Chapter 15
accounts payable Liabilities incurred when goods or supplies are purchased on credit.
accounts receivable Money that is owed to a company by a customer for products and services provided on credit. Treated as a current asset on a balance sheet.
accrual system of accounting A method of recording and allocating income and costs for the period in which each is involved, regardless of the date of payment or collection. For example, if you were paid $100 in April for goods you sold in March, the $100 would be income for March under an accrual system. (Accrual is the opposite of the cash system of accounting.)
administrative expenses An overhead cost associated with managing business affairs not directly attributable to sales, marketing, production or service delivery.
allowance for uncollectible accounts Accounts receivable judged to be uncollectible.
assets Anything of value that is owned by you or your business.
balance sheet An itemised statement listing the total assets, liabilities and net worth of your business at a given moment.
bank loan Long-term liability due to a loan from a lending institution.
break-even analysis The method of determining the point at which a company makes neither a profit nor a loss. The break-even point for a product is the point where total revenue received equals total costs.
budget A statement of estimated income and expenses over a specific period of time.
capex Short for ‘capital expenditure’, refers to costs associated with buying machinery, equipment, property and other fixed assets that provide longterm benefit.
capital budget Used to plan expenditures on assets whose returns are expected to last beyond one year.
capital budgeting A budgeting process used to determine investment decisions. It relies heavily on an evaluation of cash inflows.
cash Coins, currency and cheques on hand. It also includes money that the business has in its cheque and savings accounts.
cash-flow budget A budget that provides an overview of inflows and outflows of cash during a specified period of time.
cash-flow statement A financial statement that sets forth the amount and timing of actual and/or expected cash inflows and outflows.
cost of goods sold (cogs) The value of products sold to customers in a period. This is determined by subtracting the value of the ending inventory from the sum of the beginning inventory and purchases made during the period. Gross sales less cost of goods sold give you gross profit.
current assets Items on the balance sheet listed as assets such as cash, accounts receivable, inventory and short term investments that can be converted to cash and/or used to pay current liabilities within 12 months.
current liabilities Debts you must pay within a year (also called short-term liabilities).
debt servicing Cash required over a given period for the repayment of interest and principal on a debt.
depreciation Lost usefulness; expired utility, the diminution of service yield from a fixed asset or fixed asset group that cannot or will not be restored by repairs or by replacement of parts.
expenses An expired cost; any item or class of cost of (or loss from) carrying on an activity; a present or past expenditure defraying a present operating cost or representing an irrecoverable cost or loss; an item of capital expenditures written down or off; a term often used with some qualifying expression denoting function, organisation or time, such as a selling expense factory expense, or monthly expense.
financial expense Interest expense on longterm loans, also known as debt service.
financial ratio analysis Financial ratio analysis provides a way of organising and interpreting information from financial data. This analysis quantifies relative performance by analysing the ratio of one performance measure against another and is used to manage a firm’s performance by comparative analysis with industry standards or other benchmarks derived from similar firms.
financial statement An accounting term for an account or formal record that shows the financial activities of a firm, person or other entity.
fixed assets Land, building, equipment and other assets expected to remain with the firm for an extended period.
fixed cost Part of the operating budget, a cost that does not change in response to changes in activity for a given period of time. Rent, depreciation and certain salaries are examples. (See variable costs and mixed costs.)
food miles Distance that food (or any product) is transported from the time of its production until it reaches the consumer.
gross profit The difference between revenue (or the income from sales) and the costs associated with producing the goods or services of a business before administration and overheads, interest and taxes are deducted.
horizontal analysis A technique that involves comparing financial statement amounts and ratios for a particular company from year to year.
income statement Also called profit and loss (P&L) statement. A statement summarising the income of a business during a specific period. The income statement illustrates the projected operating results based on profit and loss.
interest The price paid for borrowed money or the return earned from money deposited or lent.
internal rate of return (IRR) method The interest rate at which the net present value of an investment project is zero; thus, the internal rate of return represents the interest yield promised by a project over its useful life.
inventory Merchandise held by the company for resale to customers.
investing activities Cash-flow effects from long-term investing activities, such as purchase or sale of plant and equipment. The net cash flow from investing activities can be either positive or negative.
investment (1) In finance, the purchase of a financial product or other item of value with an expectation of favourable future returns. In general terms, investment means the use of money in the hope of making more money. (2) In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.
liabilities Amount owing to your creditors. Liabilities can be in the form of a bank loan, accounts payable and so on. They represent a claim against your assets.
linear regression The process of fitting the best possible straight line through a series of points.
loan payable Current instalment on a long-term debt that must be paid this year; part of the current liabilities.
long-term liabilities Items or long-term debt on a balance sheet that fall due or require paying-off beyond a timeframe of one year.
