the sum total of the depreciation recorded for certain assets. Let's assume Company XYZ bought a MegaWidget for $100,000 three years ago. Read more

Accumulated Earnings

Accumulated earnings is the sum of a company's profits, after dividend payments, since the company's inception.It can also be called retained earnings, earned surplus, or retained capital. Read more

Accumulated Earnings Tax

The accumulated earnings tax is a charge levied on a company's retained earnings.Also called the accumulated profits tax, it is applied when tax authorities determine the cash on hand to be an excessively high amount. Read more

Adjusted Basis

Adjusted basis refers to the increase or decrease in an asset's value due to depreciation or capital enhancements. From the time an asset is acquired until the time it is sold, an asset experiences a number of events which affect its value. Read more

Adjusted Cost Base (ACB)

Adjusted cost base (ACB) is an income tax term that refers to an adjustment in an asset's book value resulting from the cost of improvements, payouts, and similar improvements or dispositions. Let's assume Company XYZ buys a factory building for $1,000,000. Read more

Adverse Opinion

An adverse opinion refers to the conclusion by an auditor that a company's financial statements inaccurately characterize the company's financial standing. An adverse opinion is an internal or independent auditor's official written statement of no-confidence in a company's financial statements insofar as it reflects the company's true financial status and adherence to generally accepted accounting principles (GAAP) and disclosure of information. Read more

After-Tax Operating Income (ATOI)

After-tax operating income (ATOI) is a company's operating income after taxes.ATOI is very similar to net operating profit after tax (NOPAT) The formula for ATOI is: ATOI = Gross Revenue - Operating Expenses - Depreciation - Taxes Let's assume Company XYZ reported the following information for the fiscal year: Using the formula and the information above, we can calculate that Company XYZ's ATOI was: $1,000,000 - $500,000 - $300,000 - $100,000 - $10,000 = $90,000 ATOI is a non-GAAP measure, meaning that what is included and excluded differs by company and industry. Read more

After-Tax Profit Margin

After-tax profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue.  The formula for after-tax profit margin is: (Total Revenue – Total Expenses)/Total Revenue = Net Profit/Total Revenue = After-Tax Profit Margin By dividing net profit by total revenue, we can see what percentage of revenue made it all the way to the bottom line, which is good for investors.  Let's look at a hypothetical income statement for Company XYZ: Using the formula and the information above, we can calculate that Company XYZ's after-tax profit margin was $30,000/$100,000 = 30% After-tax profit margin is one of the most closely followed numbers in finance.Shareholders look at after-tax profit margin closely because it shows how good a company is at converting revenue into profits available for shareholders.  One of the most important concepts to understand is that net profit is not a measure of how much cash a company earned during a given period. Read more

Agency Cost

Typically, agency costs refer to conflicts between shareholders and their company's managers.  While shareholders prefer managers to make decisions which will increase the share value, managers prefer to expand the business and increase their salaries (which may not necessarily increase share value). In a publicly-held company, agency costs occur when company management (i.e. Read more

Aggressive Accounting

Aggressive accounting refers to an accounting department's deliberate and purposeful tampering with its company's financials in order to outwardly characterize its revenues as higher than they truly are. The practice of aggressive accounting seeks to report a company's revenues as higher than they truly are in order to increase the market value of company stock by presenting attractive figures to current and prospective investors. Read more

Allowance for Doubtful Accounts (ADA)

An allowance for doubtful accounts (ADA) is a reduction in a company's accounts receivable.The ADA equals the amount of those receivables that the company's management does not expect to actually collect. Read more

Amortization

In lending, amortization refers to paying off a debt through periodic payments, where each payment pays the periodic interest on the remaining balance and a portion of the loan principal. Read more

Annual Report

An annual report is an audited corporate document that details the business activity and financial status of a publicly-held company over the previous year.  The Securities and Exchange Commission (SEC) requires all public companies to distribute an annual report to shareholders at the end of each fiscal year.Each report contains the three main financial statements -- the Income Statement, Cash Flow Statement and Balance Sheet -- as well as a host of other company-related data. Read more

Asset

The easiest way to define an asset is that it’s an economic resource that can be owned by an individual, company, or country.Assets are expected to provide future economic benefits like:  Increased value for a company or country Increased net worth for an individual  Assets accomplish this by providing cash flow, reducing expenses, and/or increasing sales. Read more

Audit Trail

An audit trail refers to the complete record of events that occurred in the execution of a transaction. When a transaction is executed (e.g. Read more

Auditor

In the accounting world, an auditor is a professional who examines and verifies a company's financial statements and records and in the United States examines a company's compliance with Generally Accepted Accounting Principles (GAAP).In conversation, when people refer to "the auditor," they are sometimes referring to the entire accounting firm for which an individual auditor works (rather than to the single person tasked with doing the audit). Read more

Auditor's Report

An auditor's report is a statement included in a company's annual financial report that certifies the validity of a company's financial statements according to an outside auditor. By law, companies in the U.S. Read more

Back Charge

A back charge is an unpaid bill attributable to a prior period. For example, let's say that Company XYZ sells $1,000 worth of auto parts to Store ABC every month. Read more

Backflush Costing

An accounting method whereby the costs associated with producing a good or service are recorded only after the good or service is actually produced, completed or sold. For example, let's assume that Company XYZ manufactures widgets. Read more

Bad Debt Expense

Bad debt expense is the portion of accounts receivable that became uncollectable during a given period. Let's assume that Company XYZ sells $1,000,000 worth of goods to 10 different customers. Read more

Bad Debt Reserve

Bad debt reserve, also called an allowance for doubtful accounts (ADA), is a reduction in a company's accounts receivable.The bad debt reserve is the amount of receivables that the company does not expect to actually collect. Read more

Balance Sheet

A balance sheet (also called a statement of financial position) is a statement that provides a snapshot of a company’s financial situation at a given date.It reports assets, liabilities, and shareholder’s equity to provide an overview of what a company owns, what it owes, and what is left over for the owners. Read more

Balance Sheet Reserves

Balance sheet reserves, also known as "claims reserves", are accounting entries that reflect money a company sets aside to pay future obligations. Let's assume Company XYZ has to recall one of its products and issue refunds to customers. Read more

Beginning Inventory

Beginning inventory refers to the value of goods that a company has for its use or sale at the start of an inventory accounting period. Say Company XYZ produces 5,000 units during the course of a year and sells 2,000 units. Read more

Belly Up

In the finance world, a company goes belly up when it declares bankruptcy or goes out of business. Let’s assume Company XYZ’s stock falls from $10 per share to 50 cents per share due to a series of internal scandals and product failures. Read more

Black

Black is slang for profit.Profit, also called net income, is the amount remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted from total sales. Read more

Book Value

When referring to assets, the term book value means the original cost of an asset minus accumulated depreciation.What Is the Book Value of a Company? Read more

Bottom Line

The bottom line represents the number of sales dollars remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue.  The bottom line is also referred to as net income, net profit, or net earnings.The formula for the bottom line is as follows: Total Revenue -Total Expenses = Net Income The bottom line is found on the last line of the income statement, which is why it's called the bottom line.  Let's look at a hypothetical income statement for Company XYZ: Income Statement for Company XYZ, Inc.for the year ended December 31, 2008 Total Revenue                        $100,000 Cost of Goods Sold               ($ 20,000)Gross Profit                             $ 80,000 Operating Expenses       Salaries               $10,000      Rent                    $10,000  Utilities                 $  5,000  Depreciation        $  5,000Total Operating Expenses    ($ 30,000) Interest Expense                   ($ 10,000) Taxes                                       ($ 10,000) Bottom Line                              $ 30,000 By using the formula we can see that the bottom line = $100,000 - $20,000 - $30,000, - $10,000 - $10,000 = $30,000   The bottom line is one of the most closely followed numbers in finance, and it plays a large role in ratio analysis and financial statement analysis. Read more

Burn Rate

Burn rate is the amount of time it will take a company to exhaust its capital cushion.  Burn rate is usually expressed in terms of cash burned per month, but can be expressed according to any time period the analyst finds useful.Let's assume newly formed Biotech Company ABC has just been granted venture capital (VC) funds to pursue a groundbreaking new drug. Read more

