Corporate finance teminologies

Corporate Finance Assignment No.1
Prepared by: Zafar Aziz CMS ID: 20402
1. Asset It is an economic resource, tangible or intangible that is capable of being owned or
controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity. Simply stated, assets represent value
of ownership that can be converted into cash (although cash itself is also considered an
asset) A resource with economic value that an individual, corporation or country owns or
controls with the expectation that it will provide future benefit.
2. Current Assets They are cash and other assets expected to be converted to cash or
consumed either in a year or in the operating cycle (whichever is longer), without
disturbing the normal operations of a business. These assets are continually turned over in
the course of a business during normal business activity. There are five major items
included into current assets:
 Cash and cash equivalents: it is the most liquid asset, which includes currency, deposit
accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
 Short-term investments: include securities bought and held for sale in the near future to
generate income on short-term price differences (trading securities).
 Receivables: usually reported as net of allowance for non-collectable accounts.
 Prepaid expenses: these are expenses paid in cash and recorded as assets before they are used
or consumed (common examples are insurance or office supplies).
 Marketable securities: Securities that can be converted into cash quickly at a reasonable
price.
 Inventory: trading these assets is a normal business of a company. The inventory value
reported on the balance sheet is usually the historical cost or fair market value, whichever is
lower.
3. Liabilities A company's legal debts or obligations that arise during the course of business
operations. Liabilities are settled over time through the transfer of economic benefits
including money, goods or services. Current liabilities are debts payable within one year,
while long-term liabilities are debts payable over a longer period. Recorded on
the balance sheet (right side), liabilities include loans, accounts payable, mortgages,
deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's
operations because they are used to finance operations and pay for large expansions.
They can also make transactions between businesses more efficient.
4. Current Liabilities A company's debts or obligations that is due within one year.
Current liabilities appear on the company's balance sheet and include short term debt,
accounts payable, accrued liabilities and other debts. Essentially, these are bills that are

due to creditors and suppliers within a short period of time. Normally, companies
withdraw or cash current assets in order to pay their current liabilities.
5. Acid-Test Ratio as same as Quick Ratio
6. Quick Ratio A measure of a company's ability to meet its short-term obligations using its
most liquid assets. Also stringent indicator that determines whether a firm has enough
short-term assets to cover its immediate liabilities without selling inventory. It is
calculated by subtracting inventories from current assets and dividing the quantity by
its current liabilities. A higher acid-test ratio indicates greater short-term financial health.
The acid-test ratio thus measures a company's ability to meet obligations in a worst-case
scenario.
Quick Ratio= Current Assets - Inventory
Current Liabilities
7. Asset Turnover Ratio A ratio of a company's net sales to total assets. The amount of
sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator
of the efficiency with which a company is deploying its assets. It is a measure of how
efficiently management is using the assets at its disposal to promote sales. Asset
Turnover is typically calculated over an annual basis – either fiscal or calendar year –
with the “Total Assets” figure used in the denominator calculated as the average of assets
at the beginning and end of the year. A high ratio indicates that the company is using its
assets efficiently to increase sales, while a low ratio indicates the opposite. It is also
known as total asset turnover.
Asset Turnover = Sales or Revenues/Total Assets
8. Net Current Assets as same as Working capital
9. Working capital Working capital is what remains on the balance sheet after the current
liabilities are subtracted from the current assets. This is an indicator of how well the
company can meet its financial obligations and therefore how solvent or liquid (able to
convert assets to cash) the company is. With assets exceeding liabilities, the company is
in a liquid position. It is also called Net Current Assets.
Working capital = current assets– current liabilities
10. Balance Sheet A financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time, such as the end of a quarter or year. A
balance sheet is divided into two main sections, one that records assets i.e cash, inventory
and property and one that records liabilities i.e accounts payable or long-term debt
and stockholder equity. These three balance sheet segments give investors an idea as to
what the company owns and owes, as well as the amount invested by the shareholders.

The assets should generally equal the liabilities and stockholder equity because the latter
two are how the company paid for its assets.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
11. Budget An estimate of costs, revenues, and resources over a specified period, reflecting a
reading of future financial conditions and goals. It is establishing a planned level of
expenditures and revenue and over a specified future period of time. A company may
plan and maintain a budget on either an accrual or a cash basis. Budgets are usually
compiled and re-evaluated on a periodic basis. Adjustments are made to budgets based on
the goals of the budgeting organization. As important administrative tools, serves also as
 plan of action for achieving quantified objectives,
 standard for measuring performance, and
 device for coping with foreseeable adverse situations
12. Capital Employed The value of all the assets employed in a business, including equity
and preference share capital, fixed and current assets, and gross borrowings plus current
assets and less current liabilities. It is also known as "funds employed" which consist of:
 The total amount of capital used for the acquisition of profits.
 The value of all the assets employed in a business.
 Fixed assets plus working capital.
Total assets less current liabilities.
13. Return on capital employed (ROCE) Which measures the operating profit of a
company as a percentage of capital employed. In effect, ROCE is telling us how efficient
a company is at squeezing profit out of capital.
14. Return on Average Capital Employed – (ROACE) A financial ratio that shows
profitability compared to investments made in new capital. Return on average capital
employed is a useful ratio when analyzing businesses in capital-intensive industries, such
as oil. Businesses that are able to squeeze higher profits from a smaller amount of capital
assets will have a higher ROACE than businesses that are not as efficient in converting
capital into profit.
15. Cost of goods sold Cost of goods sold is the accumulated total of all costs used to create
a product or service, which has been sold. These costs fall into the general sub-categories

