4.0 Common Terminology Glossary
Combining Theory & Practice in Finance and Accounting – The Language of Business
Common Terminology Glossary
Definitions were obtained from the following resources: www.investopedia.com and www.financialmodelingguide.com
Term
Account
Accounting equation
Accounting period
Accounting rate of return
Accounting standards
Amortization
Definition
A record in a double entry system that is kept for each (or each class) of asset, liability, revenue and expense.
An expression of the equivalence, in total, of assets = liabilities + equity.
That time period, typically one year, to which financial statements are related.
A ratio sometimes used in investment appraisal but based on profits not cash flows.
Prescribed methods of accounting by the accounting standards or financial reporting standards regulation body in your
jurisdiction.
(that which has accrued, accumulated, grown) expenses which have been consumed or enjoyed but which have not been
paid for at the accounting date.
The convention that revenues and costs are matched with one the other and dealt with in the Profit and Loss (P&L)
Account of the period to which they relate irrespective of the period of receipt or payment.
That part of the original cost of a fixed asset which has been regarded as a depreciation expense in successive Profit and
Loss (P&L) Accounts: cost less accumulated depreciation = net book value.
A percentage of collateral that determines the loan amount that a lender will issue a company. For example, If a
lender's advance rate is 80%, and a company has an asset of $1,000,000 that it could use as security on a loan, the
lender would issue a loan of up to $800,000
Another word for depreciation: commonly used for depreciation of the capital cost of acquiring leasehold property.
Asset value
A term which expresses the money amount of assets less liabilities of a company attributable to one ordinary share.
Assets
Auditing
Resources of value owned by a business entity.
The independent examination of, and expression of an opinion on, the financial statements of an enterprise by an
appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation.
Availability
The difference between the amount of funds available to be drawn and the total amount drawn. Can also mean an
amount that is currently available but has been set aside for a specific use at a future point in time
Debts known to be irrecoverable and therefore treated as losses by inclusion in the Profit and Loss (P&L) Account as an
expense.
A financial statement showing the financial position of a business entity in terms of assets, liabilities and capital at a
specified date.
One one-hundredth of one percent, or .01%. For example, 1.5% is equivalent to 150 basis points
Accruals
Accruals convention
Accumulated depreciation
Advance Rate
Bad debts
Balance Sheet
Basis Point
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4.0 Common Terminology Glossary
Term
Benchmark
Book value
Borrowing Base
Budget
Business Enterprise Value (BEV)
Capital
Capital Budgeting
Definition
Target company’s most recent balance sheet
The amount at which an asset is carried on the accounting records and Balance Sheet. The usual book value for fixed
assets is cost less accumulated depreciation. Alternative words include written down value, net book value and carrying
value. Book value rarely if ever corresponds to saleable value.
The amount of money a lender will loan to a company based on the value of the collateral the company pledges. The
borrowing base is usually determined by a discount factor, or advance rate, multiplied by the value of the collateral
(typically accounts receivable and inventory). The result is the amount of money that is available to be loaned to the
company
A formal quantitative expression of management’s plans or expectations. Master budgets are the forecast or planned
Profit and Loss Account and Balance Sheet. Subsidiary budgets include those for sales, output, purchases, labor, cash
etc.
The sum of the fair values of equity and debt in a company
An imprecise term meaning the whole quantity of assets less liabilities owned by a person or a business.
Analysis of potential projects to undertake including long-term decisions involving large expenditures
Capital Expenditures ("CAPEX")
Funds used by a company to acquire, maintain or upgrade physical assets such as property, industrial buildings or
equipment. CAPEX can include items such as roof repairs or even the construction of a new facility.
Capital Structure
The capital structure is how a company finances its overall operations and growth by using different sources of funds.
It can be comprised of a wide variety of debt, equity and/or hybrid securities.
An income approach method whereby economic benefits for a representative single period are converted to value
through division by a capitalization rate; the reciprocal of a valuation pricing multiple
Capital Asset Pricing Model - used to measure a rate of return for equity, i.e. "cost of equity". Developed in the context
of portfolio theory as a means of measuring the risk that an individual stock contributes to a well-diversified portfolio
Capitalization Rate
CAPM
Cash
Cash flow statement
Strictly coins and notes but used also to mean all forms of ready money including bank balances.
A formal financial statement showing a summary of cash inflows and outflows under certain required headings.
Collateral
Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised
loan payments, the lender can seize and liquidate the collateral to recover its losses.
