Glossary
Financial Statement Accounts- ACCOUNTS PAYABLE
- This item reflects the current debt incurred when a company purchases materials or services to be processed in the normal course of its business. In the event of liquidation, these obligations are accorded the same rights to the proceeds of liquidation as unsecured bank loans. If the original balance sheet does not contain a separate field for Accruals or Accrued Expenses, include the accrued expenses in this account.
- ACCOUNTS RECEIVABLE
- This account represents amounts due from trade customers within twelve months from statement date on notes and open accounts known to be collectable. Receivables should be shown net of reserves for Bad Debts and Discounts. Any receivables other than Trade Receivables (e.g. interest receivable, tax refund, etc.) should be classified under Other Current Assets. If there is any question regarding the value or the current nature of non-trade notes or accounts receivable, they should be classified under "Other Non-Current Assets".
- ACCRUED TAXES
- This item should include income taxes accrued and payable in the next 12months. Typical account names include "Estimated Income Taxes", "Provision for Income Taxes" and "Current Portion of Deferred Income Taxes".
- AMORTIZATION EXPENSE
- Intangible assets amortization expense should be included in this field. You may have to determine this amount from the footnotes or supporting schedules.
- CASH AND CASH EQUIVALENTS
- Include cash freely available for withdrawal on demand to meet ordinary current obligations, and not restricted to any particular use. If there are restrictions on withdrawal, such as cash in collateral account or in sinking fund, classify those accounts under Other Current Assets. Also, include any temporary investments, i.e. investments which have a ready market and have been acquired solely for the temporary investment of excess cash. If any uncertainty exists as to the purpose of an investment, it should be classified under Long-Term Investments. When a net overdraft position exists, the item should be shown as a negative cash figure.
- COST OF SALES
- This item includes the total cost of purchasing the product in the case of wholesalers and retailers, and the total cost of manufacturing the product in the case of manufacturers. Service organizations will often not have a "Cost of Sales" or "Cost of Gods Sold" account. In that case, include the total of all costs of producing the service. For manufacturers, this item should include not only raw material and direct labor costs, but also manufacturing overhead. If Cost of Sales and Operating Expenses are lumped together, include the total in the Operating Expenses field.
- CURRENT MATURITIES OF LONG-TERM DEBT
- Include amounts due within 12 months on long-term unsecured, secured and subordinated obligations.
- DEFERRED TAXES
- Deferred income tax charges and credits generally arise when there are timing differences in a company's recognition of revenues and/or expenses for income tax reporting and for general reporting purposes, due to the fact that the Internal Revenue Code does not conform to generally accepted accounting principles. For example, certain fixed assets may be depreciated using the straight line principles according to GAAP and using accelerated methods for tax purposes. When these treatments result in higher pretax profits for general reporting purposes than for income tax purposes, a deferred liability is created on the balance sheet. This item will be included in Net Worth for the purposes of ratio analysis, as part of the statement normalization process.
- DEPRECIATION EXPENSE
- Fixed asset depreciation expense is often lumped together with Operating Expenses on an income statement. In that case, you may have to determine this amount from the footnotes or supporting schedules.
- DIVIDENDS AND WITHDRAWALS
- Include all cash dividends paid on common and preferred stock or the total of all withdrawals made by the owner(s). If this item is not present in the income statement, it may be found in the footnotes or approximated by taking the Dividends Paid amount on the Cash Flow Statement (if available).
- EXTRAORDINARY INCOME/EXPENSE
- Include all revenues earned and expenses incurred outside of the normal course of business, e.g. Gains/Losses on Sale of Fixed Assets (unless those are a common activity for the business).
- GENERAL OPERATING EXPENSES
- This field should include all costs not directly associated with the production of the goods or services. Examples include accounts like "Selling, General and Administrative Expenses", "Salaries"
- GROSS PROFIT
- This field will be automatically calculated as the difference between Net Sales and Cost of Sales.
- INTEREST EXPENSE
- Include all interest paid by the company on short-term and long-term debt.
- INVENTORY
- This term refers to tangible property items which are held for sale in the ordinary course of business, are in the process of production for such sale, or are to be currently consumed in the production of goods or services to be available for sale. This includes such accounts as Raw Materials, Work-in-Process, Finished Goods, Merchandise and Supplies.
- LINE OF CREDIT
- Include under this heading all amounts drawn on temporary or permanent lines of credit.
- LONG-TERM INVESTMENTS
- This item includes noncurrent assets which are in the general nature of a permanent or long-term investment. Assets in this category include investments in affiliates, subsidiaries or related businesses and marketable securities carried for long range investment purposes. Assets which represent temporary investment of long-term cash should be classified under Cash and Cash Equivalents. Loans and advances to related entities should be included under Other Assets.
- LONG-TERM NOTES PAYABLE
- Include the non-current (i.e. maturing in 12 months or more) portion of all secured and unsecured bank or other interest-bearing debt. Examples include term loans, mortgages, standby credits, etc.