of direct labor, materials, and overhead. In a service business, the cost of goods sold is
considered to be the labor, payroll taxes, and benefits of those people who generate
billable hours (though the term may be changed to "cost of services"). COGS appears on
the income statement and can be deducted from revenue to calculate a company's gross
margin. Also referred to as "cost of sales."
16. Cost of Sales w.r.t:
I. Manufacturing: The sum of direct material, direct labor, and factory
overheads incurred in making a product.
II. Retail: The purchase price of merchandise.
III. Operations & Production: Total costs of product sold all the costs of a product sold,
including manufacturing costs and the staff costs of the production department, before a
general overhead is calculated.
17. Free On Board – (FOB) An agreement between a seller and a buyer indicating that the
seller has fulfilled his/her obligation to deliver a good when he/she has transferred it to
the ship on which it will be transported. All cost and risk transfers to the buyer when the
good crosses the ship's rail. The buyer designates the ship onto which the seller must
deliver the good.
 Term of sale under which the price invoiced or quoted by a seller includes all charges up
to placing the goods on board a ship at the port of departure specified by the buyer.
Also called collect freight, freight collect, or freight forward.
 Used in shipping to indicate that there is no charge to the buyer for goods placed on
board a carrier at the point of shipment. Typically followed by the name of a port or city.
18. Earnings Before Interest & Tax – EBIT EBIT is all profits before taking into account
interest payments and income taxes. By excluding both taxes and interest expenses, the
figure hones in on the company's ability to profit and thus makes for easier cross-
company comparisons. An indicator of a company's profitability, calculated as revenue
minus expenses, excluding tax and interest. EBIT is also referred to as "operating
earnings", "operating profit" and "operating income" Also known as Profit Before
Interest & Taxes (PBIT), EBIT equals Net Income with interest and taxes added back to
it.
19. Appreciation An increase in the value of any type of asset such as a stock, bond,
currency or real estate over time. The increase can occur for a number of reasons
including increased demand or weakening supply, or as a result of changes in inflation or
interest rates. This is the opposite of depreciation, which is a decrease over time.

20. Liquidity ratios Ratios that measure a firm’s ability to meet short term obligations.
21. Current ratio Current assets divided by current liabilities. It shows a firm’s ability to
cover its current liabilities with its current assets.
22. Net Present Value The net present value (NPV) of an investment proposal is the present
value of the proposal’s net cash flows less the proposal’s initial cash outflow. An
alternative method of project evaluation and selection used in capital budgeting.
23. Return on Investment (ROI) Measures overall effectiveness in generating profits with
available assets; earning power of invested capital. It is calculated as net income divided
by long-term liabilities plus equity also known as Return on assets
24. Capital gain (loss) The amount by which the proceeds from the sale of a capital asset
exceeds (is less than) the asset’s original cost.
25. Dividend The distribution of a firm’s earnings to its stockholders means given profit on
shares.
26. Depreciation The permanent and continuous decrease in the quality, quantity or value
and utility of tangible Assets; occasioned by physical wear and tear, obsolescence, or the
passage of time.
27. Amortization The permanent and continuous decrease in the quality or value and utility
of intangible Assets i.e copyright, goodwill etc; occasioned by obsolescence, or the
passage of time.
28. Fixed Cost It does not change in total as activity changes, always fixed not very with
production.
29. Reserves
 Bank Reserves: that portion of deposit that a bank sets aside in the form of vault cash or
non-interest earning deposits with Federal Reserve’s Bank.
 International Reserves: international money held by nation to stabilize or “peg” its
foreign exchange rate or provides financing when the nation faces balance-of-payment
difficulties.
30. Break-even-Point It is the volume of activity at which an organization’s revenue and
expenses are equal. At this amount of sales, the organization has no profit and loss.
31. Agency costs Costs associated with monitoring management to ensure that it behaves in
ways consistent with the firm’s contractual agreements with creditors and shareholders.

