GLOSSARY

Accelerated methods of depreciation Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.

Account With the accounting systems, a formal record of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense.

Accounting profit Income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense.

Accrual basis Method of accounting in which the effect of transactions on financial condition and income are recorded when they occur, not when they are settled in cash.

Accrued expenses (accrued liabilities) Liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting period—an example of an accrued expense is rent that has been incurred but not yet paid, resulting in a liability “rent payable.”

Accumulated benefit obligation Under U.S. GAAP, a measure used in estimating a defined-benefit pension plan’s liabilities, defined as “the actuarial present value of benefits (whether vested or nonvested) attributed by the pension benefit formula to employee service rendered before a specified date and based on employee service and compensation (if applicable) prior to that date.”

Accumulated depreciation An offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.

Activity ratios (asset utilization or operating efficiency ratios) Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.

Allowance for bad debts An offset to accounts receivable for the amount of accounts receivable that are estimated to be uncollectible.

Amortization The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.

Amortized cost The historical cost (initially recognized cost) of an asset adjusted for amortization and impairment.

Antidilutive With reference to a transaction or a security, one that would increase earnings per share (EPS) or result in EPS higher than the company’s basic EPS—antidilutive securities are not included in the calculation of diluted EPS.

Assets Resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

Available-for-sale investments Securities that a company does not intend to actively trade or (in the case of debt securities) hold to maturity.

Back-testing With reference to portfolio strategies, the application of a strategy’s portfolio selection rules to historical data to assess what would have been the strategy’s historical performance.

Balance sheet (statement of financial position or statement of financial condition) The financial statement that presents an entity’s current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a particular point in time (the date of the balance sheet).

Balance-sheet-based accruals ratio The difference between net operating assets at the end and the beginning of the period compared to the average net operating assets over the period.

Balance-sheet-based aggregate accruals The difference between net operating assets at the end and the beginning of the period.

Balance sheet ratios Financial ratios involving balance sheet items only.

Bargain acquisition When a company is acquired and the purchase price is less than the fair value of the net assets. The current treatment of the excess of fair value over the purchase price is different under IFRS and U.S. GAAP. The excess is never accounted for as negative goodwill.

Basic EPS Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.

Bottom-up analysis With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe, i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations.

Capital structure The mix of debt and equity that a company uses to finance its business; a company’s specific mixture of long-term financing.

Carrying amount The amount at which an asset or liability is valued according to accounting principles.

Cash In accounting contexts, cash on hand (e.g., petty cash and cash not yet deposited to the bank) and demand deposits held in banks and similar accounts that can be used in payment of obligations.

Cash basis Accounting method in which the only relevant transactions for the financial statements are those that involve cash.

Cash conversion cycle (net operating cycle) A financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to days of inventory on hand + days of sales outstanding − number of days of payables.

Cash equivalents Very liquid short-term investments, usually maturing in 90 days or less.

Cash flow from operations (cash flow from operating activities or operating cash flow) The net amount of cash provided from operating activities.

Cash-flow-statement-based accruals ratio The difference between reported net income on an accrual basis and the cash flows from operating and investing activities compared to the average net operating assets over the period.

Cash-flow-statement-based aggregate accruals The difference between reported net income on an accrual basis and the cash flows from operating and investing activities.

Cash ratio A liquidity ratio calculated as (cash + short-term marketable investments) divided by current liabilities.

Chart of accounts A list of accounts used in an entity’s accounting system.

Classified balance sheet A balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g., current and noncurrent).

Clean-surplus accounting The bottom-line income reflects all changes in shareholders’ equity arising from other than owner transactions. In the absence of owner transactions, the change in shareholders’ equity should equal net income. No adjustments such as translation adjustments bypass the income statement and go directly to shareholders equity.

Common-size analysis A tool used in financial statement analysis that involves expressing financial data in relation to a single financial statement item or base; an example is an income statement in which all items are expressed as a percent of revenue.

Completed contract A method of revenue recognition in which the company does not recognize any revenue until the contract is completed; used particularly in long-term construction contracts.

Comprehensive income The change in equity of a business enterprise during a period from nonowner sources; includes all changes in equity during a period except those resulting from investments by owners and distributions to owners; comprehensive income equals net income plus other comprehensive income.

Contra account An account that offsets another account.

Cost of goods sold For a given period, equal to beginning inventory minus ending inventory plus the cost of goods acquired or produced during the period.