mixed costs Part of the operating budget, a blend of fixed and variable costs. An example is utilities, since part of this expense would be responsive to change in activity and the rest would be a fixed expense, remaining relatively stable over the budget period. (See fixed costs and variable costs.)
net income The excess of revenue over expenses during the particular period. If revenues exceed expenses, the result is a net profit. If the reverse is true, the firm suffers a net loss.
net present value (NPV) method A measure of the equivalent lump-sum value of a stream of payments over time. In effect, the NPV represents the amount that would need to be invested at a commercial interest rate at the beginning of the period of payments, such that, with accumulated interest, it would be just adequate to meet all the payments as they fell due.
net profit Sometimes referred to as the ‘bottom line’, it is the difference between the revenue (or income from sales) and all associated business expenses including production or service delivery costs, sales, marketing, payroll, overheads, interest and taxes.
net worth Sometimes called net assets, it can be applied to either individuals or firms and is the value of the difference between an individual’s or firm’s total assets and total liabilities
note payable A promissory note given as tangible recognition of a supplier’s claim or a note given in connection with an acquisition of funds.
operating budget A detailed projection of all estimated income and expenses during a given future period.
operating cash flows Cash generated from or used in the course of business operations of the firm. The net operating cash flows will be positive for most firms, because their operating inflows (primarily from revenue collections) will exceed operating cash outflows (for example, payment for raw materials and wages).
operating expenses The major expenses, exclusive of costs of goods sold. These represent the resources expended, except for inventory purchases, to generate the revenue. (See also selling expenses and administrative expenses.)
owners’ equity Assets minus liabilities equals owner’s equity.
payback method This measures the length of time taken for the return on an investment exactly equal to the amount originally invested.
prepaid expenses Expenses the firm already has paid, but that have not yet been used. For example, insurance paid on the company car every six months is a prepaid expense entry because it will be six months before the entire premium has been used.
pro forma statements A pro forma statement is a financial statement projecting anticipated income, expenses and cash flow for some specified future period.
profit and loss statements Also known as an income statement, it is a financial record or account of all of a firm’s revenues and all of the expenses and costs incurred by the firm in achieving those revenues that shows the level of profit or loss produced by the firm over a period of time.
retained earnings Accumulated net income not distributed to owners over the life of the business to date. Every year this amount increases by the profit the firm makes and keeps within the company.
revenues Gross sales the business made during the particular period under review.
sales forecast The projected or predicted pattern or estimate of sales at some future point or period.
selling expenses Expenses from displaying, selling, delivering and installing its products or performing a service.
short-term liabilities Where the business orders some merchandise, receives it, but has not yet paid for it. This often occurs when a company receives merchandise during the third week of the month and does not pay for it until it pays all of its bills on the first day of the next month.
social impact assessment (SIA) Methods used to measure the intended and unintended social consequences, both positive and negative, of planned interventions (policies, programs, plans, projects) and any social change processes invoked by those interventions. Its primary purpose is to bring about a more sustainable and equitable biophysical and human environment.
social return on investment (SROI) Measures the value of the benefits relative to the costs of achieving those benefits. It is a ratio of the net present value of benefits to the net present value of the investment.
stakeholder A person, group, organisation or system that affects or can be affected by an organisation’s actions.
sustainability performance measures Measures that many companies are required to disclose under a range of legislative and regulatory requirements and increasingly for commercial reasons because they are accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development.
sustainable development Development which seeks to produce sustainable economic growth while ensuring future generations’ ability to do the same by not exceeding the regenerative capacity of nature.
taxes payable The amount payable to governments or statutory bodies calculated as a percentage of income according to government devised formulae.
time value of money The idea that money available today is worth more than the same amount in the future due to its potential interest earning capacity. Any amount of money is worth more the sooner it is received.
triple bottom line An accounting method that captures the values and criteria for measuring organisational (and societal) success: economic, ecological and social. (See double bottom line.)
triple bottom line (TBL) indicators Estimates of a firm’s positive and negative contributions to the biosphere, such as the use of non-renewable fuels, greenhouse gas emissions, water usage, land disturbance and so forth.
variable cost Costs that vary with the level of production or sales, such as shipping supplies and sales commissions. Part of the operating budget, a cost that changes in the same direction as, and in direct proportion to, changes in operating activity. Direct labour, direct materials and sales commissions are examples. (See fixed and mixed costs.)
vertical analysis The conversion of an entity’s profit and loss account and balance sheet (normally for a number of accounting periods) so that the amount of each item in the accounts is represented as a percentage of the total amount.
working capital Otherwise known as the operating liquidity it is calculated by the difference between short term (or current) assets and the short term (or current) liabilities. It is a measure of financial health of a business that demonstrates that a firm has sufficient surplus of cash generated from its operations to pay its debt as they fall due.