Financial Statement Analysis
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 perfor...
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, ...
The Form 13-F must be filed by institutional investors who exercise discretion over at least $100 million in investments. Data reported on this form include the names of investment managers, the nam...
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 ...
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...
The Accelerated Cost Recovery System (ACRS) is a depreciation method that assigns assets periods of cost recovery based on specific IRS criteria. Since 1986, the Modified Accelerated Cost Recovery Sy...
Accelerated depreciation is a depreciation method whereby an asset loses book value at a faster rate than the traditional straight-line method. Generally, this method allows greater deductions in the...
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 wor...
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...
Accounting is the process of systematically recording, measuring, and communicating information about financial transactions. It’s a system of providing quantitative information about a business or...
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 cons...
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 simpl...
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. She is paying ...
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. Financia...
Accounting research bulletins (ARBs) are publications from the Accounting Principles Board of the American Institute of Chartered Public Accountants. ARBs recommend accounting procedures. The oldest...
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...
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...
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 tha...
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 co...
To be accretive is to increase earnings per share. This term is most often used in the context of acquisitions. Let's assume Company XYZ has EPS of 25 cents this year. Next year, it acquires Company...
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 recognize...
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. Company XYZ must insure one of its buildings. Th...
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.   Company XYZ must ...
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...
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. Companies maintain accounts re...
Accrued market discount refers to the steady increase in value of a discounted bond from the time of purchase until maturity. The accrued market discount is a discount bond's increase in value resul...
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. The MegaWidget depreciates by $1...
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. Let's lo...
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 exces...
Activity based management (ABM) is an administrative method which examines how a company incurs costs from the standpoint of its activities rather than its final products. Companies have ordinarily ...
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...
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 indep...
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 - Operatin...
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 c...
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 ...
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 co...
The Altman Z-Score (named after Edward Altman, the New York University professor who devised it) is a statistical tool used to measure the likelihood that a company will go bankrupt. Though Altman d...
Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time. Let's ...
An analyst gathers and interprets data about securities, companies, corporate strategies, economies or financial markets. Analysts are sometimes called financial analysts, securities analysts, equity...
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 ...
An asset is 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 I...
In the tax world, an audit refers to the review of a taxpayer's tax return for accuracy.   In the accounting world, an audit is the examination and verification of a company's financial statements a...
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. a business purchase), each documented step taken makes up...
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 ...
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. Store ABC forgets to pay for its Oc...
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...
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.  Com...
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 ...
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 ye...
The meaning of book value varies, depending on the context. When referring to assets, the term book value means the original cost of an asset minus accumulated depreciation. However, when referring t...
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...
The 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 ...
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 t...
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 usefu...
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. The formula for market capitalizat...
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 c...
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 X...
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...
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. A cash budget is a planning tool used by...
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 ...
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 + Amortizatio...
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, ...
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 break...
Cash flow from operating activities measures the cash-generating abilities of a company's core operations (rather than its ability to raise capital or buy assets).  Put another way, cash flow from o...
Cash flow per share represents the portion of a company's cash flow allocated to each share of common stock. Cash flow per share can be calculated by dividing cash flow earned in a given reporting p...
A cash flow statement is the financial statement that measures the cash generated or used by a company in a given period. A cash flow statement typically breaks out a company's cash sources and uses...
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 Unif...
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-...
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 Comp...
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: ...
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 compa...
Consolidated financial statements are the combined financial statements of a company and all of its subsidiaries, divisions, or suborganizations. Let's assume Company XYZ is a holding company that o...
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 contri...
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 m...
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. For goods, COGS is primarily composed ...
Cost per unit is a measure of a company's cost to build or create one unit of product. For example, let's assume it costs Company XYZ $10,000 to purchase 5,000 widgets that it will resell in its ret...
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...
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 s...
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 ...
Days working capital is the ratio of working capital to sales. The formula is: Days Working Capital = (Average Working Capital x 365)/Annual Sales Working capital is money available to a company fo...
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. Let's look at a ...
Deferred revenue refers to payments received in advance for services which have not yet been performed or goods which have not yet been delivered. These revenues are classified on the company's balan...
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 account...
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 f...
Depreciated cost is the cost of an asset minus its accumulated depreciation. Another term for this concept is net book value. The formula for depreciated cost is: Depreciated Cost = Original Asset Pr...
Depreciation is an accounting method that measures the reduction in an asset’s value over the course of its useful life. It also represents how much of an asset’s value is depleted due to usage, ...
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 Outstan...
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. Let's lo...
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 ...
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. As such, it must file a 10-Q every quarte...
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 withou...
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 f...
