GLOSSARY

of common terms in

ACCOUNTING & FINANCE

for non-specialist students

prepared by barry pierce BA MSc ACMA

July 2012

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NOTES

This glossary is designed to help those studying a basic, introductory module in

accounting or finance, but whose degree programme is outside the specialism.
Awareness of what business accountants do, and can be asked to do, interpreting
their reports and analyses are important skills for any manager or professional
because of the ubiquitous role of money. Besides, developing financial awareness &
common sense helps personal development because many of the pressures on
organisations and the self-employed are financially motivated.
However, accountants indulge in jargon and their financial statements are full of it.
This leads to confusion amongst those outside the profession, especially where
different terms mean the same or subtly different things. This glossary should help
you navigate in this idiomatic fog. It presently contains some 350 words or phrases
that I have retrospectively surveyed from lectures to BSc engineering, MSc
management & MBA students. As such, it reflects my audience and my perspective
and is neither objective nor comprehensive. It is hoped that future contributions can
develop this glossary into a more balanced and readable reference.
I would like to thank Lynda Burkinshaw BA FCA CTA PGCE for reviewing this
glossary but mistakes in definition and explanation are entirely my responsibility.
barry pierce
Guide to use
Terms are arranged alphabetically and where synonyms exist, the acronym aka
(also known as) is given in the notes. American textbooks are in common use here
so where the term is largely indigenous, (US) is shown. Where the definition is taken,
in large part or complete form, from an independent source, that source is indicated
by an acronym in the REF column are as follows:
ODA: Anon. (2005) Oxford Dictionary of Accounting (3rd ed). Oxford University
Press
CIMA: Anon. (1996) Management Accounting Official Terminology.
Chartered Institute of Management Accountants
fd: www.thefreedictionary.com
ab: www.allbusiness.com/glossaries/accounting
ham: Liebster & Horner ( 1989) The Hamlyn Dictionary of Business Terms.
Hamlyn
2

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In digital versions, hyperlinks are indicated from a definition or note to a term

explained elsewhere in the glossary

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EXPLANATION

a/c

abbreviation for account or accounts

absorption costing

costing system that distinguishes

between direct & indirect costs and
assigns the latter to cost objects based
on an intervening factor linked to the
volume of production

aka: full costing (US)

accountability

managerial responsibility for the

appropriate conduct of the economic
affairs of a business & the obligation to
report thereon to its owners

contemporary interpretation
widens conduct beyond the
economic realm and widens
responsibility to stakeholders
& society at large

accountancy

the profession of accounting (UK)

accountant

a person who practices accountancy

accounting

the process of identifying, measuring,

recording, & communicating economic
transactions

ODA

accounting entity

the unit for which accounting records

are maintained, separate from those
who own it

ODA

eg a company
aka: business entity

accounting equation

formulae that represent the balanced

nature of accounting entries &
statements

ODA

assets = liabilities + capital

(amongst others)

accounting period

time period for which financial

statements are prepared, usually annual
where publicly disclosed, but the
frequency of accounts prepared for
internal use can be monthly or less

accounting standards

the principles & methods formulated by

an authoritative body for the treatment
of specified transactions

eg the IASB

accounts

structured records of a legal entity which

represents events in monetary terms

aka: books

accounts payable

amounts owed by a company to

suppliers which, in aggregated form,
appear in the balance sheet under
current liabilities

accounts receivable

amounts owed to a company by its

customers which, in aggregated form,
appear in the balance sheet under
current assets

aka: trade debtors; sales

ledger

accrual

a fundamental concept that revenue is

recognised in the accounting period in
which it is earned & related costs are

accruals are one of several

mechanisms which
differentiate cashflow from

regulated activities require

membership of a
professional body

ODA

aka: trade creditors;

purchase ledger

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matched to determine profit. An accrual

recognises an expense in the correct
accounting period where a suppliers
invoice is yet to be received, but it can
also refer to the advanced receipt of
revenue. It is represented in the balance
sheet as a current liability

NOTES
profit

acid test

a stringent test of liquidity

acquisition

the transfer of control of a company by

the purchase or exchange of its shares

activity-based costing

costing system that identifies the

various activities performed in a firm
and uses multiple cost drivers (volume
and non-volume based factors) to
assign overhead costs (ie indirect costs)
to products
ABC recognizes the causal relationship
of cost drivers with activities

agency theory

represents the relation associated with

the separation of ownership of an entity
from control by its management
Ross (1973)

the provision of accounts by

the agent (management) to
the principal (shareholder) is
regarded as a monitoring
cost

AIM

the introductory market for equities in

London with less onerous listing &
regulatory requirements

acronym for Alternative

Investment Market

allocation

the attribution of a whole item of cost (or

revenue) to a single unit, centre or time
period

amortisation

the process of spreading the original

cost or re-valued amount of an
intangible asset over its estimated
economic life by reducing its carrying
value in the balance sheet by the
amount expensed against profit

analyst

a market intermediary who appraises

the performance of shares, securities, &
other financial products

annuity

a constant yearly cashflow usually

associated with an accumulated fund
(eg a pension) and thus involves a
principal sum & compounded interest

apportionment

the splitting of a whole item of cost or

revenue between multiple units, centres
or time periods on some arbitrary basis

but see allocation

asset turnover

a measure of utilisation of a companys

sales assets

ab

monetary assets current

liabilities
aka: takeover; merger

ab

abbrev: ABC
widely adopted over the last
twenty years, displacing the
absorption costing method
because many costs are no
longer affected by the
volume of production

CIMA but see apportionment

commonly applied to brands

& other intellectual property

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non-current or total assets, expressed

as a multiple
assets

economic resources that are expected

to convey future benefits

attestation

a legal verification of truth & correctness

audit

examination of a procedure, process or

policy, independent of those involved,
with a view to ensuring compliance with
regulation, effectiveness, or
improvement

audited accounts

a published set of accounts that have

been independently examined by an
auditor and who expresses an opinion
as to its compliance with accounting
standards and the fairness of its
representation of economic events

the annual reports of larger

organisations will contain an
audit statement to provide
assurance to the reader on
the reliability of its financial
statements

auditor

an accountant who possesses the

certificated training to undertake an
audit

in the UK such a person

must also be a member of a
designated professional
body (eg Institute of
Chartered Accountants;
Association of Chartered
Certified Accountants)

balance

the net debit or credit which remains on

an account at the end of an accounting
period

represents asset, liability,

equity, revenue or expense

balance sheet

a statement of the financial position of

an entity at a given date disclosing the
assets, liabilities and accumulated funds

balanced scorecard

a multi-dimensional performance model

that integrates both financial & nonfinancial metrics with the aims &
strategy of an organisation
Kaplan & Norton (1992)

it contains four perspectives:

shareholder; customer;
internal business process;
innovation & growth

beta

a measure of the systematic risk of a

share or other traded asset

a coefficient above 1.0

means that its price has
been more volatile than the
market index

bill

colloquial name for an invoice

bond

a traded form of borrowing, issued by

governments or corporates that usually
offers a specified (coupon) rate of
interest and a redemption date in the
medium/long-term upon which the
6

eg receivables, inventories,
equipment, patents, etc

CIMA in a company the

accumulated funds will
represent shareholders
interests and are termed
equity

ODA
the principal sum on a UK
bond is 100 (US: $1,000)
bonds are issued in bearer
form and can be freely
traded between investors