A stock or any other security representing an ownership interest; a balance sheet item representing the funds
contributed by the owners, plus retained earnings
The U.S equivalent of ordinary shares.
Convention that the quality of accounting information enables users to identify similarities in and differences
between two sets of economic phenomena
Common Equity
Common stock
Comparability
Conservatism
Consistency
(also known as prudence) the convention whereby revenue and profits are not anticipated, but provision is made for all
known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate.
Essentially – future profit, wait until it happens – future loss, count it
Convention that there is consistency of accounting treatment of like items within each year and from year to year.
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4.0 Common Terminology Glossary
Term
Consolidation
Control Premium
Creditors
Current assets
Current liabilities
Current Yield
Cut-off
DCF
Definition
The aggregation of the financial statements of the separate companies of a group as if they were a single entity.
The additional consideration that an investor would pay over a marketable minority equity value in order to own a
controlling interest in the common stock of a company; the amount paid either over the company's per-share value or
business enterprise value that accounts for the ownership and rights associated with a controlling interest in a
corporation
Those persons, firms or organizations to whom the enterprise owes money.
Cash + those assets (stock, debtors, prepayments, bank accounts) which the management intend to convert into cash or
consume in the normal course of business within one year or within the operating cycle.
Debts or obligations that will be paid within one year of the accounting date. Another term used to describe the same is
Creditors: amount falling due within one year.
A measure that compares the annual income of an investment to the market price to determine the return an investor
would expect if they purchased the investment and held it for one year. For a bond, the current yield is calculated as
annual cash inflows divided by the market price of the bond
The difficulties encountered by accountants in ensuring all items of income and expense are correctly ascribed to the
right annual profit statement.
Discounted Cash Flow - An income approach that converts future cash flows to a single present amount (discounted).
The measurement is based on the value indicated by current market expectations about those future amounts
Debt
An amount of money borrowed by one party from another; in business, used to finance large purchases or investments
Depreciation
A measure of the wearing out, consumption or other loss of value whether arising from use, passage of time or
obsolescence through technology and market changes. Depreciation should be allocated to accounting period so as
charge a fair proportion to each accounting period during the expected useful life of the asset.
A security whose price is dependent upon or derived from one or more underlying assets; not a part of a company's
capital structure
Those costs comprising direct materials, direct labor and direct expenses which can be traced directly to specific jobs,
products or services.
Operations of the reporting entity that are sold or terminated in a period. Turnover and results must be separately
disclosed.
A rate of return used to convert a future monetary sum into present value; a forward looking rate representing an
adequate return for the projected period; needs to consider time value of money, inflation and the risk inherent in
ownership of the asset being valued
A distribution of earnings to its shareholders by a company.
Another word for profits, particularly for company profits.
An investor ratio, calculated as after tax profits from ordinary activities / number of shares.
Derivatives
Direct costs
Discontinued operations
Discount Rate
Dividend
Earnings
Earnings per share
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4.0 Common Terminology Glossary
Term
Earn-Out
EBITDA
Enterprise Value
Equity
Exceptional items
Expense
Extraordinary items
Fair Value
Financial statements
Fixed assets
Fixed cost
Free Cash Flow (FCF)
FY
Going concern
Goodwill
Gordon Growth
Gross
Gross margin
Definition
Contractual provision in the purchase and sale of a business that requires the buyer to pay additional money subsequent
to the close of the transaction if the target meets certain, pre-determined (usually sales) goals
Earnings before Interest, Taxes, Depreciation, and Amortization - an earnings metric that eliminates the effects of
financing and accounting decisions for debt/equity holders of a company, i.e. "for BEV"
The overall value of a company. Can be measured by adding the value of a company's equity to its debt, then
subtracting its cash balances.
The ordinary shares or risk capital of an enterprise.
Material items which derive from events or transactions that fall within the ordinary activities of the reporting entity
and which need to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair
view. Examples are profits or losses on termination of an operation, costs of a fundamental reorganization and profits
and losses on disposal of fixed assets.
A cost which will be in the Profit and Loss (P&L) Account of a year.
Material items possessing a high degree of abnormality which arise from events or transactions that fall outside the
ordinary activities of the reporting entity and which are not expected to recur. They should be disclosed but are very
rare indeed.
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date; seeks to simulate buyer/seller negotiated transaction
Balance Sheets, Profit and Loss Account, Income and Expenditure Accounts, Cash Flow Statements and other
documents which formally convey information of a financial nature to interested parties concerning an enterprise. In
companies, the financial statements are subject to audit opinion.
