FINANCE AND TAX TERMS

Courtesy of the Northwest Entrepreneur Network (www.NWEN.org)

10-K - Annual report required by the S.E.C. each year. Provides a comprehensive overview of a company's state of business. Must be filed within 90 days after fiscal year end. A 10-Q report is filed quarterly.

10-Q - Quarterly report required by the S.E.C. each quarter. Provides a comprehensive overview of a company's state of business.

Accounts Payable - The balance due to a creditor on a current account.

Accounts Receivable - The balance due from a debtor on a current account.

Accounts Receivable Aging - A periodic report showing all outstanding receivable balances, broken down by customer and month due.

Accrual Basis - Method wherein revenue and expenses are recorded in the period in which they are earned or incurred regardless of whether cash is received or disbursed in that period. This is the accounting basis that generally is required to be used in order to conform to generally accepted accounting principles (GAAP) in preparing financial statements for external users.

Annual Report to Shareholders - Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income statement and cash flow statement information. S.E.C. rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.

Audit - The systematic examination of records and documents and the securing of other evidence by confirmation, physical inspection, or otherwise, for one or more of the following purposes: determining the propriety or legality of proposed or consummated transactions, ascertaining whether all transactions have been recorded and are reflected accurately in accounts; determining the existence of recorded assets and inclusiveness of recorded liabilities; determining the accuracy of financial or statistical statements or reports and the fairness of the facts they present; determining the degree of compliance with established policies and procedures relative to financial transactions and business management; and appraising an accounting system and making recommendations concerning it.

Balance Sheet - Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity.

Book Value - An accounting term, which usually refers to a business' historical cost of assets less liabilities. The book value of a stock is determined from a company's records by adding all assets (generally excluding such intangibles as goodwill), then deducting all debts and other liabilities, plus the liquidation price of any preferred stock issued. The sum arrived at is divided by the number of common shares outstanding and the result is the book value per common share. Book value of the assets of a company may have little or no significant relationship to market value.
Tangible Book Value is different than Book Value in that it deducts from asset value intangible assets, which are assets that are not hard (e.g., goodwill, patents, capitalized start-up expenses and deferred financing costs). Economic Book Value allows for a Book Value analysis that adjusts the assets to their market value. This valuation allows valuation of goodwill, real estate, inventories and other assets at their market value.

Break-even Point - The volume point at which revenues and costs are equal; a combination of sales and costs that will yield a no profit/no loss operation.

Burn Rate - For a company with negative cash flow, the rate of that negative cash flow, usually per month.

Capital Expenditures - The amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment.

Cash Basis of Accounting - The accounting basis in which revenue and expenses are recorded in the period they are actually received or expended in cash. Use of the cash basis generally is not considered to be in conformity with generally accepted accounting principles (GAAP) and is therefore used only in selected situations, such as for very small businesses and (when permitted) for income tax reporting. See also Accrual Basis.

Cash Flow - An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment of financing are paid. A projected cash flow statement indicates whether the business will have cash to pay its expenses, loans, and make a profit. Cash flows can be calculated for any given period of time, normally done on a monthly basis.

Contingency Liability - A potential obligation that may be incurred dependent upon the occurrence of a future event and which must be disclosed in the footnotes of audited financial statements. A pending lawsuit is an example of a contingent liability.

Corporation - A type of business organization chartered by a state and given many of the legal rights as a separate entity.

Cost - The total money, time and resources associated with a purchase or activity.

Cost Basis - The amount invested in a given security or portfolio. It's just the share price multiplied by the number of shares, plus any commission. This figure is important in determining how your investment is doing, as well as for tax purposes.

Cost of Goods Sold (COGS) - The amount determined by subtracting the value of the ending merchandise inventory from the sum of the beginning merchandise inventory and the net purchases for the fiscal period.

Current Ratio - A commonly used measure of short-run solvency, the immediate ability of a firm to pay its current debts as they come due.