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principal sum is repaid to the bearer

bondholder

the bearer of the bond entitled to

receive interest and/or its face value
upon maturity

book value

value of an asset (or liability) shown in

the balance sheet

borrowings

generic term for funds received which

carry an obligation to be repaid in future

break-even point

the level of sales or sales volume at

which neither a profit or loss is made

budget

a plan usually expressed in financial

terms

budget phasing

the attribution of an annual budget over

shorter periods for the purpose of
control

usually monthly or 4-weekly

budget centre

normally an organisational unit whose

manager has responsibility over a
budget

classified as a cost centre,

profit centre or investment
centre

budgetary control

the process of comparing actual results

with budget, for the purpose of feedback
on past performance or forward
modification of plans

usually by budget centre so

as to make a designated
manager responsible for
action

budgetary slack

intentional underestimation of revenues

and/or overestimation of expenses;

budgeting

an approach to the short-term

management of organisational
performance through the formalised use
of financial plans & disseminated targets

business risk

generic categorisation of risks

associated with the strategy &
operations of a commercial enterprise

buyout

the acquisition of a substantial

shareholding of a business by its own
management

call option

a right but not an obligation to buy an

asset at a pre-specified (exercise) price
over a pre-specified future period of
time or date

an important risk mitigation

(or hedging) device
also see put option

capital

a generic term which represents the

funds injected into and generated by a
business

requires an associated
adjective, adverb or noun to
have particular meaning

various bases of valuation

are used, as governed by
accounting standards &
company policies

abbrev: BEP =
fixed
cost contribution per unit

ab

in finance, the term is often

used to differentiate nonfinancial risk from financial
risk which is induced through
gearing
ODA

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capital employed

the funded asset base, represented in a

balance sheet, from which operating
profits are generated

total assets current

liabilities or non-current
liabilities + equity

capital expenditure

the cost of acquiring or improving noncurrent assets which is not charged

against current profits but recognised as
an asset and then written down (as
depreciation) over its economic life

abbrev: capex

capital gain

the proceeds on disposal of an asset

(eg land; ordinary share) less its original
cost

capital gain, together with

dividend received, are the
two components of
shareholder return

capital market

a market into which long-term securities

(ie shares & bonds) are issued and in
which they are traded

key source of funds for listed

companies

capital retirement

a reduction in the funding base of a

company by repaying borrowings,
redeeming securities, or repurchasing
shares

capitalise

expenditure that is added to non-current

assets in the balance sheet rather than
charged against current profits

cash

bank notes, coins & current account

balances

cash balance

the net amount of cash possessed or

overdrawn

cash equivalent

highly liquid investments that are

capable of being converted into cash
without notice

cash injection

a rise in the external funding of a

business to facilitate growth or maintain
liquidity

cashflow

the movement of cash into & out of a

business

cashflow statement

a financial statement (eg in an annual

report) which shows the inflows &
outflows of cash & cash equivalents
over the past accounting period

analysis is by operating,
investing, & financing
cashflows in published
statements

CFO

commonly used title for the board

director responsible for finance & the

abbrev: Chief Finance

Officer

eg: installation costs on

machinery; interest costs on
funding the construction of a
building

appears in the current asset

or liability section of the
balance sheet and as the
final figure in the cashflow
statement
ODA

ODA

receipts & payments

respectively

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accounts
chairmans statement

a mandatory statement in an annual

report of a company, the content of
which is not regulated

important source of strategic

context because, whilst it is
likely to convey a favourable
picture, the statement
summates key events and is
often forward-looking

charge

a legal interest in the assets of a

company often required by lenders &
other creditors so as to provide security
on a borrowing
also see collateral & security

may be fixed where the

assets are nominated or
floating where they are
generic (eg in a bank
overdraft secured on
accounts receivable)

collateral

assets that can be offered as security to

a lender of funds

commercial paper

short-term, unsecured borrowing issued

by renowned companies on a money
market

offers no interest, but is

issued below its par value

comparability

an accounting principle that published

financial data should be prepared on the
same basis (ie accounting standards) as
other companies in order that
independent analysis can be
consistently based

where standards change,

past results are re-stated to
maintain comparability

compliance

activities to ensure accounting records,

systems, & reports concur with
regulation

fundamental role of an audit

comply or explain

a principle embedded in the UK

corporate governance code that quoted
companies should disclose in their
published report that they have
complied with provisions of the code or
explain any non-compliance, the merit
of which can then be judged by the
reader

compound interest

where the interest on a sum lent or

borrowed is re-invested and so
accentuated the amount of interest in
future periods

contingency theory

that there is no universally applicable

CIMA
best practice in the design of
organisational controls such as a
management accounting system
Lawrence & Lorch 1967

contingent

an asset or liability that arises from past

events but whose existence will be
confirmed only by the occurrence of an
9

eg 10 at 10% interest per

annum will be 1 in the first
year but 1.10 in the second
(10+1)x10%

ODA

adjective or adverb

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uncertain future event

contribution

incremental profit generated from sales

control budget

the budget that is used for

organisational control and to which
budget centre managers are held
accountable

convertible

a bond that can be changed into

ordinary shares at a future time at the
discretion of the holder or held until
maturity and repaid as if a loan

noun

corporate governance

guidance or regulation applied to boards

of directors on the conduct of their
direction and control of company
operations

governance regimes have

important implications for the
internal control of risk and
the integrity of public
reporting of accounting
information

COSO framework

the over-arching risk management

framework recommended by US law
and UK code of corporate governance

COSO stands for the

committee of sponsoring
organisations of the US
Treadway Commission
(1987)

cost

the amount of expenditure, actual or

notional, incurred on, or attributable to,
a specified thing or organisational
activity

cost accounting

the process & techniques adopted to

collect, analyse, & present internal
monetary & quantitative data

cost centre

a production or service location,

function, activity or equipment for which
costs are accumulated (eg maintenance
department)

CIMA

cost classification

the process of grouping expenditure

according to common characteristics
(eg energy)

ODA

cost driver

the factor, normally the level of

resource, that causes cost to be
incurred on organisational activities (eg
number of purchase orders)
10

an important term in
marginal costing that
represents sales minus
variable costs of sale, where
fixed costs are not attributed
to the cost object (eg to the
product)

CIMA

cost accounts are usually

integrated with financial
accounts but extend the
database considerably
beyond regulatory needs

especially associated with

activity-based costing where
it is also the basis upon
which cost of activities are

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attributed to cost objects

cost object

the destination to which or purpose for

which costs are attributed

eg product for pricing;

department for budgetary
control; customer for
profitability analysis

cost pool

a cost centre, where it is an activity

(eg procurement)

only used in activity based

costing

cost of capital

the return required by investors on the

provision of their funds. This may be a
cash cost (as in the interest on a loan)
or an opportunity cost (as in equity)

this is not the cost of

arranging or issuing finance.
It is an annualised cost of
renting the finance

costing

the process of determining the costs of

products, services or activities

cost-plus pricing

an approaching to setting the selling

price of a product or service which
involves applying a mark-up to its
attributed cost

coupon

the interest rate specified on a bond

certificate

covenant

a promise that is legally enforceable

creative accounting

misleadingly optimistic, though not

illegal, forms of accounting. Accounting
statements published on this basis are
said to be window-dressed

credit

an agreed delay in the settlement of an

invoice or other liability incurred.
an entry on the right-hand side of an
account