Calendar Year

A calendar year is the period between January 1 and December 31. If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December 31, then Company XYZ's fiscal year is said to be on a calendar year basis. Read more

Camouflage Compensation

Camouflage compensation is compensation that is not fully disclosed or is hard to identify. Let's say Company XYZ needs a new CEO. Read more

Capital Asset

For firms, a capital asset is an asset that has a useful life longer than one year and is not intended for sale during the normal course of business.For individuals, capital asset typically refers to anything the individual owns for personal or investment purposes. Read more

Capital Expenditures

Capital expenditures, or capex, is money used to purchase, upgrade, improve, or extend the life of long-term assets.Long-term assets are typically property, infrastructure, or equipment with a useful life of more than one year. Read more

Capitalization

In the business world, capitalization has two meanings.The first meaning, also called market capitalization, refers to the value of a company's outstanding shares. Read more

Capitalize

Capitalizing refers to the accounting practice of characterizing the costs of an asset purchase as a long-term asset on the balance sheet instead of an expense on the income statement.  Companies capitalize the cost of asset purchases in order to spread out the cost of the assets over many reporting periods.This way, net income is not affected disproportionately in the reporting period in which the asset was purchased.  Rather than being listed as one large expense in one reporting period, a capitalized asset cost will be expensed via depreciation over many reporting periods. Read more

Cash Accounting

Under cash accounting, a business records revenue and expenses in the period in which they are actually received or paid, rather than in the period in which they are incurred. Let's assume Company XYZ sold 1,000 widgets in December for $1,000 each and that its customers usually take 60 days to pay for their widgets. Read more

Cash and Cash Equivalents (CCE)

Cash and cash equivalents (CCE) are company assets in cash form or in a form that can be easily converted to cash. The balance sheet shows the amount of cash and cash equivalents at a given point in time, and the cash flow statement explains the change in cash and cash equivalents over time. Read more

Cash Budget

Cash budget is a review or projection of cash inflows and outflows.It can be used as a tool for analyzing the revenues and costs of a company or individual. Read more

Cash Flow

Cash flow is simply the cash expected to be generated by an investment, asset, or business.  As an investor, you buy a dividend-paying stock.You purchase the stock for $10 and the company pays you a $0.50 dividend each year. Read more

Cash Flow After Taxes (CFAT)

Cash flow after taxes (CFAT) is a measure of a company's ability to generate positive cash flow after deducting taxes. The general formula for CFAT is: CFAT = Net Income + Depreciation + Amortization Sometimes analysts also add back other non-cash items and proceeds from debt or equity issuance. Read more

Cash Flow from Financing Activities

The section of the cash flow statement titled Cash Flow from Financing Activities accounts for inflows and outflows of cash resulting from debt issuance and financing, the issuance of any new stock, dividend payments, and any repurchase of existing stock. The cash flow from financing activities section expresses the total net cash flow from the total of any of the financing activities described above. Read more

Cash Flow from Investing Activities

Cash from investing activities is a section of the cash flow statement that provides information regarding a company's purchases or sales of capital assets. A statement of cash flows typically breaks out a company's cash sources and uses for the period into three categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.  Cash flow from investing activities primarily reflect the company's purchases or sales of capital assets (that is, assets that appear on the balance sheet and have a useful life of more than one year). Read more

Cash Flow from Operating Activities (CFO)

Cash flow from operating activities (CFO) measures the cash-generating abilities of a company's core operations (instead of its ability to raise capital or buy assets).  More simply, cash flow from operations is the money a company earns from its day-to-day business operations, whether from selling goods or providing services.Cash flow from operating activities may also be referred to as operating cash flow (OCF) or net cash provided from operating activities. Read more

Cash Flow Plans

Cash flow plans are strategic documents companies make in order to forecast their cash inflows and outflows over several periods.In the insurance world, cash flow plans refer to coordinating the payment of insurance premiums with cash flow. Read more

Cash Flow Statement

A cash flow statement (also referred to as the statement of cash flows) is a document that reports the inflows and outflows of cash within a business.It is one of three main financial statements that businesses use alongside the balance sheet and income statement.  The simplest definition of a cash flow statement is that it’s a financial statement which measures the cash generated and used by a company within a given period. Read more

Certified Public Accountant (CPA)

The certified public accountant (CPA) designation is a professional designation granted by the American Institute of Certified Public Accountants (AICPA).It is given to individuals who pass the Uniform CPA Examination and meet additional education, experience, and state licensing requirements that allow them to provide accounting services to the public. Read more

Chapter X

Chapter X was a portion of the bankruptcy code that dictated bankruptcy processes and procedures for corporations.1978 was the last year corporations were able to file bankruptcy under Chapter X. Read more

Common-Size Balance Sheet

A common-size balance sheet is a balance sheet in which each line item is expressed as a percentage of assets. For example, let's assume that Company XYZ's balance sheet looks like this: The right-most column on this balance sheet, which shows each line item as a percentage of assets, is a common-size balance sheet. Read more

Common-Size Financial Statement

A common-size financial statement is an income statement or balance sheet in which each line items are expressed as a percentage of sales or assets, respectively. For example, let's assume that Company XYZ's income statement looks like this: The right side of the income statement, which shows each expense as a percentage of sales, is a common-size income statement. Read more

Common-Size Income Statement

A common-size income statement is an income statement in which each line item is expressed as a percentage of sales. For example, let's assume that Company XYZ’s income statement looks like this: The right side of the income statement, which shows each expense as a percentage of sales, is a common-size income statement. Read more

Consolidate

In the accounting world, to consolidate means to combine the financial statements of a company and all of its subsidiaries, divisions or suborganizations. Let's assume Company XYZ is a holding company that owns four other companies: Company A, Company B, Company C and Company D. Read more

Consolidated Financial Statements

A consolidated financial statement is the combined financial statements of a parent company and all of its subsidiaries, divisions, and/or sub-organizations.Consolidated financial statements provide a comprehensive overview of a company's financial operations for the entire group of entities. Read more

Contribution Margin

Contribution margin is a measure of profit per unit; it is used to tell a business how profitable each of their products is by calculating how much each product can contribute to revenues.The contribution is the difference between the market price of the product and its variable cost, where variable cost is the production cost excluding the company’s own fixed costs of operating the business.  Variable costs are the material and labor costs of making the product. Read more

Core Earnings

Core earnings are the net income a company generates from the principle products and services it provides. The concept of core earnings was developed by Standard & Poor's (S&P) in order to measure the income a company generates from its daily operations. Read more

Corporate Profit

Corporate profit, also called net income, is the amount remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted from total sales.Profit is also referred to as the bottom line, net profit or net earnings. Read more

Cost of Capital

Cost of capital can best be described as the ability to cover both asset and liability expenditures while generating a profit.  A simpler cost of capital definition: Companies can use this rate of return to decide whether to move forward with a project.Investors can use this economic principle to determine the risk of investing in a company.  Cost of capital is the return (%) expected by investors who provide capital for a business. Read more

Cost of Goods Sold (COGS)

Cost of goods sold (COGS) is an accounting term to describe the direct expenses related to producing a good or service.COGS is listed on the income statement. Read more

Coverage Ratio

A coverage ratio divides a company's income or cash flow by a certain expense in order to determine financial solvency. Some of the most common coverage ratios include the fixed-charge coverage ratio, debt service coverage ratio, times interest earned (TIE), and the interest coverage ratio. Read more

Credit

Credit is an agreement whereby a financial institution agrees to lend a borrower a maximum amount of money over a given time period.Interest is typically charged on the outstanding balance. Read more

Current Assets

Current assets (sometimes called current accounts) are any company assets that can be converted into cash within one fiscal year.There are multiple ways these assets can be converted, including sale, consumption, utilization, and exhaustion through standard operations.  Assets fall into two categories on balance sheets: current assets and noncurrent assets.  Current assets are short-term, liquid assets that are expected to be converted to cash within one fiscal year. Read more

Days Payable Outstanding (DPO)

What does DPO mean? Discover the skills you need to interpret – and even improve – days payable outstanding.  Read more

Days Sales of Inventory (DSI)

Days sales of inventory is a ratio of inventory to sales.The formula is: Days Sales of Inventory = (Inventory/Cost of Sales) x 365 For example, let's say that XYZ Company had $15 million cost of sales for the year and $50,000 in inventory today. Read more

