Ebs Mba Ac Glossary

Accounting is defined as a series of processes and techniques used to identify, measure and communicate economic information which users find helpful in making decisions. It attempts to reflect economic activity in an organisation and is usually expressed in money values.

The accounting equation expresses the relationship between resources and the funds provided to acquire these, i.e. Assets – Liabilities = Owners’ equity. It is a collection of balances after each transaction has been completed and recorded. Note that the accounting entries involve a mixture of cash-driven items and judgement-driven items.

Financial accounting (or financial reporting) derives from the legal obligation on directors and managers to report to the owners of the business (the shareholders) how they have used the resources at their disposal during the accounting period under review (usually annual).

Management accounting provides the information from the accounting process managers need, e.g. actual and projected costs, prices of individual products, actual and projected costs of individual departments and individual processes, projected sources and uses of cash, proposals for major investment in plant and equipment, and many other details.

Financial statements are drawn up on the accrual basis inform users not only of past transactions involving payment and receipt of cash but they also reflect the obligations to pay cash or the prospect of receiving cash in the future.

The accruals convention states that cash does not have to be received to create value; an obligation from a creditworthy customer is good enough to be called a sale. The accruals convention also covers the situation where a sole trader, or company or any other entity pays an invoice for a product or service which covers a period stretching beyond the date he/she draws up the financial statements. The accruals convention is sales-related.

IAS 1 attempts to indicate the allowed level of aggregation: each material class of similar items must be presented separately; and items of a dissimilar nature of function should be shown separately unless they are immaterial. So if a line item is not individually material it should be aggregated with other items either on the face of those statements or in the notes.

The allocation convention is a two-step process to is to determine how much of each means of production, expressed in money terms, was consumed during the accounting period and to determine how much of each means of production, again expressed in money terms, should be matched with sales revenue and how much should be added to the closing work-in-progress (inventory of unfinished goods) and to the inventory of finished goods (on the assumption that goods remain unfinished at the end of the accounting period and that the business produces more finished units than it sells). The allocation convention is cost-related.

Contingent assets are ’a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the company’.

Current assets are those assets which are expected to be sold or consumed during the normal operating cycle of the company, usually one year. Typically inventories (raw materials, work-in-progress, and finished goods), debtors (increasingly known by its American term accounts receivable) and cash are regarded as being current.

Fixed assets are those assets that a company keeps for a substantial period of time (like land and buildings or plant and equipment or motor vehicles), not for resale, but to use in the course of business. It is the intention of management as to the use of the asset, not its physical characteristics, that determines whether or not it is classified as a fixed asset.

Assets are defined as ’a resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity’. Intangible assets are a sub-set of this definition and attract a further definition as ’identifiable non-monetary assets without physical substance’.

Average collection period = Trade receivables/Revenues per day; efficiency ratio.

A balance sheet reports on inventory of resources (fixed assets and current assets) and claims against these resources (liabilities and equity) at a given moment, usually the end of the financial year. Items of expenditure accounted for via the balance sheet we call capital expenditure.

The technique of drawing together financial and non-financial indicators of performance in a coherent manner is called a Balanced Scorecard. A balanced scorecard includes financial measures that tell managers the results of actions which have already been taken but adds operational measures on such critical contemporary concerns as customer satisfaction, quality, product and process innovation and the ability of the workforce to come to terms with smarter work habits.

The break-even point is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and therefore one has "broken even". A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return.

Capital structure ratios are divided into two groups which are: (a) those that examine the asset structure of the company; and (b) those that analyse the financing arrangements of the company’s total assets, in particular the extent to which the company relies on debt. This group of ratios is generally known as the gearing ratios.

The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income such as Profit + bad debt provision + depreciation ± Loss/Gain on sale.

Cash flow statements are needed to ‘unstitch’ the accounting principles which are applied to compile balance sheets and profit and loss accounts and to reveal whether the entity has sufficient cash funds to finance its future operations and its future ambitions for dividend payments to the owners and investments in assets and acquisition of other businesses.