CIMA use of this term normally

requires qualification by an
adjective

this is the rate paid and

shown in the accounts. It is
not the rate of return (or
yield) to the bondholder
technically compliant with
laws and accounting
standards and, normally,
acquiesced to by the auditor

see double entry

credit crunch

a populist phrase for the loss of liquidity

in the money markets & throughout the
banking system as a result of bank
collapse in 2008/9 in the US, UK and, to
a lesser extent, Europe

led to a withdrawal or
tightened constraint on
corporate lending

credit rating

an independent assessment of the

ability of a company (or other entity) to
repay a borrowing or line of credit

undertaken by an agency
such as Standard & Poors.
Commonly the highest (most
favourable) rating is AAA
falling to a single C for high
risk clients or projects

creditors

those to whom an organisation owes

money

11

ODA

includes lenders, trade

supplier, & government
authorities for tax
aka: payables

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current

less than one year

adjective applied to assets &

liabilities in the balance
sheet

current ratio

an indicator of working capital

management. A high ratio may indicate
inefficiency; a low ratio illiquidity

current assets : current

liabilities

customer profitability
analysis

attribution of the revenue streams &

service costs to specific customers or
customer groups

contemporary re-orientation
in the cost object which
reflects the rising importance
of networks & brands

debenture

a loan agreement, normally at a fixed

rate of interest and redeemable in the
medium & long term. It often carries a
legal claim or charge over the
borrowers assets and contains
covenants which restrict the borrowers
freedom of action over decisions on
capital structure & dividends

the holder of the debenture

ie the investor can assign
its rights or sell the loan on
a capital market. In this way,
the debenture becomes
securitised and tradable

debit

an entry on the left-hand side of an

account

see double entry

debt

an amount owed by one entity to

another.
a collective term to describe any forms
of capital or financing other than equity

debtors

those who owe money to an

organisation
usually these are customers who have
been granted credit and are referred to
as trade debtors

shown in the current assets

section of the balance sheet
aka: accounts receivable

decision relevant

data that are pertinent to the taking of a

decision. In financial terms, these can
be regarded as future, incremental
cashflows

accounting data is often

irrelevant as it may involve
sunk or notional costs or be
based on historic value

deferral

an asset or liability recognised on a

balance sheet that reflects a future
income or expense

eg deferred income: liability

prepayment: asset

deficit

loss

pseudonym often used in

not-for-profit organisations

deposit

money paid in part-settlement of a

product to be supplied or service to be
received.
in banking terms, this is money lodged
by a customer

depreciation

the attribution of the initial cost of a

tangible, non-current asset over future
12

the basis of attribution is

stated as an accounting

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accounting periods to recognise the

reduction in its value through use

policy & the amount is

charged against profits in the
income statement, thus
reducing the carrying value
in the balance sheet over
time

derivative

a financial instrument originally

designed to hedge against the risk of
future movements in the price of a
specified tradable asset but whose use
is often speculative.
its prevailing price is, in part, derived
from the price of the underlying asset to
which it refers

forwards, futures, options &

swaps are all examples of
derivative products

direct cost

a cost that can be specifically attributed

to a cost object

directors report

a section in an annual report that is

required by the UKs Companies Act
2006

disclosure

provision of information in the public

interest, the minimum content of which
is specified by law, market regulations,
& financial reporting standards

discount factor

a decimal, derived from the discount

rate and future time period, which when
multiplied by the future amount,
converts it to a present value

eg discount factor for an

amount to be received in two
years where the rate of
return is 10% is 0.826

discount rate

the hurdle rate of interest applied to

appraise a potential investment.
the rate will be based upon the cost of
capital but is normally adjusted to reflect
the specific risk characteristics of the
investment or an equivalent investment
in the market

commonly used in a
discounted cashflow
projection to determine if the
net present value is positive
or negative value creative
or destructive, respectively

discounted payback

an technique that assesses the delay in

recovering the outlay on an investment
using the present values of its projected
cash generation

discounting

the reduction of future amounts to their

present value.
when used in connection with invoices,
this refers to the reduced amount
received from a factor in advance of
settlement by the customer.
when used in connection with treasury
bills or commercial paper, this refers to
13

compliance-based, it
contains little strategic or
financial insight

the level of discount on T

Bills determines the implied

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the reduced amount received on issue

in relation to the face value of the bill
that will be paid upon maturity

base rate in the UK economy

disposal

the sale or scrapping of an asset

particularly evident in the

notes to the accounts on
non-current assets and in
the investing section of the
cashflow statement

diversification

broadening in the field of operations of a

business or investor

associated with the creation

of a portfolio and risk
reduction

divestment

the sale of an asset, particularly a

subsidiary business

dividend

a discretionary reward to shareholders

from the distributable reserves of a
company

normally related to the

current earnings of a
business

dividend cover

a measure of the maintainability of a

dividend. A trend of reducing cover
multiples could be a prelude to a cut

earnings dividends
or eps dps

dividend per share

the total amount distributed divided by

the number of shares in issue
where dividends are declared, an
interim payment is made and a final
dividend per share proposed for
shareholder vote at the annual general
meeting of the company

abbrev: dps
an important measure of the
trend in shareholder reward,
where quoted companies will
seek to be progressive and
avoid the volatility
associated with earnings

dividend yield

a measure of shareholder return by

relating the last years dividend
distribution to the current share price on
the capital market, expressed as a
percentage

dividend per share share

price x 100

double entry

a method of recording transactions in a

set of accounts which reflects the dual
aspect of the transaction and involves
more than one account

since each debit entry has a

corresponding credit, the
accounts as a whole should
balance

drawn down

occurs where a borrowing facility has

been arranged where amounts may be
called upon as required and over an
agreed period up to the limit specified
by the facility

the aggregate drawdown

and not the facility
represents the liability shown
in a balance sheet

earnings

profits after tax, that are attributable to

the ordinary shareholders

aka: net income (US); the

bottom line (slang)

earnings per share

important measure of financial

performance, whose calculation is
subject to an international standard
(IAS33). eps relates the profit
attributable to shareholders to the equity

abbrev: eps
profits after tax no of
shares in issue
NOTE: the eps of different
companies are not

14

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capital base of the company and thus

provides a trend of return, irrespective
of growth

comparable

EBITDA

a contemporary measure of financial

performance that is a hybrid of profit &
cash generation

Earnings Before Interest,

Tax, Depreciation &
Amortisation

efficient market
hypothesis

a proposition that financial markets

fairly, rapidly & rationally assimilate
information into the price of a share or
other traded asset

abbrev: EMH

equity

the value of shareholders interest in a

company: represented in the accounts
as the net asset value or capital &
reserves figure in the balance sheet
also represented for a listed company
by its market capitalisation

equity = net asset value =

total assets total liabilities
= ord share capital +share
premium + reserves +
retained profit
market value of equity =
number of shares issued x
share price

exceptional items

significant costs or revenues that, whilst

unusual, fall within the normal
operations of a business and are
disclosed separately in its income
statement with the intention of
conveying a fair view of underlying
profitability

expenditure

payment of cash, or the incurrence of a

liability, to obtain an asset or service.
may be classed as revenue
expenditure which is charged against
profit or capital expenditure which is
capitalised as an asset

expense

see expenditure

face value

the value cited on a security when it is

issued. It does not represent the cash
received at the time or the market value
of the share or bond

aka: par value; nominal

value

facility

an agreement, usually with a bank, that

grants a line of credit that can be used
in future

expressed as the maximum

amount of the potential
borrowing

factoring

the sale by a company of its accounts

receivables to a third party (often a bank
subsidiary) at a discount in return for
prompt cash and for a fee in return for
the administration of the debtors ledger

