Category : Financial and Statistics
Archive   : PROSPANS.ZIP

Output of file : GLOSSARY.REF contained in archive : PROSPANS.ZIP


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º A º

ACCELERATED DEPRECIATION: Any "faster than straight-line" method of
calculating depreciation credit / period.

ACCOUNTS PAYABLE: A balance sheet record of all unpaid credit purchases.
(Often a large portion of a firm's current assets.)

ACCOUNTS RECEIVABLE: A balance sheet record of credit sales monies owed to
a firm. (Often a large portion of a firm's current assets.)

ACRS DEPRECIATION: Accelerated Cost Recovery System depreciation,
effective January 1, 1981, greatly simplified former methods of
calculating depreciation, plus significantly lowered the number of years
of the depreciation schedule.

The amount of an outflow or an inflow of money after the deduction of all
taxes and addition of all tax credits.

ALTERNATE '0': Denotes that zero funds will be invested
in the project being evaluated and assumes that the subject funds can
easily, and with a relatively low level of risk, be invested "elsewhere"
and earn the specified hurdle rate of interest.

ANNUAL PERCENTAGE RATE (APR): Annual percent rate of interest. The
interest rate obtained by multiplying the number of compounding periods
per year by the interest rate per compounding period.

ANNUITY: Commonly, a consecutive and uniform schedule of inflows per
period to be received by an investor. The amount of the investment
principal (annuity base), plus a prescribed interest rate will be
recovered over the total life of the annuity.

ASSET: Commonly used to refer to the value of capital equipment and/or
facilities owned by a firm. In a broader sense, an asset is anything that
adds value to a firm, e.g., patents, contracts, reputation, etc.

ASSOCIATED EXPENSE: An initial "time zero," non-reocurring expense associated
with the implementation of a project, e.g., removal or rearranging of
assets, operator and/or maintenance training plus sales tax and other
purchasing related expense. In addition, planning, design, research costs,
etc., can normally be charged as associated expense, provided that invoices
and other records separate associated expenses from capital costs.

º B º
BALANCE SHEET: An accounting record for a firm listing: assets (value owned),
liabilities (debt owed) and equity (assets such as retained earnings, stock,
etc.). at the close of a given accounting period. Also see income statement.

BANKRUPTCY: A formal and legal condition that can exist only when the firm's
liabilities exceed the fair market value of its assets.

BENEFIT: The profit increase and/or cost reduction. Evaluation of an investment
is based on the additional benefits yielded by the additional investment.

BOOK VALUE: With capital assets, book value is the original capitalized value
minus the accumulated depreciation previously taken. With stock, book value
is the value of the firm's equity divided by the number of shares.
Stock book value is normally significantly lower than actual market value.

BUDGET: An approved formal projected schedule of the inflow and outflow of
monies over a given future period of time. In addition to establishing limits
on spending, a primary objective of a budget is to assure that funds will be
on hand at all times to meet financial obligations.

º C º

CAPITAL: Commonly, in business, the total assets of a firm. In accounting,
capital is considered to be part of the firm's equity. In financial decision
making, capital refers to that portion of the investment which must be
capitalized and depreciated (rather than written off as an expense). See

CAPITAL ASSET: An item that must be depreciated over a fixed schedule of
several years, rather than written off as an expense at the time of purchase.

CAPITAL GAIN: Income resulting from selling an asset for more than its original
price. Short term capital gains are taxed as normal income. Long term capital
gains are normally taxed at a significantly lower rate.

CAPITAL RATIONING: A necessary practice when the total investment of the
desirable proposed capital projects exceeds the available funds. The funds
must then be distributed to the projects having the greatest justification.

Ranking by total NPV Bonus is the recommended method of maximizing the
economic advantage when capital rationing is required, i.e., choose the
combination of projects which will yield the greatest NPV Bonus.

CAPITALIZATION: The total of the capital owned, or borrowed, used to finance
the firm's total assets.

CAPITALIZE: To enter a capital asset into the accounting records where it
will be listed and depreciated. All investments not written off as an expense
are capitalized.