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 o...
Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance. Essentially, it's a way to evaluate a company's performance without having to ...
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. Simplifying things a bit, revenue minus expense...
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 ...
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 calcul...
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 - T...
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 ...
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...
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 + Depreciat...
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 performanc...
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 i...
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, depreciati...
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 conc...
Economic value added (EVA) is an internal management performance measure that compares net operating profit to total cost of capital. Stern Stewart & Co. is credited with devising this trademarke...
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. Subscribers...
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 Commiss...
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 pur...
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, Depreciati...
  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 p...
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 + Tot...
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....
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 be...
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 for...
A financial analyst gathers and interprets data about securities, companies, corporate strategies, economies, or financial markets. Financial analysts are sometimes called securities analysts, equity...
Financial engineering is the quantitative, technical development of financial strategies and products. Financial engineers design, create and implement new financial instruments, models and processe...
First in, first out (FIFO) is an accounting method for inventory valuation that assumes that goods are sold or used in the same chronological order in which they are acquired. The accounting method...
A fiscal quarter is a consecutive three-month period within a company’s fiscal year. These calendar divisions are used by publicly-traded companies to schedule the release of financial reports and ...
A fiscal year is an accounting period of 365(6) days that does not necessarily correspond to the calendar year beginning on January 1st. The fiscal year is the established period of time when an orga...
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 ...
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 ...
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 ref...
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 g...
The forward price-to-earnings ratio (forward P/E) is a valuation method used to compare a company’s current share price to its expected per-share earnings. The market value per share is the curren...
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, redu...
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...
A full-service broker executes trades for clients, but also provides research, advice, retirement planning and tax assistance. There are two general categories of brokers: discount and full-service....
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. The MegaWidget depreciates...
Fundamental analysis attempts to understand and predict the intrinsic value of stocks based on an in-depth analysis of various economic, financial, qualitative, and quantitative factors. Fundamental...
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...
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, ...
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 publ...
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 con...
Also known as work in process (WIP), goods in process are the component of a company's inventory that is partially completed.  Goods in process = (operating inventory goods in process + raw materia...
Goodwill is the excess of purchase price over the fair market value of a company's identifiable assets and liabilities.  Goodwill is created when one company acquires another for a price higher tha...
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. Go...
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 ta...
Gross profit – also referred to as gross income or sales profit – is the total sales of a company minus the total cost of goods (COGS) sold. Gross profit margin is an important indicator of a com...
A hard asset is a physical, or tangible, asset. It is the opposite of an intangible asset. Hard assets include financial instruments, property, deposit and savings accounts, and commodities (for exa...
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, sal...
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 ris...
Held-to-maturity securities refer to debt securities which an investor holds until maturity. When investors purchase debt securities such as bonds, they have two choices: to hold the security until ...
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. The equipment wou...
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. According to t...
The income statement is one of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow stateme...
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, b...
Anyone who has ever worked in retail has heard the term inventory. For businesses, inventory is not only how stores keep customers happy, but it’s also how they keep supply chains moving (and ensure...
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 f...
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. Comp...
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           ...
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. The cycle begins on the first of any month (not necessarily Ja...
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...
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. Let's assume you own the XYZ ...
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 th...
The term margin has two main definitions. The first refers to the ratio of profit to revenue. The second refers to money borrowed from a brokerage firm in order to leverage an investment. Let's ass...
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. M...
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...
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 m...
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 financ...
Market Value Added is the difference between the capital contributed to the company by bondholders and shareholders and the final market value of the product. The formula used to find market value ...
Market value of equity is the total market value of all of a company's outstanding shares. A company's market value of equity -- also known as market capitalization -- is the current market price of...
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 business...
In the finance world, the mosaic theory refers to a research approach whereby the analyst arrives at a conclusion by piecing together bits of publicly available information. For example, let's assum...
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...
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. Company XYZ has n...
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. For example, let's a...
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 p...
Net assets are what a company owns outright, minus what it owes. Net assets provide a rough guide for the value of company resources. Typically, the higher a company's net asset value, the higher the...
Net book value is the value at which a company carries an asset on its balance sheet. It is equal to the cost of the asset minus accumulated depreciation.  People often use the term net book value ...
Net cash flow refers to the difference between a company's cash inflows and outflows in a given period. In the strictest sense, net cash flow refers to the change in a company's cash balance as detai...
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 Liabilitie...
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 ...
Net earnings represent the amount of sales revenue left over after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a com...
For businesses, net income indicates how well a company is managing its profit (both earnings and expenses). For individuals, this number is defined more loosely: it can refer to your gross income ne...
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...