the factor may assume

responsibility for credit
default risk (a withoutrecourse agreement) but will
then define credit terms &
limits applied by the
company

fair value

the amount of money which it is

15

ab

ODA

aka: cost; expense

used in particular in

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assumed an asset or liability could be

exchanged in an arms-length
transaction between informed and
willing parties

acquisition accounting where

the net assets of the target
are brought onto the balance
sheet of the predator

feedback

the monitoring of actual output against

plan with a view to retrospective action
to correct the difference

as in a budgetary control
system

feedforward

the modelling of system resources &

processes so as to compare forecast
outputs against plan with a view to
taking pre-emptive action to forestall
difference

as in budgeting

finance

the practice of manipulating & managing

money.
monetary capital raised for business
purposes.
verb: to raise monetary capital

finance lease

a contract for the use of a specific noncurrent asset (eg equipment) which
conveys the risks & rewards of
ownership, but not ownership itself, to
the user (the lessee)

financial accounting

the accounting process and database

required to generate published periodic
financial reports as regulated by law,
accounting & reporting standards

financial investment

an outlay of funds with a view to profit

financial management

the management of all the processes

associated with the sourcing &
deployment of funds with a view to
providing suitable returns to investors

financial markets

formalised institutions that engage in the

trading of financial products including
shares, bonds, notes, paper, currencies,
derivatives, etc

16

ODA

aka: funds
aka: funding

requires recognition in the

balance sheet as a noncurrent asset (even though it
is not owned) and the
associated liability
represents future payments
to the lessor

investments may be
differentiated between those
that are financial as in
market securities & assets
and productive investments
made by a companys
management in
conventional business
assets

in the UK, the pre-eminent

markets are the London
Stock Exchange, the AIM,
the LIFFE

REF

NOTES

TERM

EXPLANATION

financial reporting

the presentation of structured analyses

of accounting data.
the normal connotation of the meaning
of the term is the package of statements
that are made publicly available and the
content & format of which are regulated

the International Accounting

Standards Board has issued
a series of financial reporting
standards (IFRS)

financial risk

generally refers to risks that are

associated with monetary transactions &
values but has a specific meaning in
relation to debt in a companys capital
structure which induces risk on
shareholders (who are residual
claimants on profit after interest has
been paid and upon net assets in the
event of liquidation)

a higher gearing represents

higher financial risk

fixed cost

an expenditure whose level remains

unaltered irrespective of moderate
changes in the volume of turnover or
intensity of operations
a term explicitly used in marginal
costing

examples include rent,

depreciation, & the costs of
salaried personnel

flexed budget

the adjustment of sales & variable cost

elements within an original budget to
reflect actual volumes of turnover or
production achieved

the flexed budget becomes

the standard against which
variances on resources
consumed can be validly
assessed

floating rate

an interest rate which rises and falls in

relation to the underlying base rate in
the economy

most commercial lending is

based upon LIBOR

flotation

the launch of a companys shares onto

a capital market for the first time

aka: Initial Public Offering

(IPO)

forecast

a prediction and quantification of future

events without a declared intent to
achieve them

free cash flow

the net cash generation of a business

that is available for dividend distribution
& capital redemption
note that a negative FCF means that an
entity requires external financing

abbrev: FCF
FCF = operating cashflow
(net) investing cashflow

FTALLSH

an index on the London Stock

Exchange market that represents the
aggregate movement in the price of all
shares listed on the market, weighted by
their market capitalisation

market indices provide a

general benchmark against
which the profile of an
individual shares price may
be judged

FTSE100

an index on the London Stock

Exchange market that represents the
aggregate movement in the price of

the constituent companies of

the index are changed
annually based on their

17

TERM

EXPLANATION

REF

NOTES

shares of the top 100 companies by

value, weighted by their market
capitalisation

ranking by market
capitalisation

full costing

the complete attribution of relevant

operating costs to a cost object

aka: absorption costing

funding

the provision of monetary capital to

facilitate productive investment and
operational liquidity

aka: financing

funds

monetary capital, which may be sourced

externally or internally

the equity figure in the

balance sheet represents the
accumulated, internal funds
of a business or
shareholders funds

futures

contracts that carry an obligation to buy

or sell a specified asset (eg foreign
currency, oil) at a specified price at or
over a specified time in the future

such contracts may be bilateral (eg between a

company & a bank) of
involve blocks of the asset
on a derivatives market (eg
LIFFE)

GAAP

abbrev: Generally Accepted Accounting

Principles

usually refer to accounting &

reporting standards in the
US

gain

a profit usually made from a rise in the

market price of an asset

gearing

the relative amount of debt in the total

capital structure of a business
a company is said to be highly geared
when its proportion of debt is
significantly higher than other
companies in the same industry sector
debt financing creates a geared
(multiplied) effect on earnings when
sales are growing but the reverse when
sales are in decline. Financing growth
through the use of debt offers the
prospect of higher returns for
shareholders but at greater risk

ODA

gearing can be calculated in

number of ways, but
commonly:
debt (debt + equity) x
100%
based on balance sheet
values, but the use of market
values will be more
representative
alternatively, the debt:equity
ratio may be used

GILTS

UK government bonds, regarded as a

risk-free investment issued with a range
of maturities, whose yield is used as a
basis for setting corporate bond rates

abbrev: Government Issued

Long Term Stock

going concern

a fundamental accounting concept that

determines the basis upon which
accounts are prepared that the
business will continue to operate for the
foreseeable future. Asset valuations and
liabilities recognised are thus
significantly affected by this

the UK Corporate
Governance code requires
listed companies make a
declaration in their annual
reports to this effect

18

TERM

EXPLANATION

REF

NOTES

presumption
goodwill

the difference between the amount paid

to take over a company and the
aggregate of the fair values of its net
assets caused by reputation, customer
base, and similar intangible factors

gross profit

the difference between the sales & the

directly-attributable costs of sale of a
business, but excluding distribution,
administrative, & financing expenses.
a key indicator in the retail sector which
shows the effect of price discounting &
buying power

harvest

a strategy, often adopted for mature

products & services, which curtails
investment to enhance cash generation

hedge

a financial transaction or position

designed to mitigate risk

historic cost

the valuation of assets based on their

original purchase price

hurdle rate

the discount rate set in an investment

appraisal over which the return on a
project must jump in order to be
considered viable. It is normally set by
applying a premium for risk on the
underlying cost of capital

IASB

global body which regulates principles,

content, bases, & formats of published
accounting reports and is subscribed to
by 120 member states

impairment

reduction in the value of specific noncurrent assets shown in the accounts to

reflect the recoverable value either
through realisation or use in future
economic activity

income

US term for sales or revenue; note, net

income is equivalent to profit

income smoothing

the manipulation by companies of

certain items in their financial
statements so that they eliminate large
movements in profit and are able to
report a smooth trend over a number of
years

19

CIMA it is recognised on
acquisition of a company
where the amount paid in
excess of its net asset value
is regarded as an intangible
asset and subject to annual
tests of impairment
(sales cost of sales)
sales x 100%

ODA

International Accounting
Standards Board

ODA

this is legitimate providing

the adjustment does not
contravene accounting
standards or audit opinion.
Such adjustments are
commonly made through
accruals, provisions, and the
carrying value of & policy on

