key definitions Flashcards
absorption rate
rate at which manufacturing overheads are allocated to products, services and jobs
accounting equation
assets = equity + liabilities
accrual principle
revenue should be recognised when earned regardless of when payment made; expenses should be recognised when incurred regardless of when paid for
accrued expenses
services incurred (resources used) that have not yet been invoiced for. (often estimated) - current liability
accrued income
revenue earned but not yet invoiced -current asset
amortisation
analogous to depreciation but for intangible assets - also used for financial instruments held at amortised cost
asset recognition requirements
as asset can be recognised in the financial statements provided it is an economic resource controlled by the firm whose value is measurable
assets
economic resources, controlled by the firm. Items a company owns, cash and amounts a firm is owed. They may be tangible or intangible.
associates
companies in which the firm owns 20% or more of the company’s share capital but less than 50%
average cost (AVCO)
inventory valuation method. Value for inventory and cost-of-sales are both based on average cost of inventory purchases
balance sheet
informal and historic name for SOFP
bond
a security that is issued for a certain amount, for a specific term and that pays a fixed rate of interest and that is to be repaid in full at term (on maturity date)
book value per share
book value (equity) divided by number of shares issued
capital employed
operating: non-current assets + working capital
financing: equity + non-current liabilities
capital expenditure
money spent on acquiring, manufacturing or improving non-current assets to help generate future income
capitalise
taking expenditure to an asset in the SOFP rather than as an expense in the income statement e.g. interest paid on funds for property development, money spent developing software
cash and cash equivalents
cash, short term deposits held with banks and money market instruments. cash and bank
convertible bond
a bond issued by a firm under certain specific conditions can be converted into the common stock (shares) of the issue. Reported as two components, the bond portion and the embedded call option
core operating profit
gross profits less other operating expenses
cost allocation method
method under which manufacturing/service delivery overheads are allocated
cost-of-sales
direct product costs and allocated manufacturing overheads. (including distribution and selling costs) (cost-of-goods-solf and cost-of-revenue)
credit sale
sale of goods or services that are paid for in arrears. The norm for the trading of goods between firms. Credit terms of 60-90 days are common
current assets
assets that will be sold or consumed within the next 12 months and cash and financial assets due to be paid to the firm within 12 months
current liabilities
liabilities due for payment, or other obligations owed, by the firm within the next 12 months
current portion of long-term debt
long-term debt with less than 12 months til redemption
current ratio
current assets/current liabilities - financing metric
days-purchases-outstanding
trade payables/cost-of-sales x 365
average time it takes the firm to pay invoices from its suppliers for goods it has bought on credit
days-sales-outstanding
trade receivables/revenue from credit sales x 365
average length of time it takes customers to pay their invoices
debt-equity gearing
non-current liabilities/equity
deferred tax
tax that is due for payment 12 months or more into the future
defined benefit pension obligation
the present value of the liabilities arising on a defined benefit pension plan. An off-balance sheet item
defined benefit pension plan
A pension scheme funded by an employer that pays its pensioners (both current and future) a pension for their remaining life based on their final year’s salary at the firm. Investment risks reside with the employer.
defined contribution pension plan
pension plan where employees have investment risk rather than employer
depreciable amount
purchase cost - residual value (the expected fall in the value of a tangible non-current asset over its useful economic life)
depreciation
a process of matching the costs of using property, plant and equipment against the benefit from using it and taking the capital cost of ownership through the income statement
depreciation charge
charge taken through the income statement to recognise fall in value of an asset over time
dividends
a share of the profits of a firm paid out in cash to its owners
entity concept
the firm and its owners are separate. The financial statements report on the firm not the owner
equity
the interests or claims of the owners of a firm on its assets and future income
expense or expensed (verb)
the act of taking an expenditure through the income statement as an expense
fair value
a method of valuing certain assets (e.g. investment property, financial derivatives) based on current appraised value. changes in fair value are taken through the income statement
financial leverage multiplier
capital employed/equity
first-in-first-out (FIFO)
inventory valuation method where inventory is valued at the most recent purchase prices. Costs of inventory included in cost-of-sales based on cost of first (oldest) units added to inventory
full costing
method used to estimate total production costs per unit including both direct costs (e.g. raw materials, labour) and a fair share of a manufacturing facility’s overheads
IFRS and US GAAP standard. Absorption costing
going concern principle
financial reports prepared on the basis that the firm will continue to operate indefinitely in its current form. Firm unlikely to be forced into, or management cooose, liquidation in the foreseeable future. Provides justification for historic cost accounting for asset valuations.