Debit to Equity (also Debit/Worth) - Measures the risk of the firm's capital structure in terms of amounts of capital contributed by creditors and that contributed by owners. It expresses the protection provided by owners for the creditors. In addition, low Debt/Equity ratio implies ability to borrow. While using Debt implies risk (required interest payments must be paid), it also introduces the potential for increased benefits to the firm's owners. When Debt is used successfully (operating earnings exceeding interest charges) the returns to shareholders are magnified through financial leverage.

Depreciation - The amount of expense charged against earnings by a company to write off the cost of a plant or machine over its useful live, giving consideration to wear and tear, obsolescence, and salvage value. If the expense is assumed to be incurred in equal amounts in each business period over the life of the asset, the depreciation method used is straight line (SL). If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset, the method used is said to be accelerated. Two commonly used variations of the accelerated method of depreciating an asset are the sum-of-years digits (SYD) and the double-declining balance (DDB) methods. Frequently, accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes.

Disbursement - Literally, to take money out of a purse. Figuratively, to pay out money; to expend money; and sometimes it signifies to advance money.

Dividend - That portion of a corporation's earnings which is paid to the stockholders.

Earnings - Another word for profit, or net income, in this case the sum of the trailing four quarters' net income from continuing operations and discontinued operations. Since many investors use earnings reports to make their investment decisions, there is an unfortunate tendency for companies to try to put a positive ""spin"" on their earnings reports by whatever methods necessary. Investors need to understand the different types of earnings presentations to get a clear picture of a company's financials. There are three types of earnings often presented:

Actual earnings - What a company earned including all current revenue and expenses.

·         Operating earnings. Includes only revenue and costs from on-going operations. Excludes one-time non-operational charges such as gains or losses on sales of assets or one-time acquisition costs. Inventory write-downs and currency impacts are to be included in operating earnings (though the market often views them as special).

·         Pro-forma earnings. Compares current quarter costs and losses against similar accounting practices and similar categories from the prior period. Excludes revenue and costs from operations that were not in the comparable quarter.

·         Earnings Per Share (EPS). The amount of net income (earnings) related to each share of stock; computed by dividing net income by the number of shares of common stock outstanding during the period.

Equity - An accounting term used to describe the net investment of owners or stockholders in a business. Under the accounting equation, equity also represents the result of assets less liabilities.

Equity Financing - The provision of funds for capital or operating expenses in exchange for capital stock, stock purchase warrants and options in the business financed, without any guaranteed return, but with the opportunity to share in the company's profits.

Expenditure - A payment, or the promise of a future payment.

Expense - Any operating cost, such as rent, utilities and payroll, as distinguished from capital expenditure for long-term property and equipment. For mutual funds, a fund's cost of doing business. All of a mutual fund's expenses are disclosed in its prospectus as a percentage of assets.

FASB - Financial Accounting Standards Board. The independent agency which establishes GAAP.

Financial Statements - A written report which quantitatively describes the financial health of a company. Includes an income statement and a balance sheet.

GAAP - Generally Accepted Accounting Principles. A widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board.

Gross Profit - Net sales minus cost of sales.

Income - For corporations, same as earnings. For individuals, money earned through employment and investments.

Income Statement (Statement of Operations) - A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Inventory Turns (Avg. Annual) - Measures the average efficiency of the firm in managing and selling inventories (INV) during the last period. Turns must balance efficiency needs with service levels by the number of times the firm can fulfill customer orders using current inventory.

Lessee - A person or entity who receives the use and possession of leased property (e.g., real estate or equipment) from a lessor in exchange for a payment of funds. The person to whom a lease is made.

Lessor - A person or entity who owns property (for example, real estate or equipment) to which a lessee receives use and possession in exchange for a payment of funds.

Liquidity - A company's ability to meet current obligations with cash or other assets that can be quickly converted to cash.

Market Value - Also known as market capitalization, this is simply the market value of all a company's outstanding shares (in other words, price times shares). It's a rough estimate of what a company is worth, but bear in mind that someone trying to buy the whole thing would probably have to pay a premium over this figure.