32. Benchmarking It is the continual search for the most effective method of accomplishing
a task by comparing existing methods and performance levels with those of others
organizations or with other subunits within the same organization. These studies focused
on the best practices of organizations both within industry and beyond.
33. Drawings The personal expenses of owner drawn from business.
34. Receipts Funds collected from selling land, capital, or services, as well as collections
from the public (budget receipts), such as taxes, fines, duties, and fees.
35. Turnover
 In accounting, the number of times an asset is replaced during a financial period.
 The number of shares traded for a period as a percentage of the total shares in a portfolio
or of an exchange.
 Finance: The volume or value of shares traded on a stock exchange during a day, month,
or year.
36. Petty cash It refers to small amounts of cash kept on hand in a business. There are two
reasons to keep petty cash:
 To make change for customers or patients
 To pay for small purchases which require cash, such as food for the office lunch or coffee
supplies, or for parking. Most retail businesses keep a cash drawer as do health care
practices.
37. Maturity Date The date on which the principal amount of a note, draft, acceptance bond
or other debt instrument becomes due and is repaid to the investor and interest payments
stop. It is also the termination or due date on which an installment loan must be paid in
full.
38. Hire-Purchas A system by which a buyer pays for a thing in regular installments while
enjoying the use of it. During the repayment period, ownership (title) of the item does not
pass to the buyer.
39. Float
 The number of shares of a publicly-traded company available to trade.
 In foreign exchange, a currency that is not pegged to another currency's value.

 Float may also refer to the total number of shares available for trading. Float is calculated
by subtracting closely-held shares from the total number of outstanding shares.
40. Accrual Accounting An accounting method that measures the performance and position
of a company by recognizing economic events regardless of when cash transactions
occur. The general idea is that economic events are recognized by matching revenues to
expenses (the matching principle) at the time in which the transaction occurs rather than
when payment is made (or received).
41. Profit & Loss Account
The gain and loss arising from commercial or other transactions, applied especially to an
account orstatement of account in bookkeeping showing gains and losses in business.
42. Letter Of Credit A letter from a bank guaranteeing that a buyer's payment to a seller will
be received on time and for the correct amount. In the event that the buyer is unable to
make payment on the purchase, the bank will be required to cover the full or remaining
amount of the purchase.
43. Good Will: Intangible assets relating to a company's business practices. Goodwill
includes assets with value that are exceptionally difficult to quantify. Examples
include brand recognition, customer loyalty, and employee happiness.
44. Mortgage A debt instrument, secured by the collateral of specified real estate property,
that the borrower is obliged to pay back with a predetermined set of payments.
45. Chattel Mortgage A term used to describe a loan arrangement in which an item of
movable personal property is used as security for the loan. A chattel mortgage is a loan
that is secured by chattel rather than by real property.
46. Credit Rating An assessment of the credit worthiness of a borrower in general terms or
with respect to a particular debt or financial obligation. A credit rating can be assigned to
any entity that seeks to borrow money – an individual, corporation, state or provincial
authority, or sovereign government. It is done for debt instruments such as debentures,
fixed deposits, commercial papers, bonds, etc.
47. Disbursement The act of paying out or disbursing money. Disbursements can include
money paid out to run a business, spending cash, dividend payments, and/or the amounts
that a lawyer might have to pay out on a person's behalf in connection with a transaction.
48. Bankruptcy: It is a legal status of a person or other entity that cannot repay the debts it
owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often
initiated by the debtor.

49. Bad debt: It is an amount owed by a debtor that is unlikely to be paid due, for example,
to a company going into liquidation.
50. Audit An unbiased examination and evaluation of the financial statements of an
organization. It can be done internally (by employees of the organization) or externally
(by an outside firm).
51. Overhead or overhead expense refers to an ongoing expense of operating a business; it
is also known as an "operating expense". The expenses of a business those are not
attributable directly to the production or sale of goods.
52. Price per Earning Ratio A valuation ratio of a company's current share price compared
to its per-share earnings. Also sometimes known as "price multiple" or "earnings
multiple."
P/E
Ratio =
Market Value per Share
Earnings per Share (EPS)
53. Forecasting: The use of historic data to determine the direction of future trends.
Forecasting is used by companies to determine how to allocate their budgets for an
upcoming period of time.
54. Forecast: Forecast of the expected financial position and the results of operations and
cash flows based on expected conditions
55. Gross Profit A company's revenue minus its cost of goods sold. Gross profit is a
company's residual profit after selling a product or service and deducting the cost
associated with its production and sale.
56. Opening Stock: Opening stock is the value of goods available for sale in
the beginning of an accounting period.
57. Closing stock It is the value of goods unsold at the end of the accounting period
58. Net Profit
The actual profit made on a business transaction, sale, etc., or during a specific period of
business activity,after deducting all costs from gross receipts.
59. Net assets: Total assets minus total liabilities. In a sole proprietorship the amount of net
assets is reported as owner's equity. In a corporation the amount of net assets is reported
as stockholders' equity.

Corporate finance teminologies

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