Accounting Definitions For Finance & Accounts Interview

Calculated Intangible Value - CIV

A method of valuing a company's intangible assets. This calculation attempts to allocate a fixed value to intangible assets

that does not change according to the company's market value. Examples of intangible assets include brand equity

and proprietary technology.

Usually a company's intangible assets are valued by subtracting a firm's book value from its market value. However, opponents of this method

argue that because market value constantly changes, the value of intangible assets changes also, making it an inferior measure. 

Finding a company's CIV involves seven steps:

1. Calculate the average pretax earnings for the past three years.

2. Calculate the average year-end tangible assets for the past three years.

3. Calculate the company's return on assets (ROA).

4. Calculate the industry average ROA for the same three-year period as in Step 2.

5. Calculate excess ROA by multiplying the industry average ROA by the average tangible assets calculated in Step 2. Subtract the excess return from the pretax earnings from Step 1.

6. Calculate the three-year average corporate tax rate and multiply by the excess return. Deduct the result from the excess return.

7. Calculate the net present value of the after-tax excess return. Use the company's cost of capital as a discount rate.

Capitalized Interest

An account created in the income statement section of a business' financial statements that holds a suitable amount of funds meant to

pay off upcoming interest payments. Furthermore, this type of interest is seen as an asset and unlike most conventional types of interest, 

it also is expensed over time.

Some debate exists over the decision to capitalize interest for tax purposes. Some people don't prefer to take

the tax deduction benefit that arises from making an interest payment spread over time in a situation where

interest is capitalized. To these people, it is far more beneficial to receive the complete deduction right away.

Cash And Cash Equivalents - CCE

An item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately.

Examples of cash and cash equivalents are bank accounts, marketable securities and Treasury bills.

Current Portion Of Long-Term Debt

A portion of the balance sheet that represents the total amount of long-term debt that must be paid within the next year.

The balance sheet has a liability section, which is broken down into long-term and current debt.

When a debt payment is set to be made in longer than a year's time, it is recorded in the long-term debt section,

and when that payment becomes due within a year, it moves to the "current portion of long-term debt" section.

The purpose and importance of this section of the balance sheet is that it gives investors an idea of

how much money will be spent this year to resolve the current portion of the long-term debt.

This can be compared to the current cash and cash equivalents to measure whether the

company is actually able to make the payment. A company with a large current portion and a small

cash position has a higher risk of default and should be a warning sign to investors.

Cash Earnings Per Share - Cash EPS

A measure of financial performance that looks at the cash flow generated by a company on a per share basis.

This differs from basic earnings per share (EPS), which looks at the net income of the company on a per share basis.

The higher a company's cash EPS, the better it is considered to have performed over the period.

A company's cash EPS can be used to draw comparisons to other companies or to the company's own past results.

You may sometimes see cash EPS defined as either EPS plus amortization of goodwill and other intangible items, or net income plus

depreciation divided by outstanding shares. 

Whatever the definition, the point of cash EPS is that it's a stricter number than other variations on EPS because cash flow

cannot be manipulated as easily as net income.

Accounting definitions for accounts interview

 B-Share

 A class in a family of multi-class mutual funds. This class is characterized by a back-end load structure that is paid only when the fund is sold.

  Bad Debt Reserve

  An account set aside by a company to account for and offset losses that arise as a result of defaults from futures loans. 

This figure may be calculated based on historical norms or other known information about the relative safety of the debt. 

Bad debt reserves become alarming when they reach levels outside of historical norms or averages, either at the company level

or the national level. For instance, there are many concerns today about China's high bad debt reserves at its banks,

an aftereffect of many years of almost non-existent lending requirements.

 Balance Of Payments - BOP

 A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the

dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments

means that more money is flowing out of the country than coming in, and vice versa.

 Balance Of Trade - BOT

 The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.Also referred to as "trade balance".

 Banker's Acceptance - BA

 A short-term credit investment created by a non-financial firm and guaranteed by a bank.

 Bankruptcy

 A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply can't be paid while offering creditors a chance to obtain some measure of repayment based on what assets are available. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses another chance and providing creditors with a measure of debt repayment. Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code, (which involves liquidation of assets), Chapter 11 (company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt covenants or payment plans). Bankruptcy filing specifications vary widely among different countries, leading to higher and lower filing rates depending on how easily a person or company can complete the process.

 Bear Market

 A market condition in which the prices of securities are falling or are expected to fall.

Although figures can vary, a downturn of 15-20% or more in multiple indexes (Dow or S&P 500) is considered an entry into a bear market.

Beta

 A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Also known as "beta coefficient".Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. 

A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market.