CASH FLOW: The net benefits of a project (or to a firm) plus incremental
non-cash"expense" charges, e.g., depreciation depletion, amortization, etc.

COLLATERAL: Anything of value that can be claimed by the lender in the event
that payments on a debt are not made.

COMPOUND INTEREST: Interest that is paid on both the original principal and
the total interest to date, i.e., "interest is earned on the interest".

COMPOUND VALUE OF AN ANNUITY: The future value of a fund in which equal
deposits are made each period.

CONTINUOUS COMPOUNDING: Interest calculated and added to the account on a
continuous "minute-by-minute" basis throughout the compounding period,
rather than at the end of each period.

CONTROLLER: The person responsible for a firm's: accounting, budgeting,
financial planning, inventory control, cost measurement, asset management,
etc. The Treasurer may differ from the Controller in that the Treasurer may
use information from the Controller as it applies to the Treasurer's
principal responsibility of cash flow management, i.e., in obtaining loans,
investing funds outside the firm, total financial forecasting, etc.

CORPORATION: A separate legal entity certified to conduct business. Ownership
is in the form of stock, etc. Only the corporation can be sued to collect
debts, etc., i.e., other value of the owners is usually separate and

COST OF CAPITAL: The composite 'cost of money' to a firm. The cost of capital
rate is often calculated by taking the weighted average of the firm's:
interest rate to borrow, interest rate received on funds invested outside
the company tax structure, effect on additional loans and/or price of its
common stock. In addition, a major consideration must be given to
opportunigy cost, i.e., the rate of return that may be expected from other
commonally available "low risk" opportunities. The hurdle rate (the minimum
attractive rate of return is normally higher than the cost of capital.

CURRENT ASSETS: Those assets of a firm expected to be sold, consumed or
collected on, usually within one year.

CURRENT DOLLAR: A unit of money that is not adjusted for anticipated inflation
or deflation, and whose purchasing power may actually increase or decrease
in the future.

CURRENT LIABILITIES: Money owed and payable by a firm, usually within one year.

º D º

DEFENDER-CHALLENGER ANALYSIS: Incremental analysis (normally using R.O.I.),
involving a lower investment Defender alternative and a higher investment
Challenger alternative.

Viable justified project alternatives are ranked in order by ascending
investment costs. The least investment alternative is the initial Defender
and the next higher investment alternative is the initial Challenger.
If the additional investment for the Challenger is justified by the
additional benefits yielded, then that Challenger becomes the new Defender
and the next higher investment becomes the new Challenger. This sequence
is followed in ascending investment order until no additional challengers
remain. The highest justified investment is the most financially
advantageous investment opportunity for the project.

DEPRECIATION: A "non-cash" (no actual cash outflow is involved) expense
"writeoff' allowance per period which reflects decreased value due to
deterioration and/or obsolescence. The depreciation expense allowance
reduces taxable income, thereby increasing after-tax profits.

In theory, depreciation allows funds to be retained by the firm to assist
in replacing the asset at the end of its useful life.

While depreciation is a "non-cash" expense, it results, via a reduction
in taxable income, in a very real addition to the after-tax cash flow
and to profits (provided the firm is profitable).

DISCOUNT FACTOR: A factor which multiplied by a future sum(s) of money will
calculate the equivalent present value (P) of the actual future amount(s).

DISCOUNTING: The process of determining the present value of one or more
future values.

DISCOUNTED CASH FLOW RATE: (DCFR): Commonly called Return On Investment
(ROI) or Internal Rate of Return (IRR). The interest rate that will discount
the benefits of a cash flow to a present value equal to the investment.

DIVERSIFY: To spread a sum of money over two or more unrelated investments.

º E º

EQUITY: A firm's net worth of ownership to its owners due to such sources
as: Investments in the firm, retained earnings, preferred or common stock
purchased by the owners, etc.

EQUIVALENT VALUE: In financial decision making, a value (discounted or
compounded) at a given point in time, representing the actual previous or
future value(s) from which it was calculated. Example: $110 to be received
one year from now has, at an interest rate of 10%, has an equivalent value
of $100 today.