Days Sales Outstanding (DSO)

Days sales outstanding (DSO) is the ratio of receivables to the daily average of credit sales. The formula for daily sales oustanding is: DSO = Receivables / (Net Annual Sales on Credit / 360) If a company does not sell on credit (that is, the customer must pay immediately), then total sales is used in the denominator. Read more

Debt Load

Debt load is the total amount of debt that a company has on its balance sheet.All publicly traded companies must file financial statements, including balance sheets, every quarter. Read more

Debt Ratio

A debt ratio is simply a company's total debt divided by its total assets.  Debt Ratio = Total Debt / Total Assets For example, if Company XYZ had $10 million of debt on its balance sheet and $15 million of assets, then Company XYZ's debt ratio is: Debt Ratio = $10,000,000 / $15,000,000 = 0.67 or 67% This means that for every dollar of Company XYZ assets, Company XYZ had $0.67 of debt.A ratio above 1.0 indicates that the company has more debt than assets. Read more

Deferred Income Tax

Deferred income tax refers to a portion of income earned by a company during a given year for which the associated income tax has not yet been paid. Certain accounting practices and tax laws often result in a portion of a company’s income being realized and accounted for in one accounting period, but not taxable until another. Read more

Deferred Revenue

Deferred revenue is money that a company receives in advance for products and services.Simply put, these products and services will, at a later date, be delivered or performed. Read more

Deferred Tax Liability (DTL)

Deferred tax liability (DTL) is a balance sheet line item that accounts for the temporary difference between taxes that will come due in the future and taxes paid today.  Because of accrual accounting rules, a company may be able to defer taxes on some of its income.This "unrealized" tax debt is put into an account on the balance sheet called deferred tax liability.  You can find DTL on the balance sheet or on a fund's statement of assets and liabilities. Read more

Depletion Allowance

A depletion allowance is a tax deduction allowed in order to compensate for the depletion or "using up" of natural resource deposits such as oil, natural gas, iron, timber etc.  The allowance is a form of cost recovery for capital investment which, unlike income, is not taxable. There are two basic forms of depletion allowance, cost depletion and percentage depletion.  Under the cost method, the original investment is recouped by deducting a portion of the capital investment each year from gross income over the estimated life of the resource deposit.  Cost depletion can be illustrated in this way: An oil company invests $15 million in a property with an estimated oil reserve life of 15 years.  The company deducts approximately $1,000,000 ($15 million/15 years) from taxable earnings each year until the initial investment is recouped in tax benefits. Read more

Depreciated Cost

Depreciated cost is the cost of an asset minus its accumulated depreciation.Another term for this concept is net book value. Read more

Depreciation

From calculating straight-line depreciation to using the double-declining balance formula, this is everything you need to know about depreciation in accounting.  Read more

Diluted Earnings per Share

Diluted earnings per share is a measure of profit.The formula for diluted earnings per share is: Fully Diluted Earnings Per Share = (Net Income - Preferred Stock Dividends) / (Common Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Shares + Convertible Debt + Warrants) Let's assume Company XYZ had $10,000,000 of net income this year. Read more

Earned Surplus

Earned surplus is the sum of a company's profits, after dividend payments, since the company's inception.It can also be called retained earnings, retained capital, or accumulated earnings. Read more

Earnings

Earnings are the corporate profits of a company over a specific time period after taxes and other expenses have been paid. The net (after-tax) earnings of a company are calculated by deducting such factors as operating expenses, cost of sales, taxes, and the like. Read more

Earnings Announcement

An earnings announcement is a public statement of a company's profits, usually on a quarterly basis. For example, let's say Company XYZ is a public company. Read more

Earnings Before Interest After Taxes (EBIAT)

Earnings before interest after taxes (EBIAT) is a measure of a company's operating performance.EBIAT is a measure of how profitable a company would be if it paid taxes on its operating profit without the benefit of the tax shelter that is created by using debt. Read more

Earnings Before Interest and Depreciation (EBID)

Earnings before interest and depreciation (EBID) are a post-tax measure of a company's operating performance. The formula for EBID is: EBID = EBIT + Depreciation - Taxes EBID can be easily derived from the company's income statement. Read more

Earnings Before Tax (EBT)

Earnings before tax (EBT) measures a company's operating and non-operating profits before taxes are considered.It is the same as profit before taxes. Read more

Earnings Multiplier

The earnings multiplier, also called the price-to-earnings ratio (P/E), is a valuation method used to compare a company’s current share price to its per-share earnings. The market value per share is the current trading price for one share in a company, a relatively straightforward definition. Read more

Earnings Per Share (EPS)

The term earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock.The figure can be calculated simply by dividing net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Read more

EBIDA Definition - Earnings Before Interest, Depreciation and Amortization

Earnings before Interest, Depreciation, and Amortization (EBIDA) is a post-tax measure of a company's operating performance. The formula for EBIDA is: EBIDA = EBIT + Depreciation + Amortization - Taxes EBIDA can easily be derived using the company's income statement. Read more

EBIT - Earnings Before Interest and Taxes

Earnings Before Interest and Taxes (EBIT) measures the profitability of a company without taking into account its cost of capital or tax implications. EBIT is calculated using information provided on a company’s income statement. Read more

EBITD - Earnings Before Interest, Taxes and Depreciation

Earnings before interest, tax and depreciation (EBITD) is a pre-tax measure of a company's operating performance.Essentially, it's a way to evaluate a company's performance without having to factor in many financing decisions, accounting decisions, or tax differences. Read more

EBITDA Margin

EBITDA margin is a measurement of a company's EBITDA (its earnings before interest, taxes, depreciation, and amortization) as a percentage of its total revenue.  The formula for EBITDA margin is: EBITDA Margin = EBITDA / Total Revenue  A widely-used financial ratio, EBITDA margin provides investors with a better understanding of how much cash profit a company brought into its business in a given time period relative to its total revenue. Read more

EBITDAE - Earnings Before Interest, Taxes, Depreciation, Amortization and Exceptional Items

Earnings before interest, taxes, depreciation, amortization and exceptional items (EBITDAE) are a measure of a company's operating performance. The formula for EBITDAE is: EBITDAE = EBIT + Depreciation + Amortization + Exceptional Items Essentially, the EBITDAE provides a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events, or tax environments. Read more

EBITDAL - Earnings Before Interest, Taxes, Depreciation, Amortization And Special Losses

Earnings before interest, taxes, depreciation, amortization, and special losses (EBITDAL) is a measure of a company's operating performance.Essentially, it's a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events or tax environments. Read more

EBITDAR - Earnings Before Interest, Tax, Depreciation, Amortization, and Restructuring or Rent Costs

EBITDAR, which stands for earnings before interest, tax, depreciation, and either restructuring or rent costs (depending on what you're measuring) measures a company's profitability without taking into account its capital structure, tax rate, or primary non-cash items such as depreciation or amortization.It also backs out restructuring or rent costs, so that a company or analyst can approximate the cash available before either of these costs are paid for. Read more

EBITDAX - Earnings Before Interest, Tax, Depreciation, Amortization and Exploration

A variation of EBITDA, EBITDAX is a measure used by natural resource exploration companies to reflect ongoing or core profitability.The acronym stands for earnings before interest, taxes, depreciation, amortization and exploration expense. Read more

Economic Profit

Economic profit is a measure of performance that compares net operating profit to total cost of capital. Economic profit is also referred to as economic value added (EVA), which is a trademarked concept originally devised by Stern Stewart & Co. Read more

Economic Value Added (EVA)

 Discover the components of EVA, and how it encourages managers to consider assets and expenses in their decision-making processes. Read more

EDGAR Public Dissemination Service (PDS) System

The EDGAR Public Dissemination Service (PDS) System is an electronic system that receives SEC filings. Keane Federal Systems operates the EDGAR Public Dissemination Service (PDS) System. Read more

Electronic Data Gathering, Analysis and Retrieval (EDGAR)

EDGAR, the Electronic Data Gathering, Analysis and Retrieval system, is an automated system of submission used by public companies required to file forms with the U.S.Securities and Exchange Commission (SEC) In 1984, EDGAR was created by the SEC to improve the quality and speed of information available to investors and corporations. Read more