For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk

 Black Scholes Model

 A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry. Also known as the Black-Scholes-Merton Model. The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options. There are a number of variants of the original Black-Scholes model.

 Blotter

A record of trades and the details of the trades made over a period of time (usually one trading day). The details of a trade will include such things as the time, price, order size and a specification of whether it was a buy or sell order. The blotter is usually created through a trading software program that records the trades made through a data feed. 

 Blue Chip

 A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.

 The name "blue chip" came about because in the game of poker the blue chips have the highest value. Blue chip stock is seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. The stock price of a blue chip usually closely follows the S&P 500.

 Book Building

 The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors. An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.

 Book Value Per Common Share

 A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly.

Formula:Should the company decide to dissolve, the book value per common indicates the dollar value remaining for Common shareholders after all assets are liquidated and all debtors are paid.In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate.

 Bottom Line

 Refers to a company's net earnings, net income or earnings per share (EPS). Bottom line also refers to any actions that may increase/decrease net earnings or a company's overall profit. A company that is growing its net earnings or reducing its costs is said to be "improving its bottom line".The reference to "bottom" describes the relative location of the net income figure on a company's income statement; it will almost always be the last line at the bottom of the page. This reflects the fact that all expenses have already been taken out of revenues, and there is nothing left to subtract. This stands in contrast to revenues, which are considered the "top line" figures.Most companies aim to improve their bottom lines through two simultaneous methods: growing revenues (i.e., generate top-line growth) and increasing efficiency (or cutting costs).

  Brand Equity

 Brand equity is created through aggressive mass marketing campaigns. Good examples of companies with strong brand equity are corporations such as Nike and Coca-Cola, whose corporate logos are recognized worldwide.

An intangible value-added aspect of a particular good that is otherwise not considered unique.

 Break-Even Point - BEP

1. in general, the point at which gains equal losses. 2. in options, the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid.
 Also referred to as a "breakeven". For businesses, reaching the break-even point is the first major step towards profitability.

 Breakpoint Sale

 The sale of a mutual fund at a set dollar amount that allows the fund holder to move into a lower sales charge bracket. If, at the time of investment, an investor is unable to come up with the funds needed to qualify for the lower fee, he or she can sign a letter of intent promising to reach the total amount, or breakpoint, in a set time period.
Any sales that occur just below a breakpoint are considered unethical and in violation of FINRA (formerly the NASD) rules. An example of a breakpoint sale would be when an investor plans to invest $95,000 in a front-load mutual fund and  faces a charge of 6.25% or $6,125. If the investor is properly advised, he or she will be told that adding $5,000 for a total investment of $100,000 will qualify the sale fro a lower sales charge of 5.5%, or $5,500.

This means that the investor will essentially have $5,625 more invested than the initial purchase plan due to the savings in sales charges.

 Bridge Financing

 A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations These funds are usually supplied by the investment bank underwriting the new issue. As payment, the company acquiring the bridge financing will give a number of shares at a discount of the issue price to the underwriters that equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.

 Bridge Loan

 A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. Also known as "interim financing", "gap financing or a "swing loan".

 In-House Financing

 A type of seller financing in which a firm extends customers a loan, allowing them to purchase its goods or services. In-house financing eliminates the firm's reliance on the financial sector for providing the customer with funds to complete a transaction.The automobile sales industry is a prominent user of in-house financing. Many vehicle sales rely on the buyer taking a loan, in-house financing allows the firm to complete more deals by accepting more customers. Whereas banks or other financial intermediaries might turn down a loan application, car dealerships can choose to lend to customers with poor credit ratings.

 Broker

 1. An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. A licensed real estate professional who typically represents the seller of a property. A broker's duties may include: determining market values, advertising properties for sale, showing properties to prospective buyers, and advising clients with regard to offers and related matters.

Broker-Dealer

A person or firm in the business of buying and selling securities operating as both a broker and a dealer depending on the transaction.Technically, a broker is only an agent who executes orders on behalf of clients, whereas a dealer acts as a principal and trades for his or her own account. Because most brokerages act as both brokers and principals, the term broker-dealer is commonly used to describe them.

 Buoyant

The term used to describe a commodities market where the prices generally rise with ease when there are considerable signals of strength.

These types of markets can be very volatile as the prices are rapid to rise and fall with investor sentiment.

Business Cycle

The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of

the business cycle are growth (expansion), peak, recession (contraction), trough and recovery.

At one time, business cycles were thought to be extremely regular, with predictable durations, 

but today they are widely believed to be irregular, varying in frequency, magnitude and duration.

Accounting Definitions

Accounting Definitions

 Accelerated Depreciation

 Any method of depreciation used for accounting or income tax purposes that allow greater deductions in the earlier years of the life of an asset.