gross profit
revenue less cost-of-sales. Trading profits of the firm before taking running costs and other income into account
historic cost
method of reporting assets at their acquisition cost (plus the cost of work expended on developing them) less any depreciation
human capital
loosely defined term referring to skills and capabilities of people: money spent on training and education is talked about as being invested in human capital but is actually expensed
identifiable goods
goods that have some quality which allows individual units or batches to be identified, for example by serial or batch number
IFRS
International Financial Accounting Standards. Rules governing the preparation of financial statements. Written by the IAS Board..
impairment allowance
a contra asset used to record an impairment in carrying value of an asset. For trade receivables the impairment allowance reflects the expected credit losses on impaired receivables
income statement
report summarising a firm’s revenue, expenses and profit for an accounting period
indistinguishable goods
goods that cannot be identified separately. Includes commodities such as oil, gas, metals. Accounted for under FIFO or AVCO
intangible assets
assets such as intellectual property (patents, brands, copyright, trademarks), licences, royalty right. Expenditures on these must be expensed. Only appear in SOFP if purchased separately or as part of a business combination.
also application software - rules complicated but IFRS still requires most development expenditure to be expensed
interest cover
PBIT/finance expenses
inventory
items to be traded or consumed - includes raw materials, work-in-progress and finished goods; and consumables. Aka stock, current asset, may be identifiable or indistinguishable goods
inventory-days
inventory/cost of purchases x 365 - time to turn inventory over once
last-in-first-out (LIFO)
inventory valuation method where inventory is valued at the price paid for its oldest purchases. Cost of inventory included in cost-of-sales are based on cost of last (most recent) units added to inventory. Prohibited under IFRS
liabilities
amounts, and other obligations, owing to other firms, banks, individuals or other entities
liabilities (loosely)
when used loosely, refers to the side of the SOFP with equity and liabilities
loan
medium to long-term borrowings from bank
mark-to-market
method of marketing certain financial instruments to their current quoted market price (as opposed to historic cost). Changes in market value taken through income statement as gains or losses
matching principle
matching of product costs to revenues in the period in which revenue is recognised
minorities (income statement)
the share of profit due to minority shareholders in a firm’s subsidiaries
minorities interests (SOFP)
the book value of interests of minority shareholders ina firm’s subsidiaries
net assets
assets less liabilities
net current assets
current assets less current liabilities (used when current assets are greater than current liabilities) - working capital
net current liabilities
current liabilities less current assets (used when current liabilities are greater than current assets) “negative” working capital
net profit
another name for profit after tax, profit attributable to owners
net realisable value
estimated value of an impaired item in inventory. Calculated as expected selling price less costs to completion. Applied when lower than book value under historic costing
net residual value
the estimated value of an item at the end of its useful economic life. Applied to property, plant and equipment. Scrap value
non-current assets
assets that a firm intends to keep for 12 or more months
non-current liabilities
liabilities that are due for payment 12 months or more into the future
operating margin
PBIT (operating proft)/gross sales (revenue)
other comprehensive income (OCI)
(non-cash) gains or losses in certain assets or liabilities which are reflected in a firm’s equity account but are not taken through a net income
other operating expenses
head office, marketing, and other administrative costs (G&A - general and admin)
overheads margin
other operating expenses/revenue
par value
The nominal value given to a company’s shares. Share capital is given by number of shares issued multiplied by their par value. When used with bonds is the face or redemption value of a bond
pension benefit obligation
the estimated present value of a firm’s defined benefit pension obligations
pension deficit
The deficit on a defined benefit pension plan when the defined benefit obligation (DBO) > pension plan assets.