TERM

EXPLANATION

REF

NOTES
non-current assets

income statement

an financial statement that discloses the

revenue, operating profit, & earnings
over the last accounting period

previously known in the UK

as the profit & loss account

indirect cost

a cost that cannot be specifically

attributed to a cost object (ie an
overhead expense) and, as such, is
attributed indirectly by apportionment,
secondary allocation, & ultimately
absorption

aka: overhead

intangible

a non-current asset that is documentary

(eg a patent), contractual (eg a licence)
or notional (eg a brand or goodwill)
ie does not take physical form

they may be subject to

regular write down, that is
amortised, just like a
tangiblel asset

interest

a rent for the use of money, normally

paid periodically, and expressed as an
annualised percentage rate on the
capital sum involved

interest cover

measure of the vulnerability of interest

payments to a drop in profit and thus
financial risk

internal audit

an audit that an organisation carries out

on its own behalf, normally to ensure
that its own internal controls are
operating satisfactorily

internal control

an organisational process that is

designed to assure the outcome of an
activity is as intended

accounting systems are

intended to monitor financial
transactions and ensure
probity

internal rate of return

the annualised return over the life of a

productive investment, calculated by:
the discount rate which, when applied to
future cashflows, generates an
aggregate present value equal to the
amount outlaid at the beginning
ie where the NPV is zero

abbrev: IRR, and is the r in

outlay =
cashflowy (1 + r)y
where y is each year over
the life of the investment

inventory

materials received & held in store, in

progress of manufacture, or products
not yet sold

traditional UK term: stock

investment

any application of funds which is

intended to provide a return by way of
interest, dividend or capital appreciation.

20

operating profit interest

ODA

CIMA productive investment is an

intermediate stage in which
businesses use the funds
provided to expand or
develop and thus generate
enhanced profits from which
financial returns are made

REF

NOTES

TERM

EXPLANATION

investor

the individual or corporate entity that

provides the funds for investment

invoice

a document stating the amount of

money due to an organisation issuing it
for goods or services supplied

invoice discounting

the reduced amount received from a

factor in advance of settlement by the
customer

factors include departments

or subsidiaries of banks

IPO

the launch of a companys shares onto

a capital market for the first time

abbrev: Initial Public Offering

(IPO)
aka: flotation

job costing

a process that attributes costs to a

specific customer order

common in companies that

offer bespoke products or
professional services

junk bonds

unsecured corporate bonds that carry a

high coupon and/or yield because of the
perception of a high risk of default

KPI

a main internal indicator of performance

toward achieving a corporate goal
based on monitoring a factor critical to
the success of the strategy

abbrev: Key Performance

Indicator

a contract for the use of a tangible asset

which incorporates its funding, from the
vendor itself or an independent lessor,
who retains ownership.
finance leases tend to be for specialised
assets (eg bespoke machinery) over a
longer term
operating leases tend to be for general
use assets (eg cars; photocopiers) for
shorter periods

the accounting treatment

varies according to the
classification. Only finance
leases are represented in a
balance sheet under noncurrent assets & non-current
liabilities, as if they were
owned by the user; operating
leases are simply expensed
as rent

leverage

US term for the relative amount of debt

in the total capital structure of a
business

aka: gearing

liability

an obligation to make a future payment

to another entity because of a past
transaction

LIBOR

the average rate of interest in the shortterm money market at which banks in
the UK lend money amongst

leasing

21

though the majority of

funding in unlisted
companies is from internallygenerated, retained profit
ODA

abbrev: London Inter-Bank

Offer Rate

TERM

EXPLANATION

REF

NOTES

themselves.
it is normally marginally above the base
rate in the UK economy, set by the
discount rate on government issued
treasury bills and, in itself, acts as the
base rate for most variable rate
commercial lending both in the UK &
overseas
life cycle costing

an assessment of the total cost of a

physical asset from cradle-to-grave: eg
a products development, manufacture,
servicing, & disposal

important to decisions over

economic use and
environmental impact

LIFFE

the market in London for trading

derivatives on currencies, shares,
commodities, & equity indices

abbrev: London International

Financial Futures options
Exchange

liquidity

the ability of a business to meet its

current debts when due, either through
the possession of cash or assets that
can be readily converted into cash

listing

the registration of a company on a

capital market which enables its shares
to be publicly issued and, subsequently,
other of its securities to be traded (eg
corporate bonds)

loan

a bi-lateral contract on the provision of

specified funds

loan note

medium-term traded loan, in bearer

form

loan stock

longer-term traded loan, in bearer form

loss

an excess of cost over its related sales

management accounting

the concepts and techniques used to

assimilate, analyse, & internally report
financial, quantitative & qualitative data
for organisational planning, control &
decision making

management buy-out

where a management team buy the

company they run from its existing
shareholders

margin

the profit made on the sale of products

or services, usually expressed as a
percentage of selling price

marginal costing

a costing & decision making technique

that charges only variable costs to cost
objects and treats fixed costs as a lump
sum to be deducted from total
22

both specify a coupon or

fixed rate on interest

ODA

aka: variable costing (US)

S VC = C = FC + P
S: sales; C: contribution; P:
profit; VC: variable cost; FC:

TERM

EXPLANATION

REF

contribution to derive the profit or loss

for the accounting period
important approach for examining the
effect on profit of changes in sales
volumes

NOTES
fixed cost

market capitalisation

the market value of equity in a company

market efficiency

the degree to which a financial market

observes the proposition of the Efficient
Market Hypothesis

market value

the unit price or aggregate value

determined by trading activity on a
market

mark-up

the percentage applied to unit cost to

determine the selling price of a product
or service
it may be applied to the full or variable
cost

mark-up = (selling price

cost) cost x 100%

master budget

the budget summary into which all

subsidiary budgets are consolidated and
represented by the projections of the
principal financial statements

budgeted income
statement
budgeted financial position
at start & end of the
ensuing year
cash flow budget

matching

an essential procedure in accrualsbased accounting where the costs relate

to the sales recognised in the
accounting period

adjusting entries are prepayments & inventories in

current assets & accruals in
current liabilities

materiality

a concept that governs the required

accuracy of accounting data &
information. The omission or misstatement of data is significant if it could
influence decisions by the readers of
accounts

judgements on materiality
determine an auditors extent
of examination & willingness
to contest a figure in the
accounts

merger

a combination of two or more

companies on an equal footing that
results in the creation of a new reporting
entity in which the shareholders of the
separate entities mutually share risk and
neither gain overall control

aka: acquisition; takeover

in reality, genuine mergers
are rare and the appellation
is a euphemism to maintain
the pretence of equality

money

a medium of exchange that functions as

a unit of account, a store of value, and a
means of deferred payment

money market

a short-term wholesale exchange for

financial instruments such as treasury
bills, certificates of deposit, &
commercial paper but also includes
bullion and foreign exchange
23

ODA

TERM

EXPLANATION

mortgage

a long-term loan secured on land or

property

multi-dimensional
performance models

a monitoring framework that contains

many aspects or perspectives beyond
that of profit and the interest of
shareholders

mutually exclusive

the choice of an item, action, or use

which precludes alternatives

net

the amount remaining after specific

deductions have occurred
often involves netting off two sides of
accounts

REF

NOTES

eg Balanced Scorecard;
Results-Determinants
Framework
Performance Prism

ODA
eg net asset value; net cash
flow

net present value

the aggregate of the present values of

all the future cashflows generated over
the life of a productive investment less
the amount outlaid at the beginning

abbrev: NPV, and is equal

to:
cashflowy (1 + r)y outlay
where y is each year over
the life of the investment &
r is the hurdle rate

net profit

gross profit less the expenses in an

accounting period.
note that net margin is an important
expression of operational profitability

aka: operating profit; trading

profit profit before interest &
tax; net income (US)
net margin
= net profit sales x 100%

non-current

a greater duration than one year

adjective used to classify the

longevity of assets &
liabilities

notional cost

a cost used in product evaluation,

decision making, & performance
measurement to represent the cost of
using resources which have no
conventional actual cost (or cash cost)