A company structure avoids the risk of unlimited liability by limiting the liability of the owners (called shareholders) to the amount of equity (called share capital) paid into the company. In the event of legal action being taken against the company, shareholders cannot lose any more money than the sum paid for the shares.

In order to provide a reflection of the affairs on an entity it is essential that readers get presented with information which has been prepared on a consistent basis. This allows the reader to compare this year’s performance with the previous year’s. IAS 1 requires entities to stick to its presentation and classifications from one year to another unless there are compelling reasons to change them. A significant acquisition or disposal, or a review of the presentation style, might suggest that a change is required. This change is only permissible if the changed presentation provides information that is reliable and is more relevant to the users and that the revised structure is likely to continue, so that users will be able to compare years’ performances in the future.

A future event or circumstance that is possible but cannot be predicted with certainty.

An unbiased examination and evaluation of the financial statements of an organisation, done externally by an outside firm.

Internal control is a term used to describe all the various measures taken by the owners and managers of a company to direct and control their employees.

A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance.

The cost convention allows accountants use the historical (or acquisition) cost of different means of production, that is, the price paid for them by the business when they were acquired. The cost convention is cost-related.

A formula to work out the direct costs of your stock sold over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock.

Activity-based costing is a technique currently being explored by some companies and organisations which attempts to combat the deficiencies of traditional costing techniques. The essence of activity-based costing is its focus on the belief that activities (e.g. production planning, quality inspection), rather than products, cause costs to be incurred and products consume activities (and thereby cause costs). Activity-based costing focuses on cost drivers – those activities or factors which generate cost.

Under full or absorption cost accounting the full amount of the cost of sales (variable and fixed, direct production related and direct production overhead) are charged against the sales revenue to arrive at the gross profit.

Job costing involves the calculation of costs involved in a construction "job" or the manufacturing of goods done in discrete batches. These costs are recorded in ledger accounts throughout the life of the job or batch and are then summarised in the final trial balance before the preparing of the job cost or batch manufacturing statement.

Life cycle costing has a future time focus and gathers all revenues and costs associated with a product or service over its whole lifespan so that its ultimate profitability can be measured and management decisions taken thereon.

Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of job costing which attempts to measure individual costs of production of each unit.

Target costing has been developed to help companies manage their costs in circumstances when the selling price is known. Target costs start as global figures (target selling price less target profit margin) and are set for an entirely new model or process. Target costs are usually lower than the existing product costs and therefore the entity is faced with improving its processes in order to meet this tough benchmark. This improvement is known as value engineering which is, in effect, a complete reappraisal of every aspect of the process of manufacture and distribution.

Time-based activity-based costing involves managers directly estimating the resource demands imposed by each transaction, product, or customer rather than assign resource costs first to activities and than to products or customers. Under time-based ABC, we require estimates of only two parameters: (a) the cost per time unit of supplying resource capacity, and (b) the unit times of consumption of resource capacity by products, services and customers. The traditional model has difficulty in uncovering idle capacity.

Under variable or direct cost accounting the fixed costs of production are accounted for as a lump sum.

A formula to work out the direct costs of your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock. Also see Cost of Goods Sold. Costs of sales are measured by reference to the valuation of inventory of raw materials, work-in-progress and finished goods at the end of the accounting period. This inventory can be valued in one of a number of ways, each one producing a different cost of sales figure and therefore a different profit figure.

Actual amount paid or incurred, as opposed to estimated cost or standard cost. In contracting, actual costs to date amount includes direct labour, direct material, and other direct charges.

Expenses a firm incurs as a whole, and which cannot be assigned directly to any particular department, product, or segment of the business.

Expenditures that are subject to the discretion of a manager and, hence, can be kept within predefined limits.

Direct costs are the costs of manufacture or preparation, e.g. the purchases of raw materials used, the wages of the workforce involved in the transformation process, and the costs of using up the equipment, namely depreciation.