pension surplus
The surplus on a defined benefit pension plan when the pension plan assets > defined benefit obligation (DBO).
prepayments/pre-paid expenses
amounts paid in advance for goods and services that have will be consumer in the future
profit (loosely)
refers to a derived number based on subtracting ‘costs’ from ‘revenue’: gross profit, net profit, operating profit, profit before income and tax, profit before tax, profit after tax
profit after tax
net profit, net income, earnings. In the absence of minorities, profit attributable to owners
property, plant and equipment
land, buildings, machinery, trucks, vans etc that a firm owns, fixed assets
prudency concept
Assets and income should not be overstated; liabilities and expenses should not be understated. Conservatism.
recourse
the right to return goods purchased unconditionally
reducing balance
A method of allocating the costs of ownership of property, plant and equipment where most of the costs are taken in the early period. Charges fall off as the asset ages.
The depreciation charge is calculated as (net book value -residual value) x depreciation rate.
Depreciation rate is an accounting estimate determined by management.
reserves
name for certain technical items within equity which either have some ‘restriction’ on distribution to shareholders or specific very technical reason
used loosely
retained earnings
cumulative profit after tax less dividends paid to owners
return on capital employed
PBIT/Capital employed. Key measure of operating profitability.
return on equity
profit after tax/owners’ equity. key investment return
revenue
revenue earned from the sale of goods and services to customers. Turnover, sales, top line
revenue expenditure
Expenditure on things a firm intends to sell, expense or use to keep the business running: short term horizon (less than 1 year)
revenue recognition requirements
Under IFRS defined in terms of meeting contractual obligations. For straightforward sales of good and services: revenue should only be recognised when all of the benefits and risks of ownership have been transferred from seller to buyer. In the case of goods, physical delivery must also take place. Sales must be without recourse.
share
an ordinary share represents the rights and claims of the holder to the net income and future income of the firm
share capital
an amount calculated as number of shares issued times par value per share
statement of cash flows
a report summarising the cash flows in and out of a firm for an accounting period. It is divided into. three parts: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities
statement of financial position
report summarising the assets of a firm, its liabilities and its equity as of a particular date, the end of an accounting period. Assets are divided into current and non-current assets, liabilities into current and non-current assets.
straight line depreciation
A method of allocating the costs of ownership of property, plant and equipment in a linear way over the asset’s useful economic life.
The annuaL depreciation charge is calculated as (acquisition cost -residual value) / useful economic life. Where useful economic life is defined in years.
Residual value and useful economic life are both subjective estimates made by management.
subsidiary
a firm owned by the holding company of a group which owns more than 50% of the shares in the firm
trade payables
an account used to record the total value of invoices owed to suppliers for goods and services bought on credit. A current liability
trade receivables
trade receivables (gross) less impairment allowance, the total amount the firm expects to receive from unpaid invoiced credit sales. A current asset
trade receivables (gross)
amount used to record the total amount owed by customers from invoiced credit sales. reported in the notes
true and fair view
Opinion expressed by the directors and auditors about a firm’s financial statements. True implies factually correct, prepared in accordance with accounting standards and do not contain material errors or omissions; fair implies they have been prepared without bias.
unearned income
the obligation to deliver goods or services that a firm accepts when it takes payments from customers in advance. A current liability. Deferred income
US GAAP
US Generally Accepted Accounting Principles. US Accounting Standards. Under auspices of FASB (Financial Accounting Standards Board). Increasingly superseded by IFRS outside the US.
working capital
working capital concerns a firm’s trading assets and liabilities, it is defined as current assets - current liabilities