CIMA eg depreciation; rent on

owned property; interest on
capital at sub-corporate
level; transfer prices

obligation

a commitment, duty, or promise that is

enforceable in law

eg to repay a debt

operating cycle

the average time between payment for

supplies and the receipt of cash from
related sales

indicates the funding needed

to maintain operational
liquidity
aka: working capital cycle

operating lease

a contract for the hire of plant or

equipment where the period of use by
the lessee is substantially less than the
economic life of the asset and where
many risks of ownership remain with the
lessor

there is no recognition in the

balance sheet and lease
payments are simply
expensed against profit
eg: fleet cars; office
equipment

24

REF

NOTES

TERM

EXPLANATION

operating profit

the profit or loss made in an accounting

period from the main trading activities of
a business

opportunity cost

the economic cost of an action

measured in terms of the benefit
foregone (ie sacrificed) by not pursuing
the best alternative.
in other words, the cost of the lost
opportunity

option

a contract that carries a right, but not an

obligation, to buy or sell a specified
asset at a specified price at or over a
specified time in the future

can take the form of a blocktraded derivative

also see future

ordinary shares

partial ownership of a company that

entitles the holder to a share of the
distributable profits (ie earnings) and the
residual net asset value in the event of
its liquidation

ordinary shares are undated

and normally carry the right
to vote on proposals by the
companys board of directors
in general meeting

outlay

initial expenditure on a productive

investment

out-turn

a UK term for a revised forecast in a

budgetary feed-forward system,
commonly adopted in the public sector

over/under capitalisation

an opinion on the adequacy of funds

available to a business in relation to the
structure of its net assets and its
strategic intentions

overdraft

an arrangement with a companys bank

that allows the current account to go
into deficit up to a prescribed limit (eg
the overdraft facility)

overhead

the indirect costs of an organisation

overhead absorption

the final stage in the attribution of

indirect costs to a cost object (eg a
product) using an estimated rate based
on the relation between the budgeted
overhead cost and a factor linked to the
planned output over the same period

eg budget overhead cost:

1,000
planned output: 100 machine
hours
overhead absorption rate =
10 per machine hour

over-trading

a severe liquidity problem caused by a

business over committing itself to
contracts for which it has inadequate
short-term funding resource

commonly caused by rapid

growth in SMEs that have
long cash operating cycles

par value

the value cited on a security when it is

issued. It may not bear any relation to
the cash received at the time or the
market value of the share or bond

aka: face value; nominal

value

25

aka: trading profit; net profit;

profit before interest & tax;
net income (US)
ODA

eg: the cost of funds must be

judged in terms of the
returns they could earn on
market securities of similar
risk

over-capitalisation implies
inefficient use of funds;
under-capitalisation, its
inadequacy or illiquidity

REF

NOTES

TERM

EXPLANATION

payback

the period of time required for the cash

inflows from an investment to recover
the outlay

payment

cash outflow

PBIT

abbreviation for Profit Before Interest &

Tax, the principal measure of
operational profitability

pension

a fund for an individual, accumulated by

contributions during their working life,
which pays an annuity & potentially a
lump-sum upon retirement or the
reaching of a specified age

performance

progress toward achievement of

predetermined goals but can also be
measured by reference to performance
in the past or by that of peers

perpetuity

an annuity that is everlasting

portfolio

a set of assets, usually financial

securities, held by an investor. The
constituents are chosen to reflect the
risk/return preferences of the investor

preference shares

shares that carry a fixed rate of dividend

and have a prior claim on company
profits or assets to the ordinary share
holders

prepayment

a cash payment in respect of a supply

or service which is received in a later
accounting period

present value

a cash equivalent now of a future sum

discounted at a required return on
investment

price

the exchange value of something in its

market

price earnings ratio

an important relation between the

market price of an ordinary share and its
current ability to earn profit.
High PERs are associated with rapidly
growing companies whilst low multiples
suggest maturity. PERs are perhaps
best judged by comparison with peers in
the same sector of the market

abbrev: PER; P/E ratio

Calculated by:
share price earnings per
share
or
market capitalisation
earnings

pricing

the approach adopted by a business

toward the setting of prices for its
products or services

this may be based upon

cost, prevailing prices in the
market, or a competitive

26

a simple, but widely used,

investment appraisal
technique
aka: trading profit; net profit;
operating profit; net income
(US)

TERM

EXPLANATION

REF

NOTES
strategy or tactic

principal budget factor

market demand or a specific resource

that constrains the scale of operations
of an organisation and which is
evaluated first in the preparation of the
organisations budget

proceeds

receipts from sale, but the term is

usually used in conjunction with an
extra-ordinary event

eg IPO of shares; disposal of

non-current assets

process costing

a method of collecting & attributing

costs where products or services result
from a continuous process

eg steel rods from a furnace

which is never shut-down;
electricity from a turbine

productive investment

a term which differentiates investment

made by a company in its business as
distinct from financial assets (by
external investors)

profit

the excess of revenue over related cost

profitability

a criterion of economic performance

provision

an amount set aside out of profits for an

anticipated future liability, though
uncertain as to amount & time.
the establishment and subsequent
release of provisions offer scope for
creative accounting

appears in the balance sheet

but may be included in
current or non-current
liabilities or netted off a
current asset (as in
provisions for doubtful debts
and stock obsolescence)

prudence

an accounting principle that requires the

approach to the preparation of
published accounts to be cautious,
particularly in relation to the outcome of
future events

the prudence concept seeks

to ensure that assets &
income are not overstated
and liabilities & expenses
are not understated

purchases

the buying of a supplied product or

service which is recognised in the
accounts at the time it is received or
undertaken

put option

a right but not an obligation to sell an

asset at a pre-specified (exercise) price
over a pre-specified future period of
time or date

quick ratio

an indicator of the liquidity of a

company, the level of which must be
judged in relation to the context of the
business being examined

quoted companies

companies whose shares are listed on a

recognised exchange

27

the normal motive of

business

aka: acid test

(current assets inventories)
current liabilities

REF

NOTES

TERM

EXPLANATION

ratio analysis

a systematic approach to the appraisal

of accounting data contained in the
balance sheet & income statement to
inform an assessment of profitability,
efficiency, liquidity & financial risk

textbooks are overly

prescriptive in the use of
these ratios. insufficient
attention is paid to the
underlying accounting data
and to the context of the
company under examination

real option

an approach to the financial appraisal of

productive investment opportunities in a
similar way to financial investment
opportunities.
in essence this views opportunities as
buy, sell, or option decisions ie invest,
dispose, or defer a decision on a noncurrent asset or project

a decision to invest is
analogous to a call option; a
decision to divest is
analogous to a put option;
the duration of the exercise
period facilitates deferral of
the decision until contextual
uncertainties clarify

realisable value

the future economic benefit anticipated

from an asset (eg inventories)

the prudence concept

requires that assets be
stated in the balance sheet
at the lower of cost or net
realisable value

receipt

cash inflow; or a document issued to a

third party to acknowledge such

reconciliation

an accounting procedure undertaken to

ensure that account balances or
statements are supported by
documentation

redemption

the repayment of bonds & other

securities

regulatory framework

company law, market & professional

rules, standards & codes that govern
the preparation of published accounts

reliability

an accounting principle that the financial

information provided by a company
should have the characteristics of
faithful representation, neutrality,
completeness, freedom from material
error, and caution

remuneration

the salary & monetary rewards of

employees and particularly those
enjoyed by directors

rent

a payment made for the use of an asset

over a period of time

replacement cost

the price at which identical goods or

28

eg a comparison between
the balance on a cash
account and the bank
statement & money in hand