Cost such as that of advertising, preventive maintenance, research and development, that a manager may eliminate or postpone without disrupting the firm's operations or affecting its productive capacity in the short run. A discretionary cost is usually specific in amount, or is determined by a formula such as a certain percentage of sales revenue. Also called discretionary expenditure or managed cost.

Costs having a clear relationship to output. Direct materials cost is an example.

Periodic cost that remains (more or less) unchanged irrespective of the output level or sales revenue of a firm, such as depreciation, insurance, interest, rent, salaries, and wages. While, in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short-term cost accounting. Firms with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the firm as well as its pricing and profits. The breakeven point in such firms (in comparison with high variable cost firms) is typically at a much higher level of output, and their marginal profit (rate of contribution) is also much higher.

Indirect costs are items such as advertising and salaries of service support staff.

Cost not subject to influence at a given level of managerial supervision. For instance, a manager's salary is not within the control of the manager himself. Rent of the factory building is another example.

Examples of period costs are selling, distribution and marketing costs, general administrative costs and financial charges. These costs are incurred so that a company’s products can be sold, and the money can be collected from the customer, but they typically do not add value to the products unsold at the end of the accounting period. They are therefore written off each year.

Total of direct material costs, direct labour costs, and direct expenses.

Product costs can be traced directly to the products being manufactured, or to the production process, e.g. raw materials and labour. In addition to the ones just mentioned we can add various factory overheads such as indirect labour representing wages and salaries earned by supervisors, warehouse staff and maintenance engineers, all of whom do not work directly on the products but whose services are connected to the production process. Other factory overheads would include heat, light and power, supplies and maintenance, depreciation and asset insurances.

Opportunity cost is the highest cost of other opportunities foregone.

Standard costs are budgeted costs for individual cost items. Standard costs are used as target-costs and are developed from historical data analysis or from time and motion studies. Standard costs are compared with actual costs and explanations are sought for any differences between the two.

Costs which have been incurred are called sunk costs and should be ignored when looking for relevant costs.

Expenses that can be directly assigned to an activity or cost object on the basis of a cause-and-effect (causal) relationship.

A cost that changes in proportion to a change in a company's activity or business. A good example of variable cost is the fuel for an airline. This cost changes with the number of flights and how long the trips are.

Cross-subsidisation is the practice of charging higher prices to one group of consumers in order to subsidise lower prices for another group.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. Current assets/Current liabilities; liquidity ratio.

A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital.

The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. Total debt/Total assets (gearing ratio); capital structure ratio.

A denominator volume variance arises when actual production ≠ planned production.

Depreciation is the allocation of the cost of assets purchased in one accounting period over the accounting periods in which they are used.

Straight-line Depreciation, Reducing Balance Depreciation, Consumption Depreciation

Discounted cash flow means that when dealing with an investment that extends over different time periods the cash flows arising out of the investment needs to discounted down to a present or equivalent value so that the profitability and/or cost of it can be calculated.

Dividend cover = Profit from ordinary activities attributable to common stock/Dividend payout; basic stock market ratio

A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock. The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. This quarterly dollar amount is annualised and compared to the current stock price to generate the per annum dividend yield, which represents an expected return. Dividend per share/Market value per share × 100; basic stock market ratio.

EPS measures net income earned on each share of a company's common stock. Net profit/Number of ordinary shares in issue; basic stock market ratio.

Efficiency ratios (sometimes referred to as activity or turnover ratios) give an indication of how effectively a company has been managing its assets.

A fair presentation requires management to select and apply accounting policies (e.g. the depreciation method or the inventory valuation method) which are relevant to the users and are reliable in that they (a) represent faithfully the results and financial position of the enterprise; (b) reflect the economic substance of events and transactions and not merely the legal form; (c) are neutral, that is free from bias; (d) are prudent; and (e) are complete in all material respects.

Fixed (Non-current) assets/Current assets; capital structure ratio.

Gearing (or leverage) is the comparison of a company's long term fixed interest loans compared to its assets In general two different methods are used 1. Balance sheet gearing is calculated by dividing long term loans with the equity (or proprietor's net worth). 2. Profit and Loss gearing: Fixed interest payments for the period divided by the profit for the period. Gearing ratios measure the contributions from shareholders with the financing provided by the company’s creditors and other providers of loan capital.