Business assets which have a useful life extending over more than one year. Examples are land and buildings, plant and
machinery, vehicles.
A cost which in the short term, remains the same at different levels of activity. An example is rent.
Actual cash available to investors after taxes less money required to maintain capital expenditures and excluding any
non-cash items (working capital, depreciation and amortization)
Fiscal Year; a measure of a company's annual accounting period, could be different than the calendar year
The accounting convention which assumes that the enterprise will continue in operational existence for the foreseeable
future. This means in particular that the Profit and Loss (P&L) Account and Balance Sheet (BS) assume no intention or
necessity to liquidate or curtail significantly the scale of operation.
An intangible asset which appears on the Balance Sheet of some businesses. It is valued at (or below) the difference
between the price paid for a whole business and the fair value of the net assets acquired.
A terminal value calculation in which the normalized economic income for the period immediately before the effective
capitalization date is considered a reasonable level from which to project sustainable growth
Usually means before or without deductions. For example Gross Salary or Gross Profit.
(or gross profit ratio), gross profit expressed as a percentage of sales.
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4.0 Common Terminology Glossary
Term
Intangible assets
Definition
Sales revenue less cost of sales but before deduction of overhead expenses. In a manufacturing company it is sales
revenue less cost of sales but before deduction of non-manufacturing overheads.
The accounting convention whereby goods, resources and services are recorded at cost. Cost is defined as the exchange
or transaction price. Under this Convention, realizable values are generally ignored. Inflation is also ignored. The
almost universal adoption of this convention makes accounting harder to understand and lessens the credibility of
financial statements.
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so
that company accounts are understandable and comparable across international boundaries.
The act of compensating a party to a dispute for caused damages
Assets of a company that a lender will not count as collateral for a loan. Assets are treated as ineligible because they
may be deemed to hard to collect or illiquid. Examples include obsolete inventory and accounts receivable past 90
days.
Assets which have long term value but no physical identity. Examples are goodwill, patents, trade marks and brands.
Inventory
Investment Value
Letter of Credit (LC)
A detailed list of things. Used by accountants as another word for stock.
The value to a particular investor based on individual investment requirements and expectations
An issuer provides a written commitment (LC) supporting the payment owed by a debtor to a separate creditor
LIBOR
The London Interbank Offering Rate, or the average interest rate that leading banks in London are charged when
borrowing from other banks. LIBOR rates float and are the basis for pricing of many types of commercial loans with
floating interest rates (for instance “LIBOR plus 3%”)
The ease with which funds can be raised by the sale of assets.
Ratios which purport to indicate the liquidity of a business. They include the current ratio and the acid test ratio.
Gross profit
Historical cost
IFRS
Indemnification
Ineligibles
Liquidity
Liquidity ratios
Loss contingency
LTM
Matching convention
Materiality
MD&A
Net
Probability that future event(s) will confirm loss
Latest Twelve Months, aka Trailing Twelve Months
The idea that revenues and costs are accrued, matched with one another as far as possible so far as their relationship can
be established or justifiably assumed, and dealt with in the Profit and Loss (P&L) Account of the period in which they
relate. An example is the matching of sales of a product with the development costs of that product. The appropriate
periods would be when the sales occur.
For accounting purposes this is an amount that would influence a reasonable user of financial statements in making a
judgment
Management Discussion and Analysis or MD&A is an integrated part of a company's annual financial statements. The
purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has
performed in the past, its financial condition, and its future prospects. In so doing, the MD&A attempt to provide
investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in
an entity.
Usually means after deductions. For example net current assets current assets less current liabilities and net cash flow
means cash inflows less cash outflows. Contrast gross.
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4.0 Common Terminology Glossary
Term
Net Assets
Net book value
Net Income
Net present value (NPV)
Notice of Objections
Objectivity
Options
Pari Passu
Partnership shares
Definition
Total assets less total liabilities
The valuation on the Balance Sheet of an asset. Also known as the carrying value or written down value.
Company profit, earnings, bottom line - a company's total earnings; found on income statement; earnings measure for
equity holders only
Considers the time value of money and discounts the expected future cash inflows, net of the outflows, of the project
to today’s value at an assumed interest rate.
A written notification of items the Party does not agree with on the Closing Statement
The convention of using reliable and verifiable facts (e.g. the input cost of an asset) rather than estimates of ‘value’
even if the latter is more realistic.