Cost recovery method A method of revenue recognition in which is the seller does not report any profit until the cash amounts paid by the buyer—including principal and interest on any financing from the seller—are greater than all the seller’s costs for the merchandise sold.

Coupon rate The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.

Credit With respect to double-entry accounting, a credit records increases in liability, owners’ equity, and revenue accounts or decreases in asset accounts; with respect to borrowing, the willingness and ability of the borrower to make promised payments on the borrowing.

Credit analysis The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.

Credit risk The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment.

Cross-sectional analysis Analysis that involves comparisons across individuals in a group over a given time period or at a given point in time.

Current assets Assets that are expected to be consumed or converted into cash in the near future, typically one year or less.

Current cost With reference to assets, the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today; with reference to liabilities, the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.

Current exchange rate For accounting purposes, the spot exchange rate on the balance sheet date.

Current liabilities Those liabilities that are expected to be settled in the near future, typically one year or less.

Current rate method Approach to translating foreign currency financial statements for consolidation in which all assets and liabilities are translated at the current exchange rate. The current rate method is the prevalent method of translation.

Current ratio A liquidity ratio calculated as current assets divided by current liabilities.

Days of inventory on hand (DOH) An activity ratio equal to the number of days in the period divided by inventory turnover over the period.

Debit With respect to double-entry accounting, a debit records increases of asset and expense accounts or decreases in liability and owners’ equity accounts.

Debt covenants Agreements between the company as borrower and its creditors.

Debt-to-assets ratio A solvency ratio calculated as total debt divided by total assets.

Debt-to-capital ratio A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.

Debt-to-equity ratio A solvency ratio calculated as total debt divided by total shareholders’ equity.

Deductible temporary differences Temporary differences that result in a reduction of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.

Defensive interval ratio A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calculated as (cash + short-term marketable investments + receivables) divided by daily cash expenditures.

Deferred income (also deferred revenue and unearned revenue) A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.

Deferred tax assets A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than accounting profit and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.

Deferred tax liabilities A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit and income tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.

Defined-benefit pension plans Plan in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk of the plan assets.

Defined-contribution pension plans Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets.

Depreciation The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.

Derivative A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or exchange rate).

Diluted EPS The EPS that would result if all dilutive securities were converted into common shares.

Diluted shares The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options) were exercised.

Diminishing balance method (declining balance method) An accelerated depreciation method, that is, one that allocates a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.

Direct financing lease A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) equals the carrying value of the leased asset. The revenues earned by the lessor are financing in nature.

Direct format (direct method) With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements.

Direct write-off method An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.

Dirty-surplus accounting Accounting in which some income items are reported as part of stockholders’ equity rather than as gains and losses on the income statement; certain items of comprehensive income bypass the income statement and appear as direct adjustments to shareholders’ equity.

Dirty-surplus items Direct adjustments to shareholders’ equity that bypass the income statement.

Dividend payout ratio The ratio of cash dividends paid to earnings for a period.

Double declining balance depreciation An accelerated depreciation method that involves depreciating the asset at double the straight-line rate. This rate is multiplied by the book value of the asset at the beginning of the period (a declining balance) to calculate depreciation expense.

Double-entry accounting The accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep the basic accounting equation (assets = liabilities + owners’ equity) in balance.

Downstream A transaction between two affiliates, an investor company and an associate company such that the investor company records a profit on its income statement. An example is a sale of inventory by the investor company to the associate.

DuPont analysis An approach to decomposing return on investment, for example, return on equity, as the product of other financial ratios.

Earnings expectation management Attempts by management to encourage analysts to forecast a slightly lower number for expected earnings than the analysts would otherwise forecast.

Earnings game Management’s focus on reporting earnings that meet consensus estimates.

Earnings management activity Deliberate activity aimed at influencing reporting earnings numbers, often with the goal of placing management in a favorable light; the opportunistic use of accruals to manage earnings.

Earnings per share Earnings per common share of the corporation (net income − preferred dividends) divided by the weighted average number of common shares outstanding.

Effective interest rate The borrowing rate or market rate that a company incurs at the time of issuance of a bond.

Equity Assets less liabilities; the residual interest in the assets after subtracting the liabilities.

Exercise date The day that employees actually exercise the options and convert them to stock.

Expenses Outflows of economic resources or increases in liabilities that result in decreases in equity (other than decreases because of distributions to owners); reductions in net assets associated with the creation of revenues.