Ending Inventory

Ending inventory is the book value of inventory at the end of a financial or accounting reporting period. Ending inventory equals the beginning inventory balance plus the cost of any inventory purchases minus the cost of any inventory sold and shrinkage. Read more

Enterprise Multiple

Enterprise multiple is a financial indicator used to determine the value of a company.It is equal to a company’s enterprise value divided by its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Read more

Enterprise Value (EV)

  Enterprise value represents the entire economic value of a company.More specifically, it is a measure of the theoretical takeover price that an investor would have to pay in order to acquire a particular firm. Read more

Enterprise Value to Cash Flow from Operations (EV/CFO)

Enterprise value to cash flow from operations (EV/CFO) is the ratio of the entire economic value of a company to the cash it produces.The formula for EV/CFO is: EV/CFO = (Market Capitalization + Total Debt – Cash)/Cash from Operations Some analysts adjust the debt portion of the formula to include preferred stock; they may also adjust the cash portion of the formula to include current accounts receivable and liquid inventory. Read more

Exceptional Item

An exceptional item is an unusually large and uncommon transaction charge that must be disclosed on the balance sheet in accordance with GAAP. Let's assume Company ABC is experiencing poor business. Read more

Extraordinary Item

An extraordinary item is an accounting term used to describe expenses that are infrequent, unusual and significant in size. Let's assume that Company XYZ, an American company, operates a chain of beach resorts in the Florida Keys, and the resorts are hit by a blizzard. Read more

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is an independent non-profit body responsible for the institution and interpretation of Generally Accepted Accounting Principles (GAAP). FASB was formed in 1973 and serves as the arm of the SEC responsible for governing the accounting standards for U.S. Read more

Financial Engineering

Financial engineering is the quantitative, technical development of financial strategies and products. Financial engineers design, create and implement new financial instruments, models and processes to solve problems in finance and take advantage of new financial opportunities. Read more

First In, First Out (FIFO)

Curious about this accounting method? Discover more about the importance of – and principle behind – FIFO. ​ Read more

Fiscal Quarter (Q1, Q2, Q3, Q4)

It’s more than just knowing fiscal quarter dates: Learn about tax payment due dates and where to find quarterly reports.  Read more

Fiscal Year

A fiscal year is an accounting period of 365 days (or 366 during a leap year) that doesn’t necessarily correspond to the calendar year that begins on January 1st.  Fiscal years are an established period of time when an organization's annual financial records start and conclude. The US government’s fiscal year begins on October 1st and ends on September 30th. Read more

Fixed Asset

A fixed asset is anything that has commercial or exchange value, generates revenue, has a life longer than one year and has a physical form. Let’s assume XYZ Company intends to purchase an office building for $10 million. Read more

Forensic Accounting

Forensic accounting is a form of investigative accounting which examines financial records in order to find evidence for a lawsuit or criminal prosecution. Forensic Accounting is sometimes referred to as forensic auditing. Read more

Forensic Auditing

Forensic auditing examines individual or company financial records as an investigative measure that attempts to derive evidence suitable for use in litigation. Forensic auditing can sometimes be referred to as forensic accounting. Read more

Forward Earnings

Forward earnings are the profits a company (or companies) expect to generate during a future period of time. Companies and/or analysts calculate forward earnings using a variety of techniques that generally involve a review of past earnings performance and market conditions as well as a prognostication about the future direction of the economy and/or stock market.  Forward earnings are used to calculate the forward price-to-earnings ratio (P/E), an oft-cited metric in stock valuation. Read more

Free Cash Flow (FCF)

Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment.This cash can be used for expansion, dividends, reducing debt, or other purposes.  The formula to calculate free cash flow is: FCF = Operating  Cash Flow - Capital Expenditures The data needed to calculate a company's free cash flow is usually on its cash flow statement under Operating Activities. Read more

Free Cash Flow to the Firm (FCFF)

Free cash flow to the firm (FCFF) is the cash available to pay investors after a company pays its costs of doing business, invests in short-term assets like inventory, and invests in long-term assets like property, plants and equipment.The firm's investors include both bondholders and stockholders. Read more

Fully Depreciated Asset

With a fully depreciated asset, the accumulated depreciation equals the original cost of the asset. Let's assume Company XYZ bought a MegaWidget for $100,000 10 years ago. Read more

Funds from Operations (FFO)

Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT).It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement. Read more

Funds from Operations Per Share (FFOPS)

Funds from operations per share (FFOPS) is a measure of cash generated by a real estate investment trust (REIT).It is important to note that FFOPS is not the same as Cash from Operations Per Share, which is a key component of the indirect-method cash flow statement. Read more

General and Administrative Expense (G&A)

General and administrative expenses (also called selling, general and administrative expenses, or SG&A) are the indirect costs of running a business.It is important to note that under the accrual method of accounting, G&A is recorded for the period in which it is incurred and not necessarily the period in which it is paid. Read more

General Ledger

A general ledger (GL) is a consolidated record of a company's accounting entries. The general ledger is the central place, usually electronic, that stores every accounting entry a company makes. Read more

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) is a framework of accounting standards, rules and procedures defined by the professional accounting industry, which has been adopted by nearly all publicly traded U.S.companies. Read more

Going Concern

Going concern refers to the assumption that a company has the resources to continue operating in the foreseeable future.A bankrupt company or a company near bankruptcy is the opposite of a going concern. Read more

Goodwill

Goodwill is the excess of purchase price over the fair market value of a company's identifiable assets and liabilities.Goodwill is an accounting construct that is required under Generally Accepted Accounting Principles (GAAP).  Goodwill occurs when one company acquires another for a price higher than the fair market value of its assets.  For example, Company ABC may purchase Company XYZ for more than the fair value of its assets and debts. Read more

Goodwill Impairment

Generally, a goodwill impairment occurs when a company A) pays more than book value for a set of assets (the difference is the goodwill), and B) must later adjust the book value of that goodwill. Goodwill is an asset, but it does not amortize or depreciate like other assets. Read more

Gross Margin

Gross margin is a required income statement entry that reflects total revenue minus cost of goods sold (COGS).  Gross margin is a company's profit before operating expenses, interest payments and taxes.Gross margin is also known as gross profit. Read more

Gross Profit

Also referred to as gross income or sales profit, gross profit is the total sales of a company minus the total cost of goods (COGS) sold.Gross profit reports are an important indicator of a company’s profitability. Read more

Hard Asset

A hard asset is a physical, or tangible, asset.It is the opposite of an intangible asset. Read more

Headline Earnings

Headline earnings are a measurement of a company's earnings based solely on operational and capital investment activities.It specifically excludes any income that may relate to staff reductions, sales of assets, or accounting write-downs. Read more

Hedge Accounting

Hedge accounting is a portfolio accounting method that combines the values of both a security and its offsetting hedge instrument. If investors purchase a security that comprises a high level of risk, they may accompany the purchase with an opposing item (usually a derivative, such as an option or future contract) referred to as a hedge. Read more

Hurdle Rate

A hurdle rate is an investor's minimum rate of required return on an investment. Let's assume Company XYZ is deciding whether to purchase a piece of factory equipment for $300,000. Read more

Impaired Asset

Generally, an impaired asset is an asset whose market value is below book value. Generally, an asset impairment occurs when a company (1) pays more than book value for a set of assets and (2) later lowers the value of those assets. Read more

Income

Income is an actual or recorded inflow of cash or other assets.The term is used in many different contexts. Read more

Income from Operations

Income from operations is income that is generated by the normal operations of a business. Income from operations is also referred to as operating income or operating earnings. Read more

Income Statement

An income statement is a financial statement detailing a company’s revenue, expenses, gains, and losses for a specific period of time that is submitted to the Securities and Exchange Commission (SEC).At the most basic level, it shows profit and loss. Read more

Intangible Asset

An intangible asset is an asset that lacks a physical substance.  For example, goodwill, patents, trademarks and copyrights are intangible assets.None of these assets can be physically touched, but they can still have value.  The line item for intangible assets is found on the balance sheet. Read more

Inventory

Anyone who has ever worked in retail has heard the term inventory.For businesses, inventory keeps customers happy and supply chains moving, ensuring that supply is available to meet demand.  Outside of a brick-and-mortar store, what is inventory? Read more