º F º

FINANCIAL ANALYSIS: Normally used to refer to the process of determining the economic
desirability of a proposed investment. Also, in the accounting function,
the process of determining or predicting the past and/or future economic
status of a department or firm.

FINANCIAL LEASE: A non-cancellable lease (usually not providing maintenance)
in which the item is fully paid for over the full life of the lease.

FISCAL YEAR: A consecutive twelve month period, starting at any selected date,
used to budget and report financial activity. It is often convenient to
select a fiscal year period different than the calendar year.

FIXED ASSETS: Assets that are unlikely to be converted to cash during the next
accounting period, e.g., land, facilities, equipment, etc. On the balance
sheet, facilities and equipment fixed asset data may list both the original
capital cost and the accumulated depreciation, or simply list the book value
(the original capital cost minus the depreciation thus far taken.) Due to
inflation, competitive position, etc., the firm's actual asset value may be
considerably higher than its value stated on the balance sheet.

º G º

GROSS PROFIT MARGIN: (Sales - Cost of Goods Sold*) divided by sales.
* Excludes taxes and administration expenses.

º H º

HURDLE RATE: The minimum attractive return on investment rate (internal rate
of return or discounted cash flow rate) that must be yielded by a proposed
expenditure. The hurdle rate is normally greater than the cost of capital.
Setting the hurdle rate too high may force excessive deterioration of the
firm's efficiency before the hurdle rate can be met. Often the hurdle rate
selected is in the range of 1.5 to 3.0 times the interest rare to borrow.

º I º
INCOME: Commonly refers to: revenue minus operating expenses, however the
word'income' must be used with caution in that it may have significantly
different meaning to different people and within different firms, i.e.,
usage of the word income could actually refer to such special variations as:

Earnings Before Interest and Taxes (EBIT) = Operating Revenue - Operating
Expenses. Also called operating income.

Net Income Before Tax (NIBT) = Operating Revenue - Operating Expenses -
Interest. Also called operating profit.

Net Income After Taxes (NIAT) = Operating Revenue - All Expenses and
Taxes. Also called earnings after taxes.

INCREMENTAL ANALYSIS: Analysis based on an incremental cash flow, i.e., the
ADDITIONAL investment of Alt. 'B' versus Alt. 'A' must be justified by the
ADDITIONAL benefits yielded due solely to choosing Alt. 'B' versus Alt. 'A'.
Incremental analysis is one of the most critical concepts in conducting a
valid financial evaluation. See INCREMENTAL CASH FLOW.

If the return on investment evaluation method is used, then an incremental
R.O.I., greater than the hurdle rate, must be calculated for each higher
level investment alternative accepted. See DEFENDER-CHALLENGER ANALYSIS.

INCREMENTAL CASH FLOW: The difference between the cash flow per period of two
alternatives or projects. Example:

0 $ -10K $ -22K $ -12K
1 -12K - 5K + 7K
2 -12K - 5K + 7K
3 -12K - 5K + 7K

Note: The ADDITIONAL $12K investment required for Alternative 'B' yields
an ADDITIONAL $7K of benefits each year. This incremental cash flow would
yield an incremental R.O.I. of 34.2% and an NPV Bonus at 20% of $2.7K.

INFLATION: Rising prices, in the absence of increased quantity, quality or
other value, resulting in the reduced purchasing power of a unit of currency.
Inflation is, in effect, a 'silent' tax on fixed income.

INTANGIBLE ASSETS: Value listed on a balance sheet other than physical
property or securities, e.g., goodwill, patents, licenses, etc.

INTEREST: An amount paid by a borrower to a lender in addition to the
payment(s) required to discharge the principal. See CONTINUOUS COMPOUNDING

INTERNAL RATE OF RETURN (IRR): A more precise term than the more commonly used
expression "Return on Investment" (ROI). IRR specifically refers to the
interest rate which will discount the total cash flow to a zero NPV Bonus,
i.e., the present value cost of the investment plus the present value of the
benefits discounted at the IRR of the cash flow, will equal zero.