Goodwill is defined as future economic benefits arising from assets that are not capable of being individually identified and separately recognised. In effect, on the day of acquisition, goodwill is not valued per se, it is simply the difference between the cost of the acquisition and the net fair value of the assets acquired; it is a residual.

If management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, these uncertainties should be disclosed. The standard requires management to review all available evidence relating to at least the period of twelve months from the balance sheet. Significant doubts about such matters as a collapse in orders, repayment of debt falling due, payment of interest on current debt levels or continuing support of banks and other providers of debt could trigger the need to draw up the financial statements prepared on a basis other than going concern. In practice this would lead to a material write-down of the carrying value of assets in the balance sheet which, in turn would hit the profit and loss account.

Gross profit is calculated as sales minus all costs directly related to those sales. These costs can include manufacturing expenses, raw materials, labour, selling, marketing and other expense. GP measures efficiency of transformation

A company's cost of sales, or cost of goods sold, represents the expense related to labour, raw materials and manufacturing overhead involved in its production process. This expense is deducted from the company's net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labour and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favourable profit indicator. Gross profit/Revenues; profitability ratio.

A downward revaluation of fixed assets.

See Profit and Loss Account.

See Discounted Cash Flow.

Inventory, once physically counted, is valued according to a mixture of cost and conservatism conventions in accounting. Generally, goods in inventory are valued in terms of cost, being the sum of the applicable expenditures and charges directly or indirectly incurred in bringing the article to its existing condition and location.

Inventory turnover = Cost of sales/Inventory; efficiency ratio.

A contingent liability is not recognised as a liability in the balance sheet because it is either only (a) a possible obligation as it has yet to be confirmed whether the company has an obligation that could lead to an outflow of cash; or (b) a present obligation whose probability of cash outflow is low or for which a sufficiently reliable estimate cannot be made.

Current liabilities are considered to be those debts owed by the company which it expects to pay within the next 12 months. Under this heading are found such items as creditors, bank overdraft, taxes payable on previously reported profits, dividends payable on previously reported profits, accruals, and deferred revenue (being revenue received by the company in advance of providing the goods or services).

‘Cash position’

Liquidity ratios are designed to measure a company’s ability to meet its maturing short-term obligations. A company is in a good position to meet its current obligations if current assets exceed current liabilities by a comfortable margin.

Profit is arrived at by matching the effort (or costs) with the units shipped and invoiced to the customers (sales) during the period. The matching convention is cost-related.

Materiality is defined by IAS 1 as ’Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged by the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.’

Net present value is the sum which would have to be invested today to amount to a given sum at a rate of interest over a given time period. In contrast to NPV total present value is the total of the present value for the income stream only, i.e. without the investment being subtracted.

Non-current asset turnover = Revenues/Non-current assets; efficiency ratio.

Offset is the practice of deducting one figure from another and publishing the net figure. IAS 1 addresses this practice by stating that companies are obliged to show assets and liabilities, and income and expenses separately. The rule is clear: offsetting must not be undertaken if it detracts from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. However, it allows the measurement of assets net of valuation allowances such as depreciation and provisions for doubtful debts.

In relation to profitability and cost control a favourite technique used is the One hundred per cent statement where sales are set at 100 per cent and each item of cost is calculated as a percentage of sales.

The owner’s equity of a company is represented by the net assets (fixed assets + net current assets) of the company.

In a partnership a number of individuals agree to set up business together, bringing to the partnership assets in varying proportions. As with the sole trader, a partnership need not make public its annual results because its creditors can pursue the partners beyond the limit of their equity in the partnership.

Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible. also called preferred stock.

P/E is the best known of the investment valuation indicators. The P/E is the most widely reported and used valuation by investment professionals and the investing public. The financial reporting of both companies and investment research services use a basic earnings per share (EPS) figure divided into the current stock price to calculate the P/E multiple, i.e. how many times a stock is trading (i.e. its price) per each dollar of EPS. P/E reflects investors' assessments of future earnings. Market price/EPS; basic stock market ratio.