Inventory Management

Inventory management is the process of ensuring that a company always has the products it needs on hand and that it keeps costs as low as possible. Inventories are company assets that are intended for use in the production of goods or services made for sale, are currently in the production process, or are finished products held for sale in the ordinary course of business. Read more

Inventory Reserve

An inventory reserve is an accounting entry that reflects a reduction in the market value of a company's inventory. For example, let's say that Company XYZ bought 1,000,000 widgets for $4 each. Read more

Inventory Turnover

The inventory turnover ratio measures the rate at which a company purchases and resells products to customers.There are two formulas for inventory turnover:           Sales               OR                  Cost of Goods Sold             Inventory                                   Average Inventory The first formula is considered to be more common. Read more

Itemized Statement

An itemized statement is a detailed record of certain activity that has occurred in an account for a given period of time. Monthly bank statements for common checking accounts often are itemized statements. Read more

Journal

In the finance world, journal is short for journal entry.It is also short for The Wall Street Journal. Read more

Junior Accountant

A junior accountant is an entry-level accountant.An accountant is a trained, knowledgeable person who performs functions necessary to compile, inspect, interpret, and/or report financial statements and tax returns that comply with governmental and regulatory authority requirements. Read more

Just in Time (JIT)

In the manufacturing and logistics world, just in time (JIT) inventory management helps companies reduce storage costs and improve quality.Originated by the Toyota Motor Company in 1938, the just in time concept helps companies reduce waste and align all production processes.  Does just in time management work for every company? Read more

Lady Godiva Accounting Principles (LGAP)

Lady Godiva accounting principles (LGAP) are informal, unofficial accounting principles under which companies make disclosures beyond what generally accepted accounting principles (GAAP) require. Lady Godiva is a famous historical figure from the 11th century. Read more

Last Fiscal Year (LFY)

Last fiscal year (LFY) refers to a company's most recent completed fiscal year. A fiscal year is a company's 12-month accounting cycle. Read more

Last Twelve Months (LTM)

Last twelve months (LTM), also known as trailing twelve months (TTM), is the 12-month interval occurring before a given point in time.  For example, an analyst who is issuing a report on October 15, 2012, will report last twelve months (LTW) earnings as those from October 1, 2011, to September 30, 2012.  Analysts and policymakers frequently use the last twelve months to gauge economic performance and to analyze data from the past year.It is important not to confuse the last twelve months with the last fiscal year (LFY), which covers the organization's most recently-completed fiscal year. Read more

Last-In, First-Out (LIFO)

Last-in, first-out (LIFO) describes a method for accounting for inventories.Under this system, the last unit added to an inventory is the first to be recorded as sold. Read more

Liquid Asset

A liquid asset is cash or securities that can be converted to cash quickly. Let's assume Company XYZ has $1 million of cash on its balance sheet and $300,000 of marketable securities. Read more

Liquidation Value

Liquidation value refers to the value of a project or investment if it were to be sold or abandoned immediately. Also called abandonment value, the liquidation value of a project or investment is the immediate value in cash that would be generated from liquidating a project or selling an investment.  A project's liquidation value can be an important consideration for a company's capital budget. Read more

Loan Loss Reserves

Loan loss reserves (LLRs) are types of insurance and credit enhancement that help banks and lenders mitigate estimated losses on loans in the event of defaults or nonpayments.Should borrowers default on their loan, banks might use loan loss reserve funds to alleviate these losses.  How Often Are Loan Loss Reserves Calculated?  Loan loss reserves are revised quarterly. Read more

Loss Carryback

The term "loss carryback" is where a company retroactively chooses to apply the net operating loss in the current year to the previous profitable year(s) to obtain a tax refund for monies already remitted or incurred on the profits earned in those years. For example, if a company has a net operating loss in the current year of $2,000,000, it can carry that backward to the previous year to offset its net operating income of $2,000,000. Read more

Loss Carryforward

The term "loss carryforward" refers to an accounting practice whereby companies utilize their current year's net operating loss against future year's net operating profit to reduce the taxes owed in those future profitable years.Also called tax loss carryforward, this can be utilized by individuals, corporations, or funds. Read more

Margin

Margin can be defined in two main ways:  It is the ratio of profit divided by revenue.This financial ratio is used to determine a company’s profitability.  Money borrowed from a brokerage firm in order to leverage an investment. Read more

Mark-to-Management

Mark-to-management is an accounting practice that prices an asset based on what management estimates its potential value to be under normal market conditions.It is the opposite of mark-to-market. Read more

Mark-to-Market (MTM)

Mark-to-market (MTM) is an accounting method that records the value of an asset according to its current market price. For example, the stocks you hold in your brokerage account are marked-to-market every day. Read more

Mark-to-Market Losses

Mark-to-market losses are losses in an asset's value caused solely by a decline in market price. Mark-to-market losses appear when an asset is priced according to a mark-to-market (MTM) accounting method. Read more

Mark-to-Model

Mark-to-model is an accounting method where asset prices are assigned using the results of a financial model. The mark-to-model pricing method puts a value on assets based on the outcome of a financial model. Read more

Marketable Securities

Marketable securities are financial instruments that can be sold or converted into cash (at reasonable value) within one year.They are highly liquid investments that are generally issued by businesses to raise funds for operating expenses or expansion. Read more

Negative Assurance

A negative assurance is an auditor's written statement that an audit did not uncover any signs of fraud or violations of accounting rules. For example, let's assume that Company XYZ hires an auditor to audit its financial statements and internal controls for the year 2010. Read more

Negative Equity

Negative equity occurs when liabilities exceed the value of assets. For example, let's assume that Company XYZ has $20 million of total assets and $40 million of total liabilities. Read more

Negative Goodwill

Negative goodwill, also called a bargain-purchase amount, occurs when a company buys an asset for less than its fair market value.Negative goodwill is the opposite of goodwill. Read more

Net Advantage to Leasing (NAL)

Net Advantage to Leasing (NAL) refers to the money a company or individual saves from leasing an asset rather than buying it. Under a lease agreement, the user (the lessee) agrees to make periodic payments to the owner (the lessor) in exchange for the use of the asset. Read more

Net Assets

Net assets are what a company owns outright, minus what it owes.Put another way, net assets equal the company assets (economic resources) minus liabilities (what is owed to someone else). Read more

Net Book Value

Net book value is the net value of an asset carried on its balance sheet.  Net book value results from the accounting technique of depreciating or amortizing the value of an asset: a company gradually “uses up” or expenses the cost of a fixed asset over the asset’s useful life.It’s one of several ways to derive a valuation for the asset but it may not equal the market price of the fixed asset.  Net book value is an important metric to indicate a minimum/floor value of a company’s assets. Read more

Net Borrower

A net borrower (also called a "net debtor") is a company, person, country, or other entity that borrows more than it saves or lends.Borrowing can take the form of traditional bank lending, but it also might come in the form of Treasury debt, publicly traded bonds, or even seller financing (accounts payable). Read more

Net Cash Flow

Net cash flow is the difference between a company’s cash inflows and outflows within a given time period.A company has a positive cash flow when it has excess cash after paying for all operating costs and debt payments.  Net cash flow can be broken down into three components: While net cash flow and profit are often used interchangeably, they have different parameters for measuring performance in business. Read more

Net Current Asset Value Per Share (NCAVPS)

The net current asset value per share (NCAVPS) equals a company's current assets divided by its number of shares outstanding. The formula for NCAVPS is: NCAVPS = (Current Assets - Current Liabilities) / Shares Outstanding A current asset is cash or an asset that can be converted to cash within one year. Read more

Net Debt

Net debt is a company's total debt less cash on hand. The formula for net debt is: Net Debt = Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents For example, let's assume that Company XYZ has $10,000,000 in short-term debt, $4,000,000 in long-term debt, and $1,000,000 in cash and cash equivalents. Read more

Net Earnings

For businesses, the definition of net earnings is the amount of sales revenue left over after all operating expenses, interest, taxes, and preferred stock dividends (not common stock dividends) are deducted from a company's total revenue.  For individuals, this is the amount earned after deducting taxes (and other exemptions) from their gross income.  Net earnings is also synonymous with net income, net profit, and the bottom line.    What You Should Know About Net Earnings  Net earnings are not a measure of how much cash a company earned during a given period.This is because the income statement includes many non-cash expenses (such as depreciation and amortization).  Note: To learn about how much cash a company generates, you’ll likely need to examine the cash flow statement. Read more

