accounts payable: An account that tracks the money a company owes to its suppliers, contractors, and others who provide goods and services to the company.
accounts receivable: An account that tracks individual customer accounts listing money that customers owe the company for products or services they’ve purchased. Also known as trade receivables or trade debtors.
accrual accounting: An accounting method in which a company records revenues and expenses when the actual transaction is completed rather than when cash is received or paid out.
accrued liabilities: The expenses a company has incurred but not yet paid for at the time the company closes its accounting books for the period to prepare its financial statements.
aggressive earnings management: A technique that uses legitimate accounting methods in aggressive ways to get the bottom-line results that a company needs.
amortise: To reduce the value of an intangible asset by a certain percentage each year to show that it’s being used up.
arm’s length transaction: A transaction that involves a buyer and a seller who can act independently of each other and have no financial relationship with each other.
assets: Things a company owns, such as buildings, inventory, tools, equipment, vehicles, copyrights, patents, furniture, and any other items it needs to run the business.
audit: The process by which a registered auditor verifies that a company’s financial statements have met the requirements of the generally accepted accounting principles. In the UK, this is expressed as a ‘true and fair view’.
auditors’ report: A letter from the auditors stating that a company’s financial statements show a true and fair view (or setting out any modifications to that opinion); a company includes this letter in its annual report.
balance sheet: The financial statement that gives you a snapshot of the assets, liabilities, and shareholders’ equity as of a particular date.
buy-side analysts: Professionals who analyse the financial results of companies for large institutions and investment firms that manage mutual funds, pension funds, or other types of multi-million-dollar private accounts.
capital expenditures: Money a company spends to buy or upgrade major assets, such as buildings and factories.
capital gains: The profits a company makes when it sells an asset for more than it originally paid for that asset.
cash-basis accounting: An accounting method in which companies record expenses and revenues in their financial accounts when cash actually changes hands, rather than when the transaction is completed.
cash-equivalent accounts: Asset accounts that a company can easily convert to cash, including current accounts, savings accounts, and other holdings.
cash flow: The amount of money that moves into and out of a business.
cash flow from operations: Cash a company receives from the day-to-day operations of the business, usually from sales of products or services.
chart of accounts: A listing of all a company’s open accounts that the accounting department can use to record transactions.
consolidated financial statement: A report that combines the assets, liabilities, revenues, and expenses of a parent company with that of any companies that it owns.
contingent liabilities: Possible financial obligations that arise 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 reporting entity. A company should report a contingent liability except when it determines that the possibility of a payment being required is remote.
convertibles: Shares promised to a lender who owns bonds that can be converted to stock.
corporate governance: The way a board of directors conducts its own business and oversees a corporation’s operations.
cost of goods sold: See cost of sales.
cost of sales: A line item on the income statement that summarises any costs directly related to selling a company’s products. Also known as cost of goods sold.
current assets: Things a company owns that will be used up or converted into cash in the next 12 months.
current liabilities: Amounts that a company owes in the next 12 months.
depreciate: Reduce the value of a tangible asset by a certain percentage each year to show that the asset is being used up (aging).
discontinued operations: Business activities that a company halted, such as the closing of a factory.
dividends: The portion of a company’s profits that it pays out to investors according to the number of shares that the investor holds.
double-entry bookkeeping: An accounting method that requires a company to record every transaction using debits and credits to show both sides of the transaction.
durable goods: Goods that last for more than one year.
earnings per share: The amount of net income that a company makes per share available on the market.