Profit is the excess of sales revenue over costs incurred in generating the revenue. Items of expenditure accounted for via the profit and loss account we call revenue expenditure.

The balance of the trading account assuming it has a credit balance.

The so-called bottom line is the most often mentioned when discussing a company's profitability. While undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behoves investors to take a comprehensive look at a company's profit margins on a systematic basis. Profit from ordinary activities before taxation/Revenues; profitability ratio.

The value of sales less expenses assuming that the sales are greater, i.e. if the profit and loss account shows a credit balance. Net profit before interest and taxes measures managerial efficiency; net profit after interest and before taxes assesses financial structure.

A profit and loss account reflects a flow of resources throughout a given period, usually the financial year. Because of various accounting principles embedded in the measurement of accomplishment and the measurement of effort the flows of resources are not measured in terms of cash.

Unless a standard requires otherwise, all items of income and expense recognised in a period should be included in profit and loss. What this means is that every gain or loss, whether it arose from the normal operations of the business or from the purchase or sale of assets, should be captured in the profit and loss account. A literal interpretation of the standard would also suggest that capital appreciation in non-current assets such as property should also be included but IAS 16 Property, Plant and Equipment reverses this by requiring revaluation gains and losses on property to be taken directly to equity.

Yielding profit or financial gain.

Profitability ratios are designed to measure management’s overall effectiveness.

A provision is recognised as a liability (assuming that a reliable estimate can be made) because it is a present obligation and it is probable that an outflow of cash or other resource will be required to settle the obligation.

This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenues should be recorded only when they are certain and a provision should be entered for an expense which is probable.

The quick ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. (Current assets − Inventory)/Current liabilities; liquidity ratio.

The realisation convention states that only products that have been sold are measured as sales. Products which are completed or partially completed and have not realised value for the business are not included. The realisation convention is sales-related.

The amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid.

The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. Profit from ordinary activities before taxation/Capital employed; profitability ratio.

This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilising its equity base and the better return is to investors. ROE is expressed as a percentage and calculated as Return on Equity = Net Income/Shareholder's Equity.

Profit from ordinary activities before taxation/Inventory; profitability ratio.

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI = (Gain from investment – Cost of investment)/Cost of investment or Controllable profit/Net assets.

Profit from ordinary activities attributable to shareholders/Owners’ equity; profitability ratio.

Profit from ordinary activities before taxation/Total assets; profitability ratio. This ratio is deemed by most companies to be ultimately significant.

An accounting term used when a company has to enter a line item on their balance sheet due to a revaluation performed on an asset. This line item is used when the revaluation finds the current and probable future value of the asset is higher than the recorded historic cost of the same asset.

Sensitivity analysis is not an evaluation technique, nor does it enter directly into the evaluation calculation. Rather it is a further analysis which is an aid to management in the exercise of judgement. In its simplest and often most useful form, sensitivity analysis consists of changing the value – quantity or price – of a key variable to assess the impact which this has on the final result.

A sole trader can start trading at any time with assets at his disposal. He must, however, distinguish between the transactions that pertain to his business and those that are domestic in nature. In law he has unlimited liability. Because his creditors can pursue him beyond the limit of his business there is no requirement for him to make public his profit and loss account and balance sheet each year.

Straight-line Depreciation, Reducing Balance Depreciation, Consumption Method

Throughput accounting stresses that fact that products do not earn money, but businesses earn profit by selling products. Solutions based on current management accounting fail to recognise the reality of the business situation as looked at from throughput, that is, the rate at which money is earned.

Profit before financial result (=Profit from operations)/Interest charges (gearing ratio); capital structure ratio.

Shareholders, analysts, creditors, tax authorities, the public

Directors, senior executives, managers, employees (and trade unions)

First In, First Out (FIFO), Last In, First Out (LIFO), Average Method