ODA

the existence of a
remuneration committee &
its non-executive
composition are regarded as
an important check on
excess by codes of
corporate governance

CIMA

TERM

EXPLANATION

REF

NOTES

capital equipment could be purchased

at the date of valuation
reporting standards

the approach formulated by an

authoritative body (eg the IASB) for the
format & content of published reports

reserves

part of the equity figure in a balance

sheet, reserves are created from
primary share transactions, transfers
from retained profit, revaluations,
acquisitions, disposals, etc. Reserves
as a whole are classified as distributable
or non-distributable: whilst both form
part of shareholders funds, only
distributable reserves can be used for
the payment of dividends

responsibility accounting

a performance management approach

which aligns account structures and
budget centres with organisational
responsibilities, so that managers can
be held individually accountable for the
sales, costs & even net assets
associated with their organisational
units

retained profit/earnings

the distributable profits of a business

that remain after the dividend has been
declared.

the earnings figure in the

Income Statement is prior to
distribution; the retained
profit figure in the balance
sheet is the accumulated
earnings of past years less
the aggregate dividend
distribution

return

the profit on an investment expressed

as a percentage

in the case of shares, this

will include any capital gain
as well as the dividend
received

return on capital
employed

principal accounting measure of the

profitability of operations

abbrev: RoCE, calculated

as:
operating profit capital
employed x 100%

return on equity

an accounting measure of shareholder

return

earnings equity x 100%

revaluation

an adjustment in the book value of an

asset to reflect, for example, an
increase in its market value or an
impairment

land & property is commonly

revalued in the balance
sheet to reflect an
independent market
valuation with the adjustment
made to a non-distributable
reserve

29

notes to the published

accounts will provide an
analysis of the figure in the
balance sheet. The
statement of changes in
equity will show movements
into, between & out of
reserves in the past year

REF

NOTES

TERM

EXPLANATION

revenue

sales from the main activities of a

business, recognised in the income
statement at the time the transaction
occurred (eg product delivered)

aka: sales; turnover;

gross income (US)

revenue expenditure

costs of operations charged to the

income statement in the same
accounting period as the revenue to
which they relate

day-to-day running costs

revolving credit

a loan facility that allows the company to

borrow & repay debt as required, within
an overall limit and for a set time period

reward

the return gained on the use of assets

risk

any variation in potential outcome from

an action or event

risk exposure

the level of assessed risk on an action

or event expressed in gross or
probability-weighted terms

risk management

an organisational process that seeks to

identify, assess, mitigate or transfer,
and monitor risks associated with
strategy & operations

the COSO framework offers

guidance on this and
appropriate internal controls

risk-free rate

the interest rate on government

borrowing in the economy which sets a
platform for risk premia to be applied for
commercial lending

see LIBOR; GILTS

sale & leaseback

a transaction in which the owner of an

asset sells it and immediately agrees
the right to use the asset under a lease

a common motive is to
generate cash for strategic
purposes or to boost working
capital

sales

see revenue

ake: turnover; gross income

(US)

secondary trading

trading in shares & securities after they

have been issued and from which no
cash inflow occurs to the issuer

this is analogous to a used

market in goods and
dominates trading volumes

secured

a borrowing or bond that entitles the

lender or holder to ownership of assets
of the borrower in the event of default

thus the term security

securities

shares & other traded financial

instruments

segmental analysis

a regulated disclosure in the notes to

published accounts of the financial
results of major business & geographic
divisions of a company

30

the level of the reward

should be related to the level
of risk taken

usually contains information

on total sales, operating
profit, and attributed capital
employed

REF

NOTES

TERM

EXPLANATION

sensitivity analysis

a modelling process that assesses risk

by changing individual variables and
examining the effect on the overall
outcome

it is commonly adopted in
investment appraisals where
each factor in the discounted
cashflow is adjusted to the
point where the NPV
becomes zero. In this way,
the percentage variation
(risk) in each variable that
would erode viability of the
proposal is determined

service costing

the costing of internal services, which

commonly involves the inclusion of
quantitative data

eg maintenance; IT support

settlement

a payment which satisfies a contractual

obligation

share

the unit of ownership in a company

share buy-back

the re-purchase by a company of its

own shares on the market (or by private
agreement) for cash and their
subsequent cancellation or reservation
for alternative use (eg to meet the
needs of an employee share ownership
scheme).
if the shares are cancelled this results in
a reduction in equity capital

now relatively common in

cash generative companies
that find themselves overcapitalised.
buybacks result in an
increase in EPS and gearing

share options

a right to buy a specified quantity of a

companys shares at specified price and
time

commonly used to reward

senior management and
incentivise them to act in the
shareholders interest

share price

the price of a share on a capital market

shareholder

owner of a share in a company

shareholder wealth

a largely abstract notion, the

maximisation of which is regarded as
being the over-arching financial aim of
the management of a commercial entity

probably best represented in

reality by Total Shareholder
Return

shareholders funds

the equity figure in the balance sheet

which represents the shareholders
interest in a company

aka: capital & reserves;

equity; net asset value

SME

abbreviation for Small & Medium sized

Enterprise

social responsibility

an ethical and popular view that

business has obligations to the society
that grants it the right to operate. In
contemporary terms, these obligations
extend toward the environment and the
minimisation of impact.
31

responsibilities include those

to: employees (as welfare),
customers (as fitness for
purpose), communities (as
public investment),
government (in tax

TERM

EXPLANATION

REF

many companies now publish an annual

sustainability report which recognises a
wider responsibility to society

NOTES
contributions)

solvency

the financial state of a company that is

able to pay all its debts as & when they
fall due

ODA

speculation

engagement in a risky transaction (often

a financial investment) on a chance of
quick or considerable profit

fd

stakeholder

a person, group or societal entity who

can affect or is affected by the actions of
a business and have thus a legitimate
interest in its affairs

eg customers; suppliers;
employees; communities;
pressure groups; lenders;
shareholders; government

stakeholder theory

that management of a commercial entity

should recognise & address the
interests of stakeholders and treat them
fairly on the basis of either ethical
conduct or pragmatic business
Freeman 1984

this contradicts agency

theory and its view of the
paramount duty of
management owed to
shareholders

standard cost

a predetermined unit cost of a product

or service

ODA

standard hour

a measure of production output (and not

time) that represents the amount of
work that can be achieved within an
hour under normal conditions