º J º
JUSTIFICATION: The financial or other logic (such as the least possible
investment required for a mandatory requirement) why a given action is
attractive or necessary. Financial justification normally implies that
present value and/or return on investment techniques have been used to
justify an expenditure based on the forecasted benefits per period
received as a result of the expenditure.

º K º
KITING: The practice of writing a check(s) against an account having
insufficient funds to cover the amount of the check(s), with the intent to
make a sufficient deposit(s) to cover the check(s) before it reaches the
amount of the payment.

º L º

LIQUIDITY: Ability to pay bills when due. The extent of liquidity is
indicated by the amount that the value of the liquid, i.e., "quickly
available in cash", assets exceed current liabilities.

LTD: Limited. Used by many countries to refer to an incorporated firm. As
in a corporation, the owner's liability is limited to their investment in
the business.

º M º

MUTUALLY EXCLUSIVE: Commonly relates to two or more alternative solutions
competing to be selected for the same project. Selecting any one of the
alternatives will exclude the possibility of selecting all the other
alternatives. Thus, the alternatives are said to be mutually exclusive, or

Projects having two or more mutually exclusive alternatives are by far
the most common type of project encountered, e.g., machine A, B, or C
could be purchased to meet a given objective. Purchase of any one of the
machines will exclude, for this project, the purchase of all of the
others. It is important to understand that:

1. The desirability of mutually exclusive alternatives can seldom be
ranked by the R.O.I. of each alternative versus Alt. 'O'.

2. When funds are limited, different combinations of unrelated
projects may be identified which approach, but do not exceed, the
amount of funds available. Each such combination of projects becomes a
mutually exclusive set of alternatives and Note (1) above is

º N º

NET PRESENT VALUE (NPV) BONUS: In this text the term "NPV Bonus" is used
to emphasize that the Net Present Value of the total cash flow is in
comparison to investing the funds in alternative '0' (wherein zero
additional funds are invested in the project, and the funds will be
invested "elsewhere" and yield the hurdle interest rate.)

The NPV Bonus results from discounting the total cash flow (all outflows
and inflows involved in the project life) at the hurdle rate. A positive
NPV Bonus defines the extent that the project is attracti ve. A negative
NPV Bonus defines the extent that the projects cash flow is unattractive.


0 $ -10,000 X 1.0000 = $ -10,000
1 + 5,000 X .8333 = + 4,167
2 + 5,000 X .6944 = + 3,472
3 + 5,000 X .5787 = + 2,894

The project should be accepted since the NPV Bonus of the cash flow,
discounted at the hurdle interest rate of 20%, is a positive $533. This
means that the project has yielded (in comparis on to earning the 20%
hurdle rate if the funds are invested "elsewhere") a 20% Return On
Investment, PLUS an equivalent $533 "Bonus" at the time of the investment.


NET SALVAGE VALUE: Total salvage value received minus any cost of removal
or sales.

º O º
OPERATING BUDGET: A short term financial plan, normally for one year or
less, concerned mainly with the daily balance of revenue and expenses.

OPERATING INCOME: Profit or earnings before the deduction of interest
payments and taxes.

OPERATING LEASE: A lease that can be ended by either the lessor or the
lessee after a specified notice has been given.

OPPORTUNITY COST OF MONEY: A synonym for the hurdle rate. (See HURDLE RATE.)

ORDINARY INCOME: Income from normal operation, i.e., excluding income from
sale of capital assets, etc.

º P º

PAYBACK PERIOD: The length of time required for an investment to yield
benefits equal to the amount of the investment. Several methods of
calculating the payback period are commonly used. The payback period may
be calculated on a before-tax, after-tax, undiscounted, or discounted
basis, or the various combinations thereof. Thus the payback period may
vary widely, depending on the method used. Usage of the payback
period is unfortunate in that the concept contains several critical

PERIMETER OF IMPACT: Refers to the concept of developing the cash flow for
each alternative by listing ALL the costs and benefits that will occur,
including those in other departments or divisions.

POST AUDIT: Commonly refers to the formal procedure of determining, after
the lapse of an appropriate amount of time, the accuracy of the analysis
that justified the purchase of the item.