EBITDA: An acronym for earnings before interest, taxes, depreciation, and amortisation, which may be shown as a line item on the income statement.
equity: The residual interest in the assets of the entity after deducting all of its liabilities. This used to be known as shareholders’ funds.
expenses: Any costs not directly related to generating revenues. Expenses fall into four categories: operating, interest, depreciation/amortisation, and taxes.
fair value: The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
financial statements: A company’s reports of its financial transactions over various periods, such as monthly, quarterly, or annually. The three key statements are the balance sheet, income statement, and statement of cash flows.
fixed assets: See non-current assets.
fixed costs: Those expenses which do not vary with the level of output such as rent or management salaries.
fraudulent financial reporting: A deliberate attempt by a company to distort its financial statements to make its financial results look better than they actually are.
generally accepted accounting practice (GAAP): Rules for financial reporting that are either embodied in accounting standards or have grown up as accepted practice.
going-concern: The assumption that the company will continue in operation for the foreseeable future without the intention or necessity to discontinue or significantly scale-down its level of operations.
goodwill account: An account that appears on the balance sheet when a company has bought another company for more than the actual value of its assets minus its liabilities. Goodwill includes things such as customer loyalty, exceptional workforce, and a great location.
gross margin: A calculation of one type of profit based solely on sales and the cost of producing those sales.
gross profit: The revenue earned minus any direct costs of generating that revenue, such as costs related to the purchase or production of goods before any expenses including operating, taxes, interest, depreciation, and amortisation.
income statement: A report that shows a company’s revenues and expenses over a set period of time; an income statement is also known as a profit and loss account or P&L.
initial public offering (IPO): The first time a company’s stock is offered for sale on a public stock market.
insolvent: No longer able to pay bills and other obligations.
in-store credit: Money lent directly by a company to its customers for purchases of that company’s products or services.
intangible assets: Anything a company owns that isn’t physical, such as patents, copyrights, trademarks, and goodwill.
intellectual property: Works, products, or marketing identities for which a company owns the exclusive rights, such as copyrights, patents, and trademarks.
interest expenses: Charges that must be paid on borrowed money, usually a percentage of the debt.
internal financial report: Summary of a company’s financial results that is distributed only inside the company.
International Accounting Standards Board (IASB): A body that establishes the standards of financial accounting and reporting which must be followed by all European listed companies.
liabilities: Money a company owes to its creditors, for amounts such as loans, bonds, and unpaid bills.
liquidity: A company’s ability to quickly turn an asset into cash.
limited company: Separate legal entity formed for the purpose of operating a business and to limit the owners’ liability for actions the company takes.
long-term assets: See non-current assets.
long-term debt or liabilities: See non-current liabilities.
majority interest: The position a company has when it owns more than 50 per cent of another company’s voting shares.
managing earnings: See aggressive earnings management.
marketable securities: Holdings that companies can easily convert to cash, such as shares and bonds.
material changes: Changes that may have a significant financial impact on a company’s earnings.
material misstatement: An error that significantly impacts a company’s financial position.
net assets: The value of things owned by a company after the company has subtracted all liabilities from its total assets. This will be equal to the value of equity.
net business income: Business income or profit after a company has subtracted all its business expenses.
net marketable value: The book value of investments, adjusted for any gains or losses.
net profit: A company’s bottom line, which shows how much money the company earned after it deducts all its expenses.
net sales or net revenue: Sales a company made minus any adjustments to those sales.
non-current assets: Assets that a company will use for more than a 12-month period, such as buildings, land, and equipment.
non-current liabilities: Financial obligations that a company must pay more than 12 months in the future, such as mortgages on buildings.
non-operating income: Income from a source that isn’t part of a company’s normal revenue-generating activities.
notes to the financial statements: The section in the annual report that offers additional detail about the numbers provided in those statements.
operating cash flow: Cash generated by company operations to produce and sell company products.
operating expense: Any expense that goes into operating a business but isn’t directly involved in producing or creating the product – for example, advertising, subscriptions, or equipment rental.
operating lease: Rental agreement for equipment that offers no ownership provisions.
operating margin or profit: A company’s earnings after it has subtracted all costs and expenses directly related to the core business of the company – its sales of product or services.
operating period: A specific length of time, which may be a day, month, quarter, or year, for which financial results are determined.
ordinary shares: A portion of a company bought by investors, who are given the right to vote on board membership and other issues taken to the shareholders for a vote.
parent company: A company that controls one or more other companies that it has bought in order to build the company.
partnership: A business that is owned by more than one person and is not incorporated.
physical capacity: The number of facilities a company has and the amount of product the company can manufacture.
