Other Finance Terms Flashcards
General Ledger
Contains all the accounts for recording transactions relating to a company’s assets, liabilities, owners’ equity, revenue, and expenses. In modern accounting software, the general ledger works as a central repository for accounting data transferred from all sub-ledgers or modules such as accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. The general ledger is the backbone of any accounting system which holds financial and non-financial data for an organization.
Chart of Accounts (CoA)
A list of account names and numbers used in accounting to organize financial records into different expenses, liabilities, assets and income. An example of a chart of accounts is the number system used in SAP to track profits and losses.
Cost Pool
A grouping of individual costs, typically by department or service center. Cost allocations are then made from the cost pools. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those departments using its services.
Activity Based Costing (ABC)
A technique for allocating costs to a product, service, customer, etc. The premise is that activities cause an organization to incur costs. Once the costs of the activities have been identified and each activity’s cost has been determined, the cost of the activities is then allocated to the product, service, customer, etc. that required the activity. This technique is more logical for allocating overhead than simply allocating costs based on machine hours or direct labor hours. Be careful here: the cost of achieving this level of precision is often not justified by the added value of that precision.
Capitalization
An accounting method used to delay the recognition of expenses by recording the expense as a long-term asset(s). In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost over a specified period of time. Companies take expenses that they incur today and deduct them over the long term without a delayed negative affect against income. In other words, capitalization improves the income statement by delaying the recognition of expenses to future years, thus increasing net income in the current year.
Time Value of Money
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Zero-Based Budgeting
Method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a “zero base” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.
Discounted Cash Flow (DCF)
Cash flow summary adjusted so as to reflect the time value of money. With DCF, money to be received or paid at some time in the future is viewed as having less value, today, than an equal amount received or paid today. The total discounted value (present value) for a series of cash flow events across a time period extending into the future is known as the net present value (see NPV definition above) of a cash flow stream.
Discount Rate
Also known as Hurdle Rate. Refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. Most of our clients use a discount rate of about 15%.
Budget Variance
A budget variance is the difference between the budgeted amount of expense or revenue, and the actual amount. The budget variance is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.
Fiscal Year (FY) (or Accounting Year in Europe)
A period that a company uses for accounting purposes and preparing financial statements. The fiscal year may or may not be the same as a calendar year. The fiscal year is identical to the calendar year for about 65% of publicly traded companies in the United States. A company’s fiscal year will always reflect the date of the calendar year in which it ends – e.g. if a company has a fiscal year beginning on April 1st then the fiscal year beginning on April 1st 2015 and ending March 31st 2016 is FY 2016 for that company.
Rolling Forecast
A key selling point of Apptio IT Planning is that it enables leaders to maintain rolling forecasts (coming in 2017)
Traditionally businesses look at a static period for example 1 year ahead. If the financial year is July to June then budgets and forecasts are prepared well in advance to cover that period. By October, 3 months of business has already taken place leaving only 9 months remaining of the forecast. With static forecasts you run the periods down to zero and then start again.
With a rolling forecast the number of periods in the forecast remain constant so that if for example the periods of your forecast are monthly for 12 months then as each month passes it drops out of the forecast and another month is added onto the end of the forecast so you are always forecasting 12 monthly periods out into the future.
Fungibility (fungible)
The property of a good or a commodity whose individual units are capable of mutual substitution. For example, since one ounce of gold is equivalent to any other ounce of gold, gold is fungible.
Basis Point
Primarily used in financial services industry. One hundredth of one percent. E.g. 1.5% is 150 basis points.
Sweat the Assets
A common approach where an organization keeps equipment or other assets in service well past their retirement date – e.g. keeps employee laptops in service for 6 years rather than 3. Reduces capital costs but also increases risk and may decrease productivity.