Net Income

Net income is the amount of money that’s left after taxes and certain deductions are made from gross income.  Net income can also be called net profit, the bottom line, and net earnings.  Net Income for Businesses  Net income for a business represents the income remaining after subtracting the following from a company's total revenue:  All operating expenses  Cost of Goods Sold Interest Taxes  Preferred stock dividends (but not common stock dividends)  What Does Net Income Tell You About Businesses?For businesses, net income indicates how well a company is managing its profit (i.e., earnings and expenses). Read more

Net Income After Taxes (NIAT)

Net income after taxes (NIAT) is the number of sales dollars remaining after all operating expenses, interest, depreciation, taxes and preferred stock dividends have been deducted from a firm's total revenue.  Net income after taxes is also referred to as the bottom line, profit or net earnings.The formula for NIAT is as follows: Total Revenue -Total Expenses = Net Income After Taxes Net income after taxes is found on the last line of the income statement, which is why it's often referred to as the bottom line.  Let's look at a hypothetical income statement for Company XYZ: Income Statement for Company XYZ, Inc.for the year ended December 31, 2008 Total Revenue                        $100,000 Cost of Goods Sold               ($ 20,000)Gross Profit                             $ 80,000 Operating Expenses      Salaries               $10,000     Rent                    $10,000  Utilities                 $  5,000  Depreciation        $  5,000Total Operating Expenses    ($ 30,000) Interest Expense                   ($ 10,000) Taxes                                       ($ 10,000) NIAT                                         $ 30,000 By using the formula we can see that NIAT = $100,000 - $20,000 - $30,000, - $10,000 - $10,000 = $30,000 Net income after tax is one of the most closely followed numbers in finance, and it plays a large role in ratio analysis and financial statement analysis. Read more

Net Interest Income (NII)

Net interest income is the difference between interest received from assets and interest paid on liabilities.  The formula for net interest income is: Net Interest Income = Interest Received - Interest Paid Let's assume XYZ Bank earns $1,000,000 for the month on its mortgage loans, commercial loans, and personal loans.It also pays $975,000 in interest to its depositors for their CDs, checking accounts, and savings vehicles. Read more

Net Investment

Net investment is the measure of a company's investment in capital assets, such as the property, plants, software and equipment that it uses for operations. The formula for net investment is: Net Investment = Capital Expenditures – Depreciation (non-cash) In order to calculate the net investment of a company, you must first know the amount of capital expenditures and non-cash depreciation they have. Read more

Net Investment Income

Net investment income is what an investment company receives in capital gains, dividends and interest payments, less administrative fees.  The formula for net investment income is: Net Investment Income = Capital Gains + Dividends + Interest Income - Administrative Fees For example, let's assume Fund ABC is reporting its performance results for the year.It has invested in a portfolio of growth stocks, income stocks and corporate bonds. Read more

Net Loss

A company reports a net loss when its expenses exceed revenues during a specific period of time.A net loss is the opposite of net income or net profit, which is when a organization's revenue is greater than its expenses. Read more

Net Margin

Net margin measures how much profit (or net income) is earned as a percentage of overall revenue. Read more

Net Operating Loss (NOL)

A net operating loss (NOL) is a negative profit for tax purposes.It usually occurs when a company's tax deductions exceed its taxable income, making the company unprofitable. Read more

Net Operating Profit After Tax (NOPAT)

One key indicator of a business success is net operating profit after tax (NOPAT).Considered an “apples-to-apples” measure, NOPAT helps investors determine how well one company is performing versus another in the same industry, regardless of how much debt they use to buy and control assets.  Although it may appear to be an arbitrary measurement, every investor searching for a long-term opportunity should look at net operating profit after tax.  This comprehensive financial definition has compiled everything you want to know about NOPAT – and how it can help you become a smarter investor.  Simply put, net operating profit after tax measures a company’s financial performance without considering the tax savings of debt, since it looks at operating profits exclusive of interest. Read more

Net Operating Profit Less Adjusted Taxes (NOPLAT)

Net operating profit less adjusted taxes (NOPLAT) is a measure of profit that includes the costs and tax benefits of debt financing.put another way, NOPLAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes. Read more

Net Profit

Our simple definition of net profit walks you through calculating and analyzing this important financial term.  Read more

Net Receivables

Net receivables refers to the net amount of money remaining after deducting the provision for bad debt.It is primarily used in businesses that sell on credit. Read more

Non-Cash Item

A non-cash item is an entry on an income statement or cash flow statement correlating to expenses that are essentially just accounting entries rather than actual movements of cash. Depreciation and amortization are the two most common examples of noncash items. Read more

Non-Financial Asset

A non-financial asset bases its value on its tangible characteristics and properties. On a company’s balance sheet, several types of assets and liabilities will be listed.  Financial assets can include elements such as cash, stocks, and bonds. Read more

Non-Interest Income

In banking, non-interest income is revenue derived mostly from fees and other activities outside the core activity of lending. For example, let's say Bank XYZ charges customers $25 for bounced checks, $4 to use an out-of-network ATM, and $3 for a paper statement. Read more

Non-Operating Asset

A non-operating asset is an asset that generates income, but is unrelated to the core operations of the company. Also called a redundant asset, a non-operating asset usually generates some form of revenue or return for the owning company, but play no role in the company's operations. Read more

Notice to Creditors

The notice to creditors is a way to inform creditors of their opportunity to make claims against a bankrupt company, an estate or other entity. Let's say Company XYZ files for bankruptcy. Read more

Off Balance Sheet

Off balance sheet refers to items that are effectively assets or liabilities of a company but do not appear on a company's balance sheet. For example, let's assume that Company XYZ has a $4,000,000 line of credit with Bank ABC. Read more

Off-Balance-Sheet Financing

Off-balance-sheet financing is an accounting method whereby companies record certain assets or liabilities in a way that keeps them from appearing on the balance sheet. For example, let's assume that Company XYZ has a $4,000,000 line of credit with Bank ABC. Read more

Operating Cash Flow (OCF)

Operating cash flow (OCF) is a measure of the cash generated or used by a company in a given period solely related to core operations.OCF is not the same as net income, which includes transactions that did not involve actual transfers of money (depreciation is a common example of a noncash expense that is part of net income but not OCF). Read more

Operating Cash Flow Demand (OCFD)

Operating cash flow demand (OCFD) is the present value of the minimum amount of cash a capital investment must generate over its life in order to meet the investor's minimum required return. Let's assume that Company XYZ wants to purchase a widget machine. Read more

Operating Cash Flow Margin

Operating cash flow margin is cash from operating activities as a percentage of sales in a given period.  Operating cash flow margin is generally calculated using the following formula: Operating Cash Flow Margin = Cash Flow from Operating Activities / Sales  The operating cash flow margin is not the same as net income margin, which includes transactions that did not involve actual transfers of money (depreciation is common example of a noncash expense that is included in net income calculations but not in operating cash flow).The operating cash flow margin is also not the same as EBITDA or free cash flow. Read more

Operating Earnings

Operating earnings is a measure of profitability that tells investors how much of revenue will eventually become profit for a company.The formula for calculating operating earnings is: Operating Earnings = revenue - cost of goods sold, labor and other day-to-day expenses incurred in the normal course of business It is important to understand what expenses are included and excluded when calculating operating earnings. Read more

Operating Expense

An operating expense is a day-to-day expense incurred in the normal course of business.These expenses appear on the income statement. Read more

Operating Income

Need to calculate operating income? Want to know if it's the same as EBIT? Our expert financial content walks you through the necessary points. Read more

Operating Income Before Depreciation and Amortization (OIBDA)

Operating income before depreciation and amortization (OIBDA) is a measure of the income generated or used by a company in a given period exclusive of the company's capital spending decisions and its tax structure. It is important to note that OIBDA is not the same as EBITDA. Read more

Operating Leverage

Operating leverage is the ratio of a company's fixed costs to its variable costs.  Here is the formula for operating leverage: Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost To see how operating leverage works, let's assume Company XYZ sold 1,000,000 widgets for $12 each.It has $10,000,000 of fixed costs (equipment, salaried personnel, etc.). Read more