Exposure to foreign exchange risk The risk of a change in value of an asset or liability denominated in a foreign currency due to a change in exchange rates.

Face value (also principal, par value, stated value, or maturity value) The amount of cash payable by a company to the bondholders when the bonds mature.

Fair value The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

FIFO method The first in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the order in which they were placed in inventory.

Finance lease (capital lease) Essentially, the purchase of some asset by the buyer (lessee) that is directly financed by the seller (lessor).

Financial flexibility The ability to react and adapt to financial adversities and opportunities.

Financial leverage The extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income; also, short for the financial leverage ratio.

Financial leverage ratio A measure of financial leverage calculated as average total assets divided by average total equity.

Financial reporting quality The accuracy with which a company’s reported financials reflect its operating performance and their usefulness for forecasting future cash flows.

Financing activities Activities related to obtaining or repaying capital to be used in the business (e.g., equity and long-term debt).

Fixed charge coverage A solvency ratio measuring the number of times interest and lease payments are covered by operating income, calculated as (EBIT + lease payments) divided by (interest payments + lease payments).

Fixed costs Costs that stay the same within some range of activity.

Foreign currency transactions Transactions that are denominated in a currency other than a company’s functional currency.

Free cash flow The excess of operating cash flow over capital expenditures.

Functional currency The currency of the primary economic environment in which an entity operates.

Gains Asset inflows not directly related to the ordinary activities of the business.

Goodwill An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired.

Grant date The day that options are granted to employees; usually the date that compensation expense is measured if both the number of shares and option price are known.

Gross profit (gross margin) Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).

Gross profit margin A profitability ratio calculated as gross profit divided by revenue.

Grouping by function With reference to the presentation of expenses in an income statement, the grouping together of expenses serving the same function, for example, all items that are costs of goods sold.

Grouping by nature With reference to the presentation of expenses in an income statement, the grouping together of expenses by similar nature, for example, all depreciation expenses.

Growth investors With reference to equity investors, investors who seek to invest in high-earnings-growth companies.

Held-for-trading securities (trading securities) Debt or equity financial assets bought with the intention to sell them in the near term, usually less than three months; securities that a company intends to trade.

Held-to-maturity investments Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortization of discounts or premiums.

Historical cost In reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation; with reference to liabilities, the amount of proceeds received in exchange in issuing the liability.

Historical exchange rates For accounting purposes, the exchange rates that existed when the assets and liabilities were initially recorded.

Horizontal analysis Common-size analysis that involves comparing a specific financial statement with that statement in prior or future time periods; also, cross-sectional analysis of one company with another.

If-converted method A method for accounting for the effect of convertible securities on earnings per share (EPS) that specifies what EPS would have been if the convertible securities had been converted at the beginning of the period, taking account of the effects of conversion on net income and the weighted average number of shares outstanding.

Income Increases in economic benefits in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than increases resulting from contributions by owners).

Income statement (statement of operations or profit and loss statement) A financial statement that provides information about a company’s profitability over a stated period of time.

Income tax paid The actual amount paid for income taxes in the period; not a provision, but the actual cash outflow.

Income tax payable The income tax owed by the company on the basis of taxable income.

Indirect format (indirect method) With reference to cash flow statements, a format for the presentation of the statement that, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow.

Installment method (installment-sales method) With respect to revenue recognition, a method that specifies that the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.

Installment sales Sales in which proceeds are to be paid in installments over an extended period.

Intangible assets Assets lacking physical substance, such as patents and trademarks.

Interest coverage A solvency ratio calculated as EBIT divided by interest payments.

Inventories The unsold units of product on hand (sometimes referred to as inventory stock).

Inventory turnover An activity ratio calculated as cost of goods sold divided by average inventory.

Investing activities Activities that are associated with the acquisition and disposal of property, plant, and equipment; intangible assets; other long-term assets; and both long-term and short-term investments in the equity and debt (bonds and loans) issued by other companies.

Investment property Property used to earn rental income or capital appreciation (or both).

Lessee The party obtaining the use of an asset through a lease.

Lessor The owner of an asset that grants the right to use the asset to another party.

Liabilities Present obligations of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits; creditors’ claims on the resources of a company.

