Essential Financial & Accounting Terms Defined
Essential Financial & Accounting Terms
Accounting Function
Summarizing economic transactions.
Aging Schedule
Classification of accounts receivable by time outstanding.
American Option
An option that can be exercised at any time before its expiration date.
Annuity
An asset that pays a fixed sum each year for a specified number of years.
Authorized Share Capital
The maximum number of shares that a company is permitted to issue, as specified in the firm’s articles of incorporation.
Banker’s Acceptance
An example of a trade acceptance.
Bankruptcy
The reorganization or liquidation of a firm that cannot pay its debts.
Beta
A measure of market risk. Specifically, beta measures how an individual stock’s returns vary with market returns.
Bond Price
Bond valuation, including calculating the present value of the bond’s future interest payments.
Bond Rating
Ratings issued on debt instruments to help investors assess the default risk of a term.
Bond Yield
A figure that shows the return you get on a bond.
Bond
A financial instrument with several key characteristics:
- If issued, it represents a liability for the issuer.
- For the holder, it is an asset or investment.
- Holders typically have no right to vote or participate in business decisions.
- Often pays a fixed interest rate (not a dividend).
- Has a specified maturity date.
- Interest payments are generally tax-deductible for the issuer.
Book Rate of Return
Average income divided by average book value over a project’s life. Also known as the accounting rate of return.
Book Value
A backward-looking measure. It represents how much capital the firm has raised from shareholders in the past.
Call Option
The right to buy an asset at a specified exercise price on or before the exercise date.
Callable Bond
A bond that may be repurchased by the firm before maturity at a specified call price.
Capital Budgeting Decision
A decision on how to invest a company’s capital.
Capital Expenditure
A payment made in cash or cash equivalent over a period of more than one year, typically for long-term assets.
Capital Market
The market where safe and risky future cash flows are traded.
CAPM (Capital Asset Pricing Model)
A model that describes the relationship between risk and expected return and is used in the pricing of risky securities.
Carrying Costs
Costs of maintaining current assets, including the opportunity cost of capital.
Cash Dividend
Payment of cash by the firm to its shareholders.
Collection Policy
Procedures established to collect and monitor accounts receivable.
Combining Complementary Resources
A strategy in mergers where each firm fills in the “missing pieces” of their firm with resources or capabilities from the other firm.