Preference share: A type of share that usually gives its owners no voting power in the company’s operations. Dividends are usually fixed and, although they are not guaranteed, they must be paid before any dividend can be paid to ordinary shareholders.
profit: The amount of money the company earned after paying all expenses.
Profit and loss account (P&L): See income statement.
provision: A liability of uncertain timing or amount. A company should recognise a provision in the financial statements when it is more likely than not that a payment will be required to settle the obligation.
proxies: Paper ballots sent to shareholders so they can vote on critical issues that will impact the company’s operations, such as members of the board of directors and executive remuneration.
receivership: An arrangement in which a company can avoid liquidating itself and, instead, work with a court-appointed trustee to restructure its debt and thus avoid bankruptcy.
recognise: To record a revenue, expense, asset or liability in a company’s books.
related-party: A party can be related to an entity in a number of ways including where they are members of the same group of companies, where the party is a director or key manager of the entity or where the party is a close family member of a director or key manager of the entity. Two parties are also related if they are subject to common control.
related-party transaction: A transfer of resources, services or obligations between related parties, regardless of whether a price is charged. Related party transactions are disclosed in financial statements because of the possibility that they may be carried out at a value that is not a fair value.
restate earnings: To correct ‘accounting errors’ by changing the numbers originally reported to the general public.
restructure: To reorganise business operations by means such as combining divisions, splitting divisions, dismantling an entire division, or closing manufacturing plants.
retained earnings: Profit that a company doesn’t pay to shareholders over the years accumulates in the retained earnings account.
revenue: Payments a company receives for its products or services.
royalties: Payments a company makes for the use of intellectual property owned by another company or individual.
secondary public offerings: The sale of additional shares to the general public by a company that already has its shares quoted on the public stock market.
secured debt: Money borrowed on the basis of collateral, which is usually a major asset such as a building.
securities: Shares and bonds sold on the public financial markets.
shareholders’ funds: See equity.
share-option plan: An offer a company gives to employees and board members to buy the company’s shares at prices below market value.
short-term borrowings or debt: Lines of credit or other debt that a company must repay within the next 12-month period.
side letters: The agreements a company makes with its regular customers outside the actual documentation it uses in a formal contract to purchase or sell the goods.
sole proprietorship: A business that was started and owned by an individual and that is not incorporated.
solvency: A company’s ability to pay all its outstanding bills and other debts.
statement of cash flows: One of the key financial statements; reports a company’s performance over time, focusing on how cash flowed through the business.
share incentives: Shares that a company offers as part of an employee remuneration package.
tangible asset: Any asset that you can touch, such as cash, inventory, equipment, or buildings.
tax liability account: An account that tracks tax payments that a company has made or must still make.
trade debtors: See trade receivables.
trade receivables: An account that tracks individual customer accounts listing money that customers owe the company for products or services they’ve purchased. Also known as trade debtors or accounts receivable.
trading securities: Securities that a company buys as a short-term investment until the company decides how to use the money for its operations or growth.
turnover: Revenue received from sales.
unrealised losses or gains: Changes in the value of a holding that hasn’t sold yet but has a market value that has increased or decreased since the time it was bought.
variable costs: Costs that change based on the level of output, such as raw materials or employee overtime.
venture capitalist: A person who invests in start-up businesses, providing the necessary cash in exchange for some portion of company ownership.
volume discount: A reduced rate received by a business that agrees to buy a large number of the manufacturer’s product.
wholly owned subsidiary: A company whose shares are purchased in full by another company.
working capital: A company’s current assets minus its current liabilities; this figure measures the liquid assets a company has at its disposal to continue building its business.