LIFO layer liquidation (LIFO liquidation) With respect to the application of the LIFO inventory method, the liquidation of old, relatively low-priced inventory; happens when the volume of sales rises above the volume of recent purchases so that some sales are made from relatively old, low-priced inventory.

LIFO method The last in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the reverse order the items were placed in inventory (i.e., inventory produced or acquired last are assumed to be sold first).

LIFO reserve The difference between inventory reported at FIFO and inventory reported as LIFO (FIFO inventory value less LIFO inventory value).

Liquidity With reference to a firm’s financial condition, the ability to meet short-term obligations.

Liquidity ratios Financial ratios measuring the company’s ability to meet its short-term obligations.

Local currency The currency of the country where a company is located.

Long-lived assets (or long-term assets) Assets that are expected to provide economic benefits over a future period of time, typically greater than one year.

Long-term contract A contract that spans a number of accounting periods.

Losses Asset outflows not directly related to the ordinary activities of the business.

Market-oriented investors With reference to equity investors, investors whose investment disciplines cannot be clearly categorized as value or growth.

Market rate of interest The rate demanded by purchasers of bonds, given the risks associated with future cash payment obligations of the particular bond issue.

Mark-to-market The revaluation of a financial asset or liability to its current market value or fair value.

Matching principle The accounting principle that expenses should be recognized when the associated revenue is recognized.

Monetary assets and liabilities Assets and liabilities with value equal to the amount of currency contracted for, a fixed amount of currency. Examples are cash, accounts receivable, mortgages receivable, accounts payable, bonds payable, and mortgages payable. Inventory is not a monetary asset. Most liabilities are monetary.

Monetary/nonmonetary method Approach to translating foreign currency financial statements for consolidation in which monetary assets and liabilities are translated at the current exchange rate. Nonmonetary assets and liabilities are translated at historical exchange rates (the exchange rates that existed when the assets and liabilities were acquired).

Multi-step format With respect to the format of the income statement, a format that presents a subtotal for gross profit (revenue minus cost of goods sold).

Net asset balance sheet exposure When assets translated at the current exchange rate are greater in amount than liabilities translated at the current exchange rate. Assets exposed to translation gains or losses exceed the exposed liabilities.

Net book value The remaining (underappreciated) balance of an asset’s purchase cost. For liabilities, the face value of a bond minus any unamortized discount, or plus any unamortized premium.

Net income (loss) The difference between revenue and expenses; what remains after subtracting all expenses (including depreciation, interest, and taxes) from revenue.

Net liability balance sheet exposure When liabilities translated at the current exchange rate are greater than assets translated at the current exchange rate. Liabilities exposed to translation gains or losses exceed the exposed assets.

Net operating assets The difference between operating assets (total assets less cash) and operating liabilities (total liabilities less total debt).

Net profit margin (profit margin or return on sales) An indicator of profitability, calculated as net income divided by revenue.

Net realizable value Estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

Net revenue Revenue after adjustments (e.g., for estimated returns or for amounts unlikely to be collected).

Noncurrent assets Assets that are expected to benefit the company over an extended period of time (usually more than one year).

Noncurrent liability An obligation that is expected to be settled, with the outflow of resources embodying economic benefits, over a future period generally greater than one year.

Nonmonetary assets and liabilities Assets and liabilities that are not monetary assets and liabilities. Nonmonetary assets include inventory, fixed assets, and intangibles, and nonmonetary liabilities include deferred revenue.

Notes payable Amounts owed by a business to creditors as a result of borrowings that are evidenced by (short-term) loan agreements.

Operating activities Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services.

Operating lease An agreement allowing the lessee to use some asset for a period of time; essentially a rental.

Operating leverage The use of fixed costs in operations.

Operating profit (operating income) A company’s profits on its usual business activities before deducting taxes.

Operating profit margin (operating margin) A profitability ratio calculated as operating income divided by revenue.

Ordinary shares (common stock or common shares) Equity shares that are subordinate to all other types of equity (e.g., preferred equity).

Other comprehensive income Items of comprehensive income that are not reported on the income statement; comprehensive income minus net income.

Other post-retirement benefits Promises by the company to pay benefits in the future, other than pension benefits, such as life insurance premiums and all or part of health care insurance for its retirees.

Other receivables Amounts owed to the company from parties other than customers.

Owners’ equity The excess of assets over liabilities; the residual interest of shareholders in the assets of an entity after deducting the entity’s liabilities.