Net interest cost (NIC) is a way to compute the average annual interest expense for a bond issue.  The formula for net interest cost is: Net Interest Cost = (Total Interest Payments + Discount - P...
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 - Inte...
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 I...
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 I...
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 gr...
Net 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 tota...
A net operating loss (NOL) is a negative profit for tax purposes. It usually occurs when a company's tax deductions exceed its taxable, making the company unprofitable. Net operating losses can be u...
Net operating profit after tax (NOPAT) is a measure of profit that excludes the costs and tax benefits of debt financing. put another way, NOPAT is earnings before interest and taxes (EBIT) adjusted ...
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 (EBI...
Net Present Value of Growth Opportunities (NPVGO) is the simply the present value of additional cash flows associated with an acquisition, net of the purchase price of the acquisition. Essentially, t...
Net profit impacts the “take-home” profit of a company. It’s used to calculate net profit margin, which puts a value metric on a company. For this reason, net profit and net profit margin are u...
Net profit margin is a metric that indicates how well a company can transform its revenues into profits. Net profit margin is the percent of revenue remaining after all operating expenses, interest, ...
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. Net Receivables = (Total Amount Borrow...
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 ...
A non-financial asset has a value based on its tangible characteristics and properties. A company's balance sheet includes several types of assets and liabilities. Assets include financial assets, s...
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 r...
Obsolete inventory is inventory that is essentially useless and/or unsellable. For example, consider Company XYZ, a cheese manufacturer. Company XYZ makes a batch of 1,000 wheels of cheese that are ...
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 tha...
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 t...
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 Ear...
An operating expense is a day-to-day expense incurred in the normal course of business. These expenses appear on the income statement. Operating expenses are costs associated with running a business...
Operating income is the amount of revenue left after subtracting operating expenses and cost of goods sold (COGS). Operating income is a measure of profitability directly related to a company’s ope...
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...
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 ope...
Also called earnings before interest and taxes (EBIT), operating profit calculates the profits earned from a company’s core business after subtracting the cost of goods sold (COGS), operating costs...
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. It also sold $40,...
Ordinary income is not a capital gain, dividend or other income subject to special taxation.   In the United States, ordinary income is taxed progressively, meaning that there are a series of brac...
Pass-through income is sent from a pass-through entity to its owners. The income is not taxed at the corporate level -- it is only taxed at the individual owners' level. A pass-through entity is a sp...
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 ...
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 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 s...
Profit before tax measures a company's operating and non-operating profits before taxes are considered. It is the same as earnings before taxes. Simplifying things a bit, revenue minus expenses equa...
A profit warning is a public communication from a company that its earnings will fall below expectations. Profit warnings are part of the large, fluid world of earnings guidance, whereby the managem...
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 audit...
A quarterly report is a set of financial statements issued by a company every three months. Public companies in the United States file this report via the Securities and Exchange Commission (SEC) For...
Quick assets are assets that can be converted to cash quickly. Typically, they include cash, accounts receivable, marketable securities, and sometimes (not usually) inventory. For example, let's say...
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 Sa...
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. Its customers sign ...
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 typ...
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. Let's lo...
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. Let's as...
Return on assets (ROA) is a financial ratio that can help you analyze the profitability of a company. ROA measures the amount of profit a company generates as a percentage relative to its total asset...
Also referred to as “return on net assets”, return on equity (ROE) is a measurement of how effectively a business uses equity – or the money contributed by its stockholders and cumulative retai...
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 c...
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/N...
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 compa...
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. For example, the number 10.5693 would round up ...
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 r...
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. You believe the car could last for 15 years....
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. must file with the SEC....
A securities analyst gathers and interprets data about securities, companies, corporate strategies, economies or financial markets. Securities analysts are sometimes called financial analysts, 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. It has five primary components: Par Value of Sha...
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 b...
The statement of operations is one of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow ...
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 ...
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 = Commo...
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 r...
Tax expense is the amount of tax owed in a given period. It appears on the income statement. The formula for tax expense is: Tax Expense = Effective Tax Rate x Taxable Income For example, let's assu...
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 B...
The Tobin's Q ratio is a measure of firm assets in relation to a firm's market value. The formula for Tobin's Q is: Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm For example, le...
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 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 fin...
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. You believe the car could last for 15 years. After that, the car is prob...
A Venn diagram is an illustration of common characteristics. Named after John Venn, a Venn diagram is often little more than two or more overlapping circles (you can use other shapes, too). The plac...
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 unp...
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 statem...
Weighted average cost of capital (WACC) is the average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company...
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 poten...
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 cap...
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. A writ...
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 y...