FSA Flashcards
Accelerated methods
Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.
Accounting profit
Income as reported on the income statement in accordance with prevailing accounting standards before the provisions for income tax expense.
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.
Accrued expenses
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.”
Acquisition method
A method of accounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint project of the IASB and FASB aiming at convergence in standards for the accounting of business combinations.
Activity ratios
Ratios that measure how efficiently a company performs day-to-day tasks such as the collection of receivables and management of inventory.
Amortisation
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.
Amortised cost
The historical cost (initially recognised cost) of an asset adjusted for amortisation 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.
Asset utilization ratios
Ratios that measure how efficiently a company performs day-to-day tasks such as the collection of receivables and management of inventory.
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
Under US GAAP debt securities not classified as either held-to-maturity or held-for-trading securities. The investor is willing to sell but not actively planning to sell. In general available-for-sale debt securities are reported at fair value on the balance sheet with unrealized gains included as a component of other comprehensive income.
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
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 ratios
Financial ratios involving balance sheet items only.
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
An investment selection approach that focuses on company-specific circumstances rather than emphasizing economic cycles or industry analysis.
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 conversion 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 flow from operating activities
The net amount of cash provided from operating activities.
Cash flow from operations
The net amount of cash provided from operating activities.
Classified balance sheet
A balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g. current and noncurrent).
Common shares
A type of security that represent an ownership interest in a company.
Common stock
A type of security that represent an ownership interest in a company.
Common-size analysis
The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences; an example is an income statement in which all items are expressed as a percent of revenue.
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.
Coupon rate
The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.
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 liabilities
Short-term obligations such as accounts payable wages payable or accrued liabilities that are expected to be settled in the near future typically one year or less.
Days of inventory on hand
An activity ratio equal to the number of days in the period divided by inventory turnover over the period.
Dealing securities
Securities held by banks or other financial intermediaries for trading purposes.
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
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 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
Plans 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 during their working years and expect to draw on the accumulated funds at retirement. The employee bears the investment and inflation 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.
Derivatives
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
An accelerated depreciation method i.e. 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 leases
Under US GAAP 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. No selling profit is recognized at lease inception. The revenues earned by the lessor are financing in nature.
Direct format
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 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.
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.
DuPont analysis
An approach to decomposing return on investment e.g. return on equity as the product of other financial ratios.
Earnings per share
The amount of income earned during a period per share of common stock.
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.
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.
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
From the lessee perspective under US GAAP a type of lease which is more akin to the purchase of an asset by the lessee. From the lessor perspective under IFRS a lease which “transfers substantially all the risks and rewards incidental to ownership of an underlying asset.”
Financial flexibility
The ability to react and adapt to financial adversity 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.
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 remain at the same level regardless of a company’s level of production and sales.
Free cash flow
The actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company’s investors (e.g., shareholders and bondholders) without impairing the value of the company.
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.
Gross margin
Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).
Gross profit
Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).
Gross profit margin
The ratio of gross profit to revenues.
Grouping by function
With reference to the presentation of expenses in an income statement, the grouping together of expenses serving the same function, e.g. 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, e.g., all depreciation expenses.
Growth investors
With reference to equity investors, investors who seek to invest in high-earnings-growth companies.
Held-to-maturity
Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortisation 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.
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 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
With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow.
Indirect method
With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow.
Intangible assets
Assets lacking physical substance, such as patents and trademarks.
Interest coverage
A solvency ratio calculated as EBIT divided by interest payments.
Inventory turnover
An activity ratio calculated as cost of goods sold divided by average inventory.
Investing activities
Activities 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
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 the reported LIFO inventory carrying amount and the inventory amount that would have been reported if the FIFO method had been used (in other words, the FIFO inventory value less the LIFO inventory value).
Liquidity
The ability to purchase or sell an asset quickly and easily at a price close to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.
Liquidity ratios
Financial ratios measuring the company’s ability to meet its short-term obligations.
Long-lived assets
Assets that are expected to provide economic benefits over a future period of time, typically greater than one year.
Losses
Asset outflows not directly related to the ordinary activities of the business.
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.
Market-oriented investors
With reference to equity investors, investors whose investment disciplines cannot be clearly categorized as value or growth.
Matching principle
The accounting principle that expenses should be recognized in the same period in which the associated revenue is recognized.
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 book value
The remaining (undepreciated) 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
The difference between revenue and expenses; what remains after subtracting all expenses (including depreciation, interest, and taxes) from revenue.
Net profit margin
An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses.
Net realisable 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).
Non-current assets
Assets that are expected to benefit the company over an extended period of time (usually more than one year).
Non-current liabilities
Obligations that broadly represent a probable sacrifice of economic benefits in periods generally greater than one year in the future.
Operating activities
Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services.
Operating breakeven
The number of units produced and sold at which the company’s operating profit is zero (revenues = operating costs).
Operating cash flow
The net amount of cash provided from operating activities.
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.
Operating lease
An agreement allowing a lessee to use some asset for a period of time; essentially a rental.
Operating leverage
The use of fixed costs in operations.
Operating profit
A company’s profits on its usual business activities before deducting taxes.
Operating profit margin
A profitability ratio calculated as operating income (i.e., income before interest and taxes) divided by revenue.
Ordinary 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.
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.
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.
Prepaid expense
A normal operating expense that has been paid in advance of when it is due.
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
(P/E ratio or P/E) 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.
Profit and loss (P&L) statement
A financial statement that provides information about a company’s profitability over a stated period of time.
Profit margin
An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses.
Profitability ratios
Ratios that measure a company’s ability to generate profitable sales from its resources (assets).
Property, plant, and equipment
Tangible assets that are expected to be used for more than one period in either the production or supply of goods or services, or for administrative purposes.
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.
Return on assets (ROA)
A profitability ratio calculated as net income divided by average total assets; indicates a company’s net profit generated per dollar invested in total assets.
Return on equity (ROE)
A profitability ratio calculated as net income divided by average shareholders’ equity.
Return on sales
An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses.
Return on total capital
A profitability ratio calculated as EBIT divided by the sum of short- and long-term debt and equity.
Revaluation model
Under IFRS, the process of valuing long-lived assets at fair value, rather than at cost less accumulated depreciation. Any resulting profit or loss is either reported on the income statement and/or through equity under revaluation surplus.
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
Generally, a synonym for revenue; “sales” is generally understood to refer to the sale of goods, whereas “revenue” is understood to include the sale of goods or services.
Sales-type leases
Under US GAAP, 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 both a selling profit at inception and financing (interest) revenues.
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; a risk management technique involving examination of the performance of a portfolio under specified situations. Closely related to stress testing.
Screening
The application of a set of criteria to reduce a set of potential investments to a smaller set having certain desired characteristics.
Sensitivity analysis
Analysis that shows the range of possible outcomes as specific assumptions are changed.
Shareholders’ equity
Assets less liabilities; the residual interest in the assets after subtracting the liabilities.
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.
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.
Statement of changes in 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 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).
Statement of financial position
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).
Statement of operations
A financial statement that provides information about a company’s profitability over a stated period of time.
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.
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.
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.
Top-down analysis
An investment selection approach that begins with consideration of macroeconomic conditions and then evaluates markets and industries based upon such conditions.
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
Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.
Trading securities
Under US GAAP, a category of debt securities held by a company with the intent to trade them.
Treasury stock method
A method for accounting 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.
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.
Units-of-production method
A depreciation method that allocates the cost of a long-lived asset based on actual usage during the period.
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 fluctuate with the level of production and sales.
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.
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 difference between current assets and current liabilities.