Operating Margin

Operating margin is a financial metric used to measure the profitability of a business.The operating margin shows what percentage of revenue is left over after paying for costs of goods sold and operating expenses (but before interest and taxes are deducted). Read more

Operating Profit

With this comprehensive operating profit definition, you’ll learn how investors analyze and calculate operating profit.  Read more

Operating Revenue

Operating revenue is the sales associated with a company's core, day-to-day operations. Let's assume that Company XYZ sells $1,000,000 of widgets -- its main business -- this year. Read more

Pass Through Income

Pass through income is sent from a pass-through entity to its owners.These special business structures help to reduce the effects of double taxation.  Because income isn’t taxed at the corporate level, tax liability is passed on to the owners.  Company XYZ is a pass-through entity. Read more

Pass-Through Entity

A pass-through entity (also known as flow-through entity) is a business structure in which business income is treated as personal income of the owners.It is used to avoid double taxation, when business income is subject to corporate tax and then to the owner’s personal income. Read more

Per Share Basis

Per share basis is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership.In many cases, cash flow per share is one of the most important measures. Read more

Pre-Tax Operating Income

Pre-tax operating income is a company's operating income before taxes.The formula for pre-tax operating income is: Pre-Tax Operating Income = Gross Revenue - Operating Expenses – Depreciation Let's assume Company XYZ reported the following information for the fiscal year: Using the formula and the information above, we can calculate that Company XYZ's pre-tax operating income was: $1,000,000 - $500,000 - $300,000 - $100,000 = $100,000 Pre-tax operating income is a measure of a company's operating efficiency because it only takes into account expenses that are directly related to ongoing business operations. Read more

Present Value (PV)

Present value (PV) measures the current value of an amount of money – or a stream of cash flows – that is expected in the future.This value will differ from the cash flows’ nominal value, since time itself affects value. Read more

Profit

Discover more about profit in business, from a straightforward definition to simple profit examples.  Read more

Profit & Loss Statement (P&L)

Profit and loss (P&L) statements are one of the three financial statements used to assess a company’s performance and financial position.The two others are the balance sheet and the cash flow statement. Read more

Profit Before Tax

Profit before tax measures a company's operating and non-operating profits before taxes are considered.It is the same as earnings before taxes. Read more

Profit Margin

Profit margin usually refers to the percentage of revenue remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted.The formula is: (Total Sales - Total Expenses)/Total Sales = Profit Margin Note that preferred stock dividends are typically included in the calculation, but common stock dividends are not. Read more

Qualified Opinion

A qualified opinion is a cautionary written notice from an auditor stating that a company has not complied with generally accepted accounting principles (GAAP).  There are two main reasons an auditor may write a qualified opinion on a company's audit report: 1.) Deviations from GAAP: The audited company did not accurately follow the GAAP accounting principles on one or more items in their financial report.2.) Limitation of scope: Not all financial statement information was available to the auditor. Read more

Qualified Production Activities Income (QPAI)

Qualified production activities income (QPAI) is certain income related to manufacturing that qualifies to be taxed at a lower rate. For example, let's assume that Company XYZ generated $10,000,000 in widget sales last year. Read more

Quarter Over Quarter

Quarter over quarter refers to the mathematical process of comparing one quarter of data to the previous quarter.In business, note that the start and end dates of quarters can vary, though they are generally three months, or 90 days, long. Read more

Quarter to Date (QTD)

Quarter to date refers to the three-month period extending from the beginning of the quarter to the end of the quarter.In the finance world, quarter 1 usually spans January 1-March 31; quarter 2 usually spans April 1-June 30; quarter 3 usually spans July 1-September 30; and quarter 4 usually spans October 1-December 31. Read more

Quarterly Report

A quarterly report - also referred to as a quarterly earnings report - is a set of financial statements containing information related to its performance. The report is intended for shareholders who own stock in the company. Read more

Quick Assets

Quick assets are defined as assets that can quickly be converted to cash.Most typically, quick assets include: cash, accounts receivable, marketable securities, and sometimes (not usually) inventory. Read more

Ramp Up

A ramp up is an increase in the amount of products or services a company sells, usually by expansion into new markets or geographic regions. Let's say John Doe opens a sandwich shop. Read more

Receivables

The term receivables is short for accounts receivable (A/R), which are amounts bought by customers for a company's goods and services. Company XYZ sells $1 million in widget parts to a widget manufacturer and gives that customer 60 days to pay for those parts. Read more

Receivables Turnover Ratio

The receivables turnover ratio is a company's sales made on credit as a percentage of average accounts receivable.The formula for receivables turnover ratio is: Receivables Turnover = Net Credit Sales/Average Accounts Receivable For example, let's assume that Company XYZ sells $10,000,000 of widget parts this year. Read more

Recurring Revenue

Recurring revenue is revenue that a company has reasonable assurance will occur at regular intervals in the future.  Let's assume Company XYZ sells a widget-cleaning service. Read more

Redundant Asset

A redundant asset is an asset that generates income, but is not linked to the fundamental operations of the company. Also known as a non-operating asset, a redundant asset usually generates some type of revenue or return for the owning company, but does not play a part in the company's operations. Read more

Retained Capital

Retained capital is the sum of a company's profits, after dividend payments, since the company's inception.It can also be called retained earnings, earned surplus, or accumulated earnings. Read more

Retained Earnings

Retained earnings are the sum of a company's profits, after dividend payments, since the company's inception.They are also called earned surplus, retained capital, or accumulated earnings. Read more

Return on Assets (ROA)

Return on assets (ROA) is a financial ratio that can help analyze the profitability of a company.ROA measures the amount of profit a company generates as a percentage relative to its total assets.  Put another way, ROA answers the question of how much money is made (net income) from what a company owns (assets). Read more

Return on Equity (ROE)

Return on equity (ROE) is a measurement of how effectively a business uses equity – or the money contributed by its stockholders and cumulative retained profits – to produce income.In other words, ROE indicates a company’s ability to turn equity capital into net profit.  You may also hear ROE referred to as “return on net assets.” A high ROE suggests that a company’s management team is more efficient when it comes to utilizing investment financing to grow their business (and is more likely to provide better returns to investors). Read more

Return on Net Assets (RONA)

Return on net assets is a metric which measures a company's financial performance with regard to fixed assets combined with working capital. Return on net assets (RONA) is calculated by dividing a company's net income in a given period by the total value of both its fixed assets and its working capital. Read more

Revenue Per Employee

Revenue per employee measures the average revenue generated by each employee of a company.  Revenue per employee is calculated by dividing a firm's revenue by its total number of workers (Revenue/Number of Employees).Let's take a closer look some sample figures from Company XYZ: 2005 Revenue:  $50,000,000 Employees:  312 By plugging the information provided above into the above formula, we can calculate the firm's revenue per employee as follows: $50,000,000/312 = $160,256.41 Therefore, every employee at Company XYZ contributed approximately $160,256 in revenue for 2005. Read more

Rolling EPS

The rolling EPS is a variation of the earnings per share (EPS) metric which measures a company's profitability. The rolling EPS is measured on the basis of a year and is calculated by adding a company's EPS from the two previous quarters to the projected EPS for the two upcoming quarters. Read more

Rounding Error

A rounding error is a mistake made when rounding a number up or down.  For example, most math books teach students to round numbers 5 through 9 up. Read more

Same-Store Sales

Same-store sales measures the increase in revenue over a particular period for the same set of stores in each period. For example, let's assume that Company XYZ is a restaurant company that has 45 restaurants. Read more

Scrap Value

Scrap value, also called salvage value, is the value of an asset after it has come to the end of its useful life. Let's assume you buy a car for $20,000. Read more

SEC Form 10-Q

SEC Form 10-Q is a quarterly performance report that public companies must submit to the SEC. The 10-Q is just one of many forms a company that is publicly traded in the U.S. Read more

Senior Debt

Senior debt is debt that is first to be repaid, ahead of all other lenders or creditors, in the event of a borrower’s bankruptcy. For example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders, for example. Read more

Shareholders Equity

Shareholders equity is a measure of how much of a company's net assets belong to the shareholders. Shareholders equity is found on the balance sheet. Read more