A contract which gives the owner the right, but not the obligation, to buy or sell an underlying asset or instrument at a
specified strike price on or before a specified date; not a part of a company's capital structure
Latin phrase meaning "equal footing". In leveraged finance, it refers to different loans that share equal rights of
payment and seniority.
Structure in which multiple partners, or general partners together control the business. Partnerships are not taxed at the
entity level and profits are passed to the partners and taxed at the individual level
Performance Period
Specified period of time after closing during which company's performance is measured for Earn-Out purposes
PIK
Preferred stock
Paid in kind interest, or interest that is accumulated rather than paid in cash
Preferred returns usually in the form of scheduled or guaranteed dividend payments. An individual/entity
owning preferred stock typically has a non-controlling interest.
Expenditure already made on goods or services but where the benefit will be felt after the Balance Sheet (BS) date.
Examples are rent or rates or insurances paid in advance.
Prepayments
Present Value (PV)
The current worth of a future sum of money or stream of cash flows given a specified a discount rate, such as a WACC
Pro forma
Profit and Loss (P&L) Account
Profit Margin
Information about the continuing impact of a particular transaction by showing how it affected historical financial
data
A financial statement which measures and reports the profit earned over a period of time.
The ratio of net earnings to total revenue
Provision
A charge in the Profit and Loss (P&L) Account of a business for an expense which arose in the past but which
will only give rise to a payment in the future. To be a provision the amount payable must be uncertain as to
amount or as to payability or both. An example is possible damages awardable by a court in a future action over a
past incident (e.g. a libel).
Prudence (or conservatism)
Purchase Price Adjustment Mechanism
Realizable value
Realization
Relevant information
Reliable Information
Representations and Warranties
The convention whereby revenue and profits are not anticipated, but provision is made for all known liabilities
(expenses andoflosses)
whether
theeither
amount
of down
these is
known
with certainty
or upon
is a best
estimate.
future profit,
Modification
a purchase
price
up or
using
a previously
agreed
metric
by theEssentially
Parties
The amount that an asset can be sold for.
To sell an asset and hence turn it into cash.
Relevance requires information that has the capacity to make a difference in a decision
Reliability requires that the information should be accurate and true and fair.
Declarations from Parties about facts that exist when a contract is signed
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4.0 Common Terminology Glossary
Term
Retained profits
Definition
Expenditure already made on goods or services but where the benefit will be felt after the Balance Sheet (BS) date.
Examples are rent or rates or insurances paid in advance.
The current worth of a future sum of money or stream of cash flows given a specified a discount rate, such as a
WACC
A technical term indicating that a company has total assets which exceed in amount the sum of liabilities and share
capital. This excess arises from retained profits or from revaluations of assets.
Also known as retentions, the excess of profits over dividends.
Revenue
Amounts charged to customers for goods or services rendered.
Revolver
Secured debt
Terminal Value
Time value of money
A loan which the borrower is permitted to borrow, repay and re-borrow over and over again, up to a set amount or over
aDebt
set period
of time.
Revolvers
are has
useful
to cover
short-term
cashin
needs
awaiting
accounts
in which
something
of value
been
pledged
as collateral
casewhile
of default
(e.g.the
realcollection
estate or of
equipment)
Captures the value of cash flows beyond the discrete projection period
The concept that a dollar received today is worth more than a dollar received tomorrow because today’s dollar can
be invested so that we have more than one dollar tomorrow
Debt in which nothing is pledged as collateral in case of default. The two sources of repayment of unsecured debt
are cash flow or asset value. Unsecured loans are typically more expensive than secured loans.
Weighted Average Cost of Capital - a calculation of a firm's cost of capital derived by proportionately weighting the
cost of debt and equity; used as a discounting factor for enterprise value; i.e. "For BEV"
A right, without obligation, to buy equity at an agreed price
The cash required to conduct the day-to-day operations of a business. In accounting terms, it is calculated as the
Company's current assets minus its current liabilities
The return on an investment that one should expect from the time of origination to a specified call date, typically before
the maturity of the investment. It is common for investments, such as some bonds, to have several scheduled "call
dates" which are times when the issuer can redeem the bond (repay investors) prior to its maturity
Prepayments
Present Value (PV)
Reserves
Unsecured debt
WACC
Warrant
Working Capital
Yield to Call
Yield to Maturity
The return on an investment that one should expect from the time of origination to the maturity
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