ODA

standard costing

a planning, control & accounting

technique that establishes and uses
pre-determined resource consumption,
costs & prices to determine a
benchmark against which actual costs &
revenues are compared and variances
analysed

statement of changes in
equity

a main financial statement that appears

in published accounts, the purpose of
which is to reconcile opening & closing
balances in the capital & reserves
section of the balance sheet and identify
the nature of the movements during the
intervening accounting period

statement of financial
position

the title formally adopted in reporting

standards issued by the IASB for the
balance sheet
32

the term is associated with

whimsical decisions that are
not rationally-based and are
thus inconsistent with
conventional finance theory

acts as a benchmark for

judging labour or machine
efficiency
total standard hours are an
important measure of
equivalent output where a
diverse range of products
are manufactured
suitable in repetitive
operations, such as batch
manufacturing

aka: balance sheet

REF

NOTES

TERM

EXPLANATION

stewardship

traditional term for the duty of care owed

by management toward the
shareholders of a company in the
custody of their assets and maintenance
of their capital

stock

UK term for inventory

US term for ordinary shares

stockbroker

an individual or firm that acts as an

agent for investors, buying & selling
shares & other securities on their behalf

aka: broker

stock turnover

a measure of the utilisation of

inventories, either as the number of
times inventory is turned over or
consumed in a year or in the average
number of days material remains in
stock

purchases & consumption

data are not usually
available in published
accounts so cost of sales is
used as an approximation

strategy

a coherent suite of plans which seek to

achieve a declared organisational
objective

a range of concepts and techniques

which provide information to senior
management on the strategic position of
a business in its environment, its
competitiveness, and its options for the
future.
the concepts, variously, tend to use
non-financial data, external data,
multiple perspectives, & informed
guesswork

abbrev: SMA, contrasts with

conventional management
accounting which is largely
concerned with operations,
the present, & internal
performance

substance over form

a principle according to which

transactions are accounted for on the
basis of their intended purpose in reality
rather than the strictly legal form they
take. This is UK practice

important to inhibiting the

opportunity for creative
accounting and hidden
financing
US GAAP accepts the legal
form and is thus more
vulnerable to fraudulent
accounting (as in Enron)

sunk cost

a cost already incurred and unalterable

that has no relevance to current
decisions

surplus

the excess of revenue over expenditure

a term commonly in not-forprofit organisations

the extent of total risk that is inherent in

eg the volatility in a shares

strategic management
accounting

33

ham

eg installation costs of plant;

design costs on a failed
tender

REF

NOTES

TERM

EXPLANATION

systematic risk

the market and cannot be avoided

through diversification

price that is due to

movements in the market
index as a whole

tangible

adjective used to describe non-current

assets that take physical form (eg
machinery)

as opposed to intangibles
such as goodwill, brands, &
patents

target costing

the setting of unit cost targets based

upon an anticipated market price that
customers would be willing to pay and
the planning & subsequent monitoring of
the emerging unit cost down to the
target level

tax

a legal levy imposed by the state to

raise revenue to fund government
expenditure, commonly applied to sales,
remuneration, profits, & capital gains

the knowledge of tax

required for basic corporate
finance is limited to
corporation tax on profits
and the tax relief on debt
funding

term

an indicator of the duration of time over

which a business activity extends or
until a financial security matures (ie is
redeemed or repaid)

requires a prefix: eg shortterm (< 1 year); mediumterm (2-5 years); long-term

(> 5 years) approx

throughput accounting

a short-term decision making approach

which seeks to increase profit by
optimising the mix of products through a
process based on the return generated
on a bottleneck.
it assumes that contemporary
manufacturing facilities are a fixed cost
and the only variable aspects are
purchases & sales

throughput = sales
purchases
profit = throughput fixed
costs

time value of money

the concept, used as a basis for

discounted cashflow calculations, that
cash received earlier is worth more than
the same nominal amount received later
because it can earn interest in the
intervening period

total shareholder return

the actual return enjoyed by a

shareholder over an annual period
based on market prices & the dividend
received

(closing share price opening share price +

dividend per share)
opening share price x 100%

trade credit

granted by suppliers on their invoices

and represents a short-term, and muchabused, source of funding for
businesses

accounts payable figure in

the balance sheet

trading profit

a term for operating profit commonly

aka: operating profit; PBIT;

34

ODA

TERM

EXPLANATION

REF

adopted by retailers & traders

NOTES
net income (US)

trading volumes

the number of shares bought & sold on

a capital market

transactions

an external or internal event

treasury bill

issued, at a discount to its par value, by

treasuries or central banks to raise
funds in the short-term for governments.
It is repaid in full on the date designated
on the bill

abbrev: T-bill
forms the base interest rate
in an economy (aka: repo
rate)

true & fair view

an audit opinion on a published annual

report that accounts have been
prepared in accordance with the
regulatory framework and faithfully
represent the state of financial affairs at
the balance sheet date & of financial
performance over the reporting period

fair representation (US)

turnover

the total sales for the accounting period.

in more general terms, it refers to the
amount of times a specified
classification of assets is utilised in a
year

aka: revenue; gross income

(US)

unrealised

a profit that results from the holding of

an asset and, hence, not yet realised
as a cash inflow

aka: paper gain

value

has a wide range of meanings, even

when definitions are confined to
economics. exchange values
commonly form the basis for many
accounting entries as these are market
prices but examine the adjective linked
to the word value to determine the
basis on which a monetary amount has
been determined

there is a particular
connotation that is important
in finance and that is
shareholder value. This
normally pertains to the
market price of an ordinary
share. Under agency theory,
management should aim to
create (add to) such value

value chain analysis

a strategic appraisal of the whole

sequence of suppliers & customers
involved in the products or services of
an organisation with a view to identifying
the sections where value is created

it is often undertaken to
understand the relative
competitive position of a
business or as a prelude to
its repositioning

value analysis

a systematic inter-disciplinary study of

factors affecting the cost of a product or
service, in order to maintain its purpose,
quality & reliability, but more
economically

CIMA

value engineering

an activity that helps (re)design

products at the lowest cost whilst
meeting customer needs and required

CIMA

35

eg inventory; non-current
assets

TERM

EXPLANATION

REF

NOTES

standards of quality & reliability

variable cost

a cost which varies with the level of

activity

variable costing

US term for marginal costing

variance

the difference between the standard or

budgeted levels of cost or sales and the
actual costs or sales achieved

venture capital

risky finance for SMEs with high growth

potential which usually involves a
package of unsecured loans & equity.
The equity often takes the form of a
core number of shares which dont
convey control of the company plus
share options, the exercise of which will
depend on the subsequent financial
performance of this business

if the management perform

well, the existing owners
retain control but if growth in
earnings is inadequate, the
venture capitalist takes
control. For this reason
venture capital is commonly
used in management buyouts

viability

in a commercial sense, this is the ability

of a business or project to be selfsustainable

its connotes a combination

of profitability & liquidity

watchdog

a government or independent agency

that monitors commercial companies for
illegal or unethical practice

eg Office of Fair Trading;

Greenpeace; Which?
magazine

whistle-blowing

where an employee with inside

knowledge of wrong-doing by their
employer, notifies external authorities
(eg auditors or regulators)

corporate governance &

ethics codes of professional
bodies encourage this
practice despite the fear of
retribution (ie loss of job)

white-collar crime

fraud or other illegal conduct by an

administrative or professional member
of staff

working capital

the funding available for conducting the

day-to-day operations of a business and
represented as the net current assets in
the balance sheet

current assets current

liabilities

work-in-progress

the amount of partly-completed work in

a manufacturing operation or
construction/client project

it is valued in current assets

at the lower of accumulated
cost or net realisable value
where a loss against
contract price is evident

yield

a measure of the current return on the

market value of an investment

36

CIMA aka: marginal cost

eg earnings yield = eps share price

dividend yield = dps share price
yield to redemption = IRR on interest
& repayment cashflows on a bond