Pension obligation The present value of future benefits earned by employees for service provided to date. Under IFRS it is defined as “the present value, without deducting any plan assets, of expected future payments required to settle the obligation arising from employee service in the current and prior periods.”

Percentage-of-completion A method of revenue recognition in which, in each accounting period, the company estimates what percentage of the contract is complete and then reports that percentage of the total contract revenue in its income statement.

Period costs Costs (e.g., executives’ salaries) that cannot be directly matched with the timing of revenues and which are thus expensed immediately.

Permanent differences Differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date. These result in a difference between the company’s effective tax rate and statutory tax rate and do not result in a deferred tax item.

Pooling of interests accounting method A method of accounting in which combined companies were portrayed as if they had always operated as a single economic entity. Called pooling of interests under U.S. GAAP and uniting of interests under IFRS. (No longer allowed under U.S. GAAP or IFRS.)

Prepaid expense A normal operating expense that has been paid in advance of when it is due.

Present value The present discounted value of future cash flows: for assets, the present discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

Presentation currency The currency in which financial statement amounts are presented.

Pretax margin A profitability ratio calculated as earnings before taxes divided by revenue.

Price to book value A valuation ratio calculated as price per share divided by book value per share.

Price to cash flow A valuation ratio calculated as price per share divided by cash flow per share.

Price to earnings ratio The ratio of share price to earnings per share.

Price to sales A valuation ratio calculated as price per share divided by sales per share.

Profitability ratios Ratios that measure a company’s ability to generate profitable sales from its resources (assets).

Property, plant, and equipment Tangible assets used in company operations that are expected to be used (provide economic benefits) over more than one fiscal period.

Purchased in-process research and development costs The costs of research and development in progress at an acquired company.

Purchasing power gain A gain in value caused by changes in price levels. Monetary liabilities experience purchasing power gains during periods of inflation.

Purchasing power loss A loss in value caused by changes in price levels. Monetary assets experience purchasing power losses during periods of inflation.

Qualifying special purpose entity Under U.S. GAAP, a special purpose entity structured to avoid consolidation that must meet qualification criteria.

Quick ratio A liquidity ratio calculated as (cash + short-term marketable investments + receivables) divided by current liabilities.

Realizable (settlement) value With reference to assets, the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal; with reference to liabilities, the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

Residual claim The owners’ remaining claim on the company’s assets after the liabilities are deducted.

Retail method An inventory accounting method in which the sales value of an item is reduced by the gross margin to calculate the item’s cost.

Return on assets (ROA) A profitability ratio calculated as net income divided by average total assets.

Return on equity (ROE) A profitability ratio calculated as net income divided by average shareholders’ equity.

Revenue The amount charged for the delivery of goods or services in the ordinary activities of a business over a stated period; the inflows of economic resources to a company over a stated period.

Sales returns and allowances An offset to revenue reflecting any cash refunds, credits on account, and discounts from sales prices given to customers who purchased defective or unsatisfactory items.

Sales-type lease A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) exceeds the carrying value of the leased asset. The revenues earned by the lessor are operating (the profit on the sale) and financing (interest) in nature.

Scenario analysis Analysis that shows the changes in key financial quantities that result from given (economic) events, such as the loss of customers, the loss of a supply source, or a catastrophic event.

Screening The application of a set of criteria to reduce a set of potential investments to a smaller set having certain desired characteristics.

Sector neutralizing Measure of financial reporting quality by subtracting the mean or median ratio for a given sector group from a given company’s ratio.

Sensitivity analysis Analysis that shows the range of possible outcomes as specific assumptions are changed.

Service period The period benefited by the employee’s service, usually the period between the grant date and the vesting date.

Simulation Computer-generated sensitivity or scenario analysis that is based on probability models for the factors that drive outcomes.

Single-step format With respect to the format of the income statement, a format that does not subtotal for gross profit (revenue minus cost of goods sold).

Solvency With respect to financial statement analysis, the ability of a company to fulfill its long-term obligations.

Solvency ratios Ratios that measure a company’s ability to meet its long-term obligations.

Special purpose entity (special purpose vehicle or variable interest entity) A nonoperating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trust, limited liability, or partnership formed to facilitate a specific type of business activity.

Specific identification method An inventory accounting method that identifies which specific inventory items were sold and which remained in inventory to be carried over to later periods.

Standard cost With respect to inventory accounting, the planned or target unit cost of inventory items or services.