PRESENT VALUE: The actual and/or the equivalent value of one or more
future values. See Net Present Value Bonus.



PRIME INTEREST RATE: The average interest rate charged by major banks to
its most dependable business customers. The prime rate normally varies
inversely with the money supply.

PRINCIPAL: The original value of a loan, or face value of a security, on
which interest is owed or paid.

PROBABILITY: The assessment of likelihood that a certain event will have a
specified outcome.

PROFIT: Basically the difference between revenue and costs. However, the
term "profit" may be used to refer to virtually any result that yields an
economic advantage.

º Q º
QUICK RATIO: A measure of liquidity, i.e., ability to pay bills. Commonly
calculated by dividing (Current Assets* - Inventory) by current

* Assets that can be quickly and easily converted to cash.
º R º
RANKING: In financial decision making, the process of listing proposed
projects in order of their financial desirability.

Maximizing the total Net Present Value Bonus is the recommended methods
to maximize financial advantage.

Ranking by ROI is specifically discouraged since the method is only
valid when all investment opportunities are equal in cost, or when each
successive higher investment alternative yields a higher ROI. See

RECAPTURE: Commonly refers to applicable tax penalties or credits due when a
capital item is sold at a net salvage value different than its book value.

RETAINED EARNINGS: The net income after taxes (NIAT) retained as equity.

RETURN ON ASSETS: Commonly, the ratio of a firm's total after-tax profit for
a given year divided by the value of its total assets. Often used as an
"overall" indication of how a firm, or division of a firm, has performed
during the previous fiscal year(s).

RETURN ON EQUITY: Commonly, earnings to stockholders divided by total equity
(value of stock owned). See RETURN ON ASSETS.

RETURN ON INVESTMENT (R.O.I.): Commonly and more meaningfully refers to
analysis including the effect of time value of money. The interest rate which
will discount a project's future benefits to equal the project's investment.
The NPV Bonus will be zero when the cash flow is discounted at the ROI
interest rate. When ROI is calculated in this mannrr the term ROI
is synonymous with the terms "Discounted Cash Flow Rate" and "Internal
Rate of Return".

Unfortunately, the term ROI is also used to refer to several ratio
calculations which exclude the time value of money, and therefore have value
only as general indicators. Examples:

þ Average savings per year divided by the investment. þ Profit divided by
cost. þ Total inflow divided by total investment (See RETURN ON ASSETS).

REVENUE: Commonly refers to inflow from sales. Revenue may have different
meanings in different firms or departments such as:

þ Sales plus inflows from interest, dividends, etc. þ Sales minus discounts
for prompt payment, loss due to returns, etc.

º S º
SIMPLE INTEREST: Interest per period paid on the principal invested, i.e.,
interest is not paid on previous interest. See COMPOUND INTEREST.

STRAIGHT-LINE DEPRECIATION: A depreciation schedule having equal depreciation
charges per period, i.e., the amount capitalized divided by the number of
years of the depreciation schedule.

SALVAGE VALUE: Commonly used to refer to the expected or actual value of an
asset at the end of any given period. See NET SALVAGE VALUE.

SENSITIVITY ANALYSIS: A method of calculating the effect of an increase or
decrease in an element of data (e.g., labor cost) used in developing the
present value, ROI, etc., of a project.

º T º
TIME VALUE OF MONEY: The concept that the actual value of money received at a
certain point in time has, due to the interest rate and time involved,
different equivalent values at each different point in time.


º V º
VARIABLE COSTS: Expenses entirely created by and directly proportional to
changes in volume or usage, e.g., direct labor and/or material in proportion
to the number of units produced.

º W º

WORKING CAPITAL: Commonly, current available assets minus current liabilities.
Also may be used to refer to the initial inventory expense required to start up
a project.

WRITE-OFF: The removal of a fixed asset from the accounting records. Also used
to refer to a reduction in taxable income, e.g., operating expenses or

  3 Responses to “Category : Financial and Statistics
Archive   : PROSPANS.ZIP

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