Solvency

Solvency is a company’s ability to pay its debts as they become due. Solvency measures a company's ability to meet its financial obligations. Read more

Statement of Income

The statement of income is one of the three primary financial statements used to assess a company’s performance and financial position at the end of an accounting period (the two others being the balance sheet and the cash flow statement).Specifically, it summarizes a company's revenues and expenses over the entire reporting period. Read more

Statement of Operations

Discover how operating statements are used to determine the health of a company.  Read more

Tangible Book Value Per Share (TBVPS)

Tangible book value per share (TBVPS) equals a company's net tangible assets divided by its number of shares outstanding.A tangible asset is anything that has commercial or exchange value and has a physical form. Read more

Tangible Common Equity (TCE)

Tangible common equity (TCE) is the common equity listed on the balance sheet minus preferred stock and intangible assets.  The formula for tangible common equity is: Tangible Common Equity = Common Equity - Preferred Stock - Intangible Assets Let's say Company XYZ has $40,000,000 of total assets and $25,000,000 of total liabilities.It has no preferred stock, but it does have a $3,000,000 line item for goodwill and $2,000,000 worth of trademarks.  First, we can calculate common equity by subtracting liabilities from assets: $40,000,000 - $25,000,000 = $15,000,000.  Then we can use the formula above to calculate Company XYZ's tangible common equity: TCE =  $15,000,000 - $0 - $5,000,000 = $10,000,000.  Goodwill is an accounting construct with no marketable value and trademarks cannot be easily separated from the company and sold piecemeal, so these two intangible assets are subtracted from common equity to calculate tangible common equity.  Few intangible assets have liquidation value. Read more

Tax Accounting

Tax accounting focuses on the preparation, analysis and presentation of tax returns and tax payments. For example, Company XYZ might use one accounting method for calculating depreciation when it reports financial results to investors, but tax laws may require it to use a different method for tax accounting purposes. Read more

Tax Clawback Agreement

In a tax clawback agreement, a company or organization agrees to repay government benefits via higher taxes at a later date. Company XYZ agrees to take $40 million from the federal government to prevent the company from going bankrupt. Read more

Tax Expense

Tax expense is the amount of tax owed in a given period.It appears on the income statement. Read more

Tax Loss Carryforward

A tax loss carryforward is a "negative profit" for tax purposes.It usually occurs when a company's expenses exceed revenues, making the company unprofitable. Read more

Tax Umbrella

A tax umbrella is a negative profit that reduces a company's tax liability.It usually occurs when a company's tax deductions exceed its taxable income (often because expenses exceeded revenues, making the company unprofitable). Read more

Tax-Exempt Commercial Paper

Tax-exempt commercial paper is short-term debt for which the interest payments are tax-exempt at the federal, state or local level. Universities are some of the most common issuers of tax-exempt commercial paper. Read more

Times Interest Earned

The times interest earned, also known as interest coverage ratio, is a measure of how well a company can meet its interest-payment obligations.The formula for times interest earned is: Earnings Before Interest and Taxes/ Interest Expense Here is some information about Company XYZ: Net Income    $350,000 Interest Expense    ($400,000) Taxes    ($50,000) Using the formula and the information above, we can calculate that XYZ’s times interest earned is: This means that XYZ Company is able to meet its interest payments two times over. Read more

Top Line

The top line, also called gross sales, usually refers to a company's revenue before subtracting discounts and returns. Let's assume restaurant chain XYZ had $1,000,000 in sales for the year. Read more

Trailing Twelve Months (TTM)

Trailing twelve months (TTM), sometimes referred to as last twelve months (LTM), is the 12-month interval of a company's financial performance that occurs before a designated point in time.  TTM is a helpful statistic for reporting, comparing, and contrasting financial figures.For example, an analyst issuing a report on October 15, 2019 will report trailing twelve months (TTM) earnings as those from October 1, 2018 to September 30, 2019. Read more

Turnaround

A turnaround occurs when a company takes successful steps to correct a period of deteriorating financial performance. To turn a business' financial results around, companies often obtain special financing for revitalization projects or hire managers with a proven track record of improving the financial results at struggling companies. Read more

Unaudited Opinion

An unaudited opinion is a written statement describing an auditor’s expectations about the outcome of its audit before the audit occurs Before an audit occurs, the auditor may issue an unaudited opinion, expressing what it expects to find and its view of the overall condition of the company's books and records.An audit is an independent, unbiased and qualified evaluation of the accuracy and completeness of a company’s financial statements and practices, as well as an evaluation of a company’s compliance with Generally Accepted Accounting Standards (GAAP). Read more

Unqualified Opinion

An unqualified opinion is a written notice from an auditor stating that a company has complied with generally accepted accounting principles (GAAP). For example, let’s assume that Company XYZ is a publicly traded company. Read more

Unrelated Business Taxable Income (UBTI)

Unrelated business taxable income (UBTI) is the tax placed on the income derived from unrelated business activities of an otherwise tax-exempt entity. For example, if an investor uses his Individual Retirement Account (IRA) open a bakery, this is a business clearly not related to the primary purpose of an IRA. Read more

Unsecured Note

In the finance world, an unsecured note is corporate debt that does not have any collateral attached.Unsecured notes are not the same as debentures, which are also unsecured corporate debt (but debentures usually have insurance policies that pay out when the borrower defaults). Read more

Useful Life

A useful life is the number of years in which an asset can reliably produce benefits. Let's assume you buy a car for $20,000. Read more

Variability

Variability is the degree to which a data series deviates from its mean (or in the accounting world, how much a budgeted value differs from an actual value). For example, let's say Company XYZ stock has the following prices: The average of these prices is $21.33. Read more

Variable Cost

Variable costs are the direct costs that a company incurs when producing goods or services.  These costs are directly proportional to the quantity of goods or services produced.As a company’s production output increases, the variable costs increase. Read more

Variance

Variance is a statistical measure of how much a set of observations differ from each other.In accounting and financial analysis, variance also refers to how much an actual expense deviates from the budgeted or forecast amount. Read more

Voodoo Accounting

Voodoo accounting refers to any accounting practices that artificially inflate the profits reported on a company's financial statements. Voodoo accounting comprises a wide range of unethical and unprofessional methods for making a company's profits appear larger than they really are. Read more

Wage Expense

Wage expense is the total compensation a company pays its employees during a particular accounting period. The compensation a company pays its employees is treated as an expense on its income statement. Read more

Window Dressing

Window dressing is a term that describes the act of making a company's performance, particularly its financial statements, look attractive. Let's assume Company XYZ wants to look attractive to potential acquirers. Read more

Working Capital

Working capital is money that’s available to a company for its day-to-day operations.Simply put, working capital indicates a company's operating liquidity and efficiency.  A company's working capital reflects a host of company activities, including cash, inventory, accounts receivable, accounts payable, and the portion of debt due within one year (as well as any other short-term accounts). This can extend to inventory management, debt management, revenue collection, and payments to suppliers. Read more

Working Ratio

A company's working ratio measures its ability to cover its annual expenses. A company's working ratio indicates whether or not it is capable of at least breaking even by dividing its annual expenses by its annual revenues as shown: Working Ratio = Yearly Expenses – (Debt + Depreciation) / Yearly Gross Revenue A company with a ratio of 1 or less is capable of covering its expenses. Read more

Write-Down

A write-down is the accounting term used to describe a reduction in the book value of an asset due to economic or fundamental changes in the asset.A write-down is the opposite of a write-up. Read more

Year to Date (YTD)

Year to date (YTD) refers to the period extending from the beginning of the year to the present.In business, note that the beginning of the year is not always January 1; many companies have fiscal years beginning at other times. Read more

Year-End Bonus

A year-end bonus is extra money given to an employee, typically as a reward for helping the company achieve financial goals. Let's say Company XYZ's goal this year was to earn 5 cents per share. Read more

Z-Score

The Z-score is a financial statistic that measures the probability of bankruptcy.  The Z-score is used to predict the likelihood that a company will go bankrupt.A company's Z-score is calculated based on basic indicators found on its financial statements (e.g. Read more

Zero Balance Account

A zero-balance account, sometimes called a "ZBA," is a business-oriented bank account that usually has a balance of $0. Let's say restaurant company XYZ keeps its cash in a checking account. Read more