- NET FIXED ASSETS
- This item includes all tangible fixed assets used in the production of the company's goods and services, and should be entered net of reserves for depreciation and depletion. Examples include real estate, equipment, vehicles, etc.
- NET INTANGIBLES
- Intangible assets generally do not have physical characteristics, are not realized apart from the business as a whole and may have little or no liquidation value. They usually require some cash outlay at the time of acquisition. Intangible assets are amortized, and should be shown on the balance sheet net of reserve for amortization. Examples include intellectual property (such as patents and trademarks), goodwill, capitalized R&D expenses, computer software, leasehold improvements, and deferred charges.
- NET PROFIT AFTER TAX
- This field reflects Operating Profit net of Interest Expense, Tax Expense, Extraordinary Income/Expense and Other Income/Expense. After you fill in this field, the Other Income/Expense will be automatically adjusted to maintain consistency.
- NET SALES
- Include all of the revenues derived from the principal operating activities of the concern and from the sideline operating activities which have been separated in the company's income statement. Revenue adjustments, such as Returns and Allowances, Discounts or Excise Taxes, should be deducted.
- NET WORTH
- This field will be automatically calculated to reflect the difference between Total Assets and Total Liabilities. Net Worth represents the interests of the company's owners. It includes such accounts as Common Stock, Preferred Stock, Paid-In Capital and Retained Earnings.
- OPERATING PROFIT
- This field shows the profit amount after the operating, depreciation, and amortization expenses are subtracted.
- OTHER ACCRUALS
- This item should include all accruals except income taxes. Accruals are liabilities that arise through adjusting entries when accounting for unrecorded liabilities. This account typically refers to expenses incurred but not yet paid. Examples include utilities and wages where the service period does not coincide with the financial statement period of the business.
- OTHER CURRENT ASSETS
- This account will be automatically calculated as the difference between the Total Current Assets and the sum of itemized current assets. All current assets not classified elsewhere are included here.
- OTHER CURRENT LIABILITIES
- This item will be automatically calculated after you fill in the Total Current Liabilities field. It refers to miscellaneous current liabilities that do not fit any specific classification.
- OTHER INCOME/EXPENSE
- This item should include revenues derived from activities other than the primary operations and important sideline activities of the company, as well as expenses incurred in such activities. This field should reflect the net of recurring items for which separate accounting for revenues and related expenses is not feasible. Non-recurring items should be included in the Extraordinary Income/Expense field instead. This field will be automatically adjusted after Net Income is entered, to make sure that Net Income reflects the true revenue net of all expenses.
- OTHER NON-CURRENT ASSETS
- This item will be automatically calculated as the difference between Total Non-Current Assets and the sum of all specifically identified non-current assets (Net Fixed Assets, Net Intangibles and Long-Term Investments). This account includes all long-term assets that cannot be classified elsewhere, such as loans to shareholders and employees, restricted funds and pension plans, notes receivable, cash surrender value life insurance, etc.
- OTHER NON-CURRENT LIABILITIES
- This item will be automatically calculated after the Total Long-Term Liabilities or Total Liabilities amount is entered. It includes all noncurrent portions of secured and unsecured obligations other than those that can be separately identified as bank or other interest-bearing debt. Note that loans from related parties (shareholders, employees) should be classified as current liabilities regardless of stated maturity, unless they are fully subordinated to bank debt.
- PREPAID EXPENSES
- This item represents expenditures made for services or supplies which have not been wholly used as of the statement date and are being carried over to the period in which they are to be used. Unlike "deferred charges", which should be included under Intangibles, Prepaid Expenses represent some value in liquidation. Examples include insurance premiums, prepaid rent and taxes.
- SHORT-TERM NOTES PAYABLE
- This account includes all secured and unsecured notes payable due within twelve months that cannot be separately identified as due to banks or current maturities. Accounts such as Bills Payable, Commercial Paper, Short-Term Borrowings and Trade Acceptances may be included under this heading. Notes payable to related parties (shareholders, employees, management)who may be able to effect prepayment as a result of intimacy with the company or control over it should be included in this classification regardless of stated maturity, unless they are fully subordinated to bank loans.
- TAX EXPENSE
- Include all federal, state and foreign income taxes, both current and deferred.
- TOTAL ASSETS
- Enter the Total Assets figure from the original balance sheet here. The Other Non-Current Assets and Total Non-Current Assets fields will be automatically calculated so that the Total Assets figure reflects the actual total.
- TOTAL CURRENT ASSETS
- Enter the Total Current Assets amount from the original balance sheet. The Other Current Assets field will be automatically calculated for you.
- TOTAL CURRENT LIABILITIES
- Enter the Total Current Liabilities figure from the original balance sheet here. The Other Current Liabilities field will be automatically adjusted to make sure this item is equal to the sum of all current liability accounts.