Statement of cash flows (cash flow statement) A financial statement that reconciles beginning-of-period and end-of-period balance sheet values of cash; provides information about an entity’s cash inflows and cash outflows as they pertain to operating, investing, and financing activities.

Statement of changes in shareholders’ equity (statement of owners’ equity) A financial statement that reconciles the beginning-of-period and end-of-period balance sheet values of shareholders’ equity; provides information about all factors affecting shareholders’ equity.

Statement of retained earnings A financial statement that reconciles beginning-of-period and end-of-period balance sheet values of retained income; shows the linkage between the balance sheet and income statement.

Straight-line method A depreciation method that allocates evenly the cost of a long-lived asset less its estimated residual value over the estimated useful life of the asset.

Sustainable growth rate The rate of dividend (and earnings) growth that can be sustained over time for a given level of return on equity, keeping the capital structure constant and without issuing additional common stock.

Taxable income The portion of an entity’s income that is subject to income taxes under the tax laws of its jurisdiction.

Taxable temporary differences Temporary differences that result in a taxable amount in a future period when determining the taxable profit as the balance sheet item is recovered or settled.

Tax base The amount at which an asset or liability is valued for tax purposes.

Tax expense An aggregate of an entity’s income tax payable (or recoverable in the case of a tax benefit) and any changes in deferred tax assets and liabilities. It is essentially the income tax payable or recoverable if these had been determined based on accounting profit rather than taxable income.

Tax loss carry forward A taxable loss in the current period that may be used to reduce future taxable income.

Temporal method A variation of the monetary/nonmonetary translation method that requires not only monetary assets and liabilities, but also nonmonetary assets and liabilities that are measured at their current value on the balance sheet date to be translated at the current exchange rate. Assets and liabilities are translated at rates consistent with the timing of their measurement value. This method is typically used when the functional currency is other than the local currency.

Top-down analysis With reference to investment selection processes, an approach that starts with macro selection (i.e., identifying attractive geographic segments and/or industry segments) and then addresses selection of the most attractive investments within those segments.

Total comprehensive income The change in equity during a period resulting from transaction and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Total invested capital The sum of market value of common equity, book value of preferred equity, and face value of debt.

Trade payables, also accounts payable Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.

Trade receivables (commercial receivables or accounts receivable) Amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise).

Trading securities (held-for-trading securities) Securities held by a company with the intent to trade them.

Transaction exposure The risk of a change in value between the transaction date and the settlement date of an asset or liability denominated in a foreign currency.

Treasury stock method A method for accounted for the effect of options (and warrants) on earnings per share (EPS) that specifies what EPS would have been if the options and warrants had been exercised and the company had used the proceeds to repurchase common stock.

Unbilled revenue (accrued revenue) Revenue that has been earned but not yet billed to customers as of the end of an accounting period.

Unclassified balance sheet A balance sheet that does not show subtotals for current assets and current liabilities.

Unearned fees Unearned fees are recognized when a company receives cash payment for fees prior to earning them.

Unearned revenue (deferred revenue) A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.

Uniting of interests A method of accounting in which combined companies were portrayed as if they had always operated as a single economic entity. Called pooling of interests under U.S. GAAP and uniting of interests under IFRS. (No longer allowed under U.S. GAAP or IFRS.)

Upstream A transaction between two affiliates, an investor company and an associate company such that the associate company records a profit on its income statement. An example is a sale of inventory by the associate to the investor company.

Valuation allowance A reserve created against deferred tax assets, based on the likelihood of realizing the deferred tax assets in future accounting periods.

Valuation ratios Ratios that measure the quantity of an asset or flow (e.g., earnings) in relation to the price associated with a specified claim (e.g., a share or ownership of the enterprise).

Value investors With reference to equity investors, investors who are focused on paying a relatively low share price in relation to earnings or assets per share.

Variable costs Costs that rise proportionally with revenue.

Vertical analysis Common-size analysis using only one reporting period or one base financial statement; for example, an income statement in which all items are stated as percentages of sales.

Vested benefit obligation Under U.S. GAAP, a measure used in estimating a defined-benefit pension plan’s liabilities, defined as the “actuarial present value of vested benefits.”

Vesting date The date that employees can first exercise stock options; vesting can be immediate or over a future period.

Weighted average cost method An inventory accounting method that averages the total cost of available inventory items over the total units available for sale.

Working capital The excess of current assets over current liabilities.