Net Income - The difference between total revenue and total expenses of a business. This caption and amount is usually found at the bottom of a company's Profit and Loss statement.

Net Worth - The difference between Total Liabilities and Total Assets. Minority interest is included here.

P/E Ratio - Also known as the P/E multiple, this is the latest closing price divided by the latest 12 months' earnings per share. P/E is perhaps the single most widely used factor in assessing whether a stock is pricey or cheap. A company's P/E should be looked at against those of similar companies, and against that of the stock market as a whole, since different industries and even different companies are characterized by markedly different P/Es. In general, fast-growing technology companies have high P/Es, since the stock price is taking account of anticipated growth as well as current earnings. High-tech companies often trade at P/Es above 40, or about double the overall market P/E. Banks, on the other hand, typically have below-market P/E ratios. A high P/E is often a reflection of lofty expectations for a stock, since no one would invest knowing it would take 40 years just to make one's money back. The idea is that earnings will grow. A high P/E can also reflect poor recent earnings. A low P/E can imply low investor expectations, an undervalued stock, or both. Some investors like to compare P/E to the growth of earnings per share. The resulting PEG ratio (P/E divided by growth rate) gives some idea of whether investor expectations are reasonable given past performance. Value investors sometimes say that a PEG ratio of less than one means a stock is cheap.

Prime Rate - Interest rate that is charged business borrowers having the highest credit ratings, for short term borrowing.

Pro Forma - A hypothetical balance sheet and income statement based on a set of assumptions. Pro forma statements are used in business plans, loan requests and earnings reports.

Profit - The excess of the selling price over all costs and expenses incurred in making a sale; the money remaining after a company has paid all of its bills.

Profit Margin - The amount of money earned after the cost of goods (gross profit margin) or all operating expenses (net profit margin) are deducted; usually expressed in percentage terms.

Retained Earnings - The profits of the business that have not been paid out to the owners as of the balance sheet date. The earnings have been "retained" for use in the business. Retained Earnings is an account in the equity section of the balance sheet.

Return On Investment - The amount of profit (return) based on the amount of resources (funds) used to produce it. Also, the ability of a given investment to earn a return for its use.

Revenue - All the money (or other items of value) that came into the company during the given period. Revenue includes everything: sales, interest income, proceeds from the sale of a subsidiary and so forth. Revenue is thus one of the most reliable items on the income statement, as opposed to net income, which is subject to various accounting and managerial judgments. But the all-inclusive nature of revenue can make it misleading. If 50 percent of revenue in a given year came from the one-time sale of some land, clearly one shouldn't assume that the business will have similar revenue in future years.

Sales/Receivables (Receivables Turnover) - This ratio measures the number of times trade Receivables turn over during the year. The higher the SALES/RECEIVABLES Ratio (turnover of Receivables), the shorter the time between sale and cash collection.

Securities & Exchange Commission (S.E.C.) - The S.E.C. is a federal agency that regulates the U.S. financial markets. This federal agency also oversees the securities industry and promotes full disclosure and protection of the investing public against malpractice in the securities markets.

Statement of Cash Flow - An analysis of cash flow that presents a company's sources and uses of funds. The statement focuses on cash and involves some nonintuitive leaps (an increase in accounts receivable is a use of cash, not a source), but to the educated eye it can provide a telling picture of where a company is headed with respect to liquidity. Sources of cash include net income, depreciation and reductions in inventory. Uses of cash include dividends declared as well as increases in current assets. A statement of cash flow reveals healthy or unhealthy trends and allows for at least the possibility of predicting future cash requirements.

Tax Basis - Purchase price, including commissions and other expenses, used to determine capital gains and capital losses for tax purposes.

Worker's Compensation - A state-mandated form of insurance covering workers injured in job-related accidents. In some states the state is the insurer; in other states insurance must be acquired from commercial insurance firms. Insurance rates are based on a number of factors including salaries, firm history and risk of occupation.