- TOTAL LIABILITIES
- Include the Total Liabilities amount from the original balance sheet here. The Other Non-Current Liabilities and Total Long-Term Liabilities fields will be adjusted to make sure that the Total field reflects the sum of its parts.
- TOTAL LONG-TERM LIABILITIES
- Include the total long-term liabilities amount from the original balance sheet here. The Other Non-Current Liabilities field will be automatically calculated to make sure that the Total field reflects the sum of its parts.
- TOTAL NON-CURRENT ASSETS
- Enter the Total Non-Current Assets figure from the original balance sheet here. If the account is not present on the balance sheet, fill in the Total Assets field and this item will be automatically calculated.
- Accounts Payable to Sales
- This ratio provides a measure of the efficiency of a firm and the ability to generate sales revenue to cover supplier expenses. A low percentage may indicate an over reliance on supplier credit to support sales.
- Assets to Sales
- This ratio is a measure of a firm's productive use of assets and a low percentage compared to the average for the industry usually indicates high asset use efficiency.
- Collection Period
- This indicates the amount of time the firm must wait after making a sale before receiving payment. A long collection period usually signals high delinquencies and the potential for cash shortages.
- Current Liabilities to Inventory
- This ratio provides an indication of the ability of a firm's inventory sales to generate the cash needed to meet the short-term obligation of creditors. A ratio that is low usually indicates that the company will be able to meet short term obligations and a high ratio may be cause for concern and signal a potential cash shortage.
- Current Liabilities to Net Worth
- This ratio expresses the relationship between capital contributed by current obligation creditors and capital contributed by owners. It indicates the ability of a firm to safely meet the obligations of current creditors. The higher the ratio, the greater the risk that a firm will not be able to meet the obligations of creditors and a ratio less than 1 may be an indication of potential cash shortage problems.
- Current Ratio
- This is a general indication of the extent to which claims of short-term creditors are covered by assets that are expected to be converted into cash in a period that roughly corresponds to the due dates of the current liabilities. The higher the ratio, the greater the cushion between current obligations and the firm's ability to pay them. A general guideline suggests that a current ratio less than 2 might indicate a potential cash shortage.
- Fixed Assets to Net Worth
- This ratio provides the percentage of assets centered in fixed assets compared to total equity. Generally the higher this percentage the more vulnerable a firm becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow to support day-to-day operations.
- Profit Per Employee
- This is a measure of the profits a firm is generating for each of its employees.
- Quick Ratio
- This is a measure of a firm's ability to meet short-term obligations without relying on sale of inventory. A ratio of less than one may indicate a potential cash shortage.
- Return on Assets
- This ratio provides measures the return on the total investment in assets including those financed with debt as well as equity.
- Return on Net Worth
- This ratio is a measure of the return or earnings on the money invested in the firm. This return must be high enough to provide owners with an adequate return for the risk that is being assumed by keeping investments in the firm. A low return will also make it difficult to attract additional investment capital in the future.
- Return on Sales
- This ratio shows the percentage profit earned on sales by a firm. This ratio should increase as the volume of sales grows because fixed costs are spread over more units of sales.
- Sales Per Employee
- This is a measure of the productivity of employees. In addition, this is a measure of how capital or labor intensive a firm is. A low measure may indicate that the firm is labor intensive (or over staffed) and a high measure may indicate the firm is capital intensive (or under staffed).
- Sales to Inventory
- This ratio is a measure of the efficient use of inventory or the ability of a firm to turn inventory into sales. Generally, the higher the ratio the more efficient the use of inventory and a low ratio may indicate potential cash shortages.
- Sales to Net Working Capital
- This ratio measures how efficiently working capital is being used by a firm. A low ratio may indicate inefficient use of working capital while a high ratio may signal potential cash shortages and risk of not being able to pay creditors.
- Total Liabilities to Net Worth
- This ratio expresses the relationship between the capital contributed by creditors and the capital contributed to the firm by owners. This provides an indication of the ability of a firm to meet creditor obligations and the lower the ratio the better financial condition the firm is thought to be in. A high ratio may signal potential cash shortage and a low ratio firm usually has greater ability to borrow debt in the future.
- NET BALANCE POSITION (NBP)
- This is an extremely effective cash liquidity measure that overcomes the drawbacks of the traditional measures. It combines information from both the Income Statement (Profit and Loss) and Balance Sheet, along with planned or anticipated financial decisions, to accurately predict cash flow and working capital during periods of fluctuating sales.
- RETURN ON ASSET INVESTMENT (ROAI)
- This is a fundamental measure of a company's earnings power. It evaluates the return achieved by a company before tax and interest expenses on the total investment made combining both debt and equity.
- SPREAD BETWEEN RETURN ON DEBT AND COST OF DEBT
- This is a very effective measure of the long-term viability of a business that estimates the difference between what a company earns on its debt obligations and its cost of debt.
- SUSTAINABLE GROWTH RATE (SGR)
- This is the revenue growth rate at which a company can afford to grow given its capital structure without experiencing cash shortage problems.