 Accounting Method

In terms of taxation, the method by which income and expenses are determined for taxation purposes

 Accounting Period

  In general, the time period reflected by a set of financial statements.

 Accounting Rate of Return - ARR

 ARR provides a quick estimate of a project's worth over its useful life. ARR is derived by finding profits before taxes and interest.

 Accounts Payable - AP

 Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks. Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors. For example, the phone company, the gas company and the cable company are types of creditors. Each one of these creditors provide a service first and then bills the customer after the fact. The payable is  essentially a short-term IOU from a customer to the creditor. 
Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.

Accounts Receivable - AR

 Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year. On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts

 Accrual Accounting

 The need for this method arose out of the increasing complexity of business transactions and a desire for more accurate financial information. Selling on credit and projects that provide revenue streams over a long period of time affect the company's financial condition at the point of the transaction. Therefore, it makes sense that such events should also be reflected on the financial statements during the same reporting period that these transactions occur.
For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue.

 Accrued Expense

 Accrued expenses are the opposite of prepaid expenses. Firms will typically incur periodic expenses such as wages, interest and taxes. Even though they are to be paid at some future date, they are indicated on the firm's balance sheet from when the firm can reasonably expect their payment, until the time they are paid. An example would be accruing interest that is building up on a bank loan.

 Accrued Income

 For example, assume that a company is expected to complete services for another company once per month for six consecutive months, but that under the terms of the contract, it will not receive monetary payment for these services until the end of the six-month period. The company performing the services can accrue a percentage of the income earned after each month, even though physical payment will not take place until after the six-month period.

 Actuarial Analysis

 The analysis of an investment's risk done by an actuary A highly educated actuary will use statistics and historical data in an attempt to measure the risk of a particular investment.

 Actuary

 A professional statistician working for an insurance company. They evaluate your application and medical records to project how long you will live.

 Ad Valorem Tax

 The phrase ad valorem is Latin for "according to value". In the case of municipal property taxes, property owners have their property assessed on a periodic basis by a public tax assessor. The assessed value of the property is then used to compute an annual tax, which is levied on the owner by his or her municipality. Ad valorem taxes are incurred through ownership of an asset, in contrast to transactional taxes such as sales taxes, which are incurred only at the time of transaction.

 Alternative Minimum Tax - AMT

 A tax calculation that adds certain tax preference items back into adjusted gross income. If AMT is higher than the regular tax liability for the year the regular tax and the amount by which the AMT exceeds the regular tax are paid. AMT is designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks.

 Amortization

 The paying off of debt in regular installments over a period of time.2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

 Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense. While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.

 Appraiser

 A practitioner who has the knowledge and expertise necessary to estimate the value of an asset, or the likelihood of an event occurring, and the cost of such an occurrence. Ideally, an appraiser acts independently of the buying and selling parties in a transaction in order to arrive at the fair value of an asset without bias

 Arbitrage

 The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces. Also known as a "risk less profit". Here's an example of arbitrage: Say a domestic stock also trades on a foreign exchange in another country, where it hasn't adjusted for the constantly changing exchange rate. A trader purchases the stock where it is undervalued and short sells the stock where it is overvalued, thus profiting from the difference. Arbitrage is recommended for experienced investors only.

Arbitration

 An informal hearing regarding a dispute. The dispute is judged by a group of people (generally three) who have been selected by an impartial panel. Once a decision has been reached, there is no further appeal process. 

We frequently hear this term when professional sports teams are negotiating contracts with their athletes. Typically, one party aims unrealistically high and the other one aims really low, and the settlement occurs somewhere in the middle.

 Assessor

 A local government official who determines the value of a property for taxation purposes.

 Asset Management Company - AMC

 A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.Mutual funds, hedge funds and pension plans are all run by asset management companies.  These companies earn income by charging service fees to their clients.

AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing

securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment.

 Asset-Backed Commercial Paper

 A short-term investment vehicle with a maturity that is typically between 90 and 180 days. The security itself is typically issued by a bank or other financial institution. The notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs.

 Attrition

 The reduction in staff and employees in a company through normal means, such as retirement and resignation. This is natural in any business and industry.

 Auction Market

 A market in which buyers enter competitive bids and sellers enter competitive offers at the same time. The price a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell at. Matching bids and offers are then paired together and the orders are executed. 

 Authorized Stock

 The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation.

This figure is usually listed in the capital accounts section of the balance sheet.
Also known as "authorized shares" or "authorized capital stock".

 Average-Cost Method

 A costing method by which the value of a pool of assets or expenses is assumed to be equal to the average cost of the assets or expenses in the pool.