Amounts owed by the business for purchases made on credit. These amounts are paid by the business after a time lag that is measured by Day PPs Payable Outstanding (DPO).
Amounts due to the business from customers for merchandise or services purchased on credit. The business does not receive payment for these amounts immediately, and the delay before payment is measured by Days Sales Outstanding (DSO).
Expenses that the business has incurred for which it has not received, or will not receive, an invoice, and that have not yet been paid.
The total amount of depreciation expense recorded to date for the company's fixed assets. On the balance sheet, this value is subtracted from the gross value of Property, Plant and Equipment to derive a net figure.
The amount actually paid to purchase an asset. This includes all costs associated with the purchase, such as installation, freight, and sales tax.
Financial statements describing the actual operations of the business. Actuals often pertain to the "historical" period before the start of the forecast period, but as time goes on, additional imported Actuals will generally overlap with the forecast.
Additional Paid-in Capital
The amount paid by investors for stock over and above its par value. See also contributed capital.
After Tax Income
Another term for net income.
The recognition of part of an intangible asset's cost as an expense during each year of its useful life. Items that are amortized include goodwill, start-up expenses and purchased patents.
Anything that has future economic value. In addition to items such as cash and equipment, assets can include intangibles such as goodwill.
Average Annual Return
The expected annual return on an investment, including interest and dividends, expressed as a percentage.
A method of inventory valuation whereby the total cost of all units bought or produced is divided by the number of units.
Bad Debt Expense
Losses for uncollectible accounts receivable.
A financial statement that lists the assets, liabilities, and equity of a company at a certain point in time.
The total amount of indirect compensation that the business will provide to employees for each forecast year. Benefits are either statutory, such as payroll taxes and worker's compensation; or discretionary, such as health insurance, life insurance, and 401(K) plans.
The value of an asset for accounting purposes. For assets where depreciation is taken or reserves booked, this is often expressed as a net book value. The book value of a company is the excess of assets over liabilities, which is equivalent to total owner's equity.
An analysis tool that models how revenue, expenses, and profit vary with changes in sales volume. Breakeven analysis estimates the sales volume needed to cover fixed and variable expenses.
The sales level at which revenues equal expenses (fixed and variable).
The process of determining and recording the expected financial results of a future period, generally the next fiscal year. In some organizations budgeting is limited to financial items that are shown on the income statement, while in others the budgeting process produces the three major statements (Income Statement, Balance Sheet, and Cash Flow Statement). After the target time period begins, the budgeting process frequently includes tracking actual financial figures against the forecast as well. There is considerable overlap between the activities of budgeting and forecasting. Budgeting usually involves a more detailed account structure and a finer time scale than forecasting, which typically covers between three and seven years of higher-level projections.
A long-term lease of property, plant, or equipment in which the lessee acquires essentially all the risks and benefits associated with the ownership of the leased item. Because it most closely resembles the financing of an asset purchase, a capital lease is treated as a long-term debt rather than as a rental.
Cash & Equivalents
Cash plus investments of very high liquidity and safety, such as money market funds and treasury bills. See also minimum cash balance.
Cash Flow Statement
A financial report that expresses a company's performance in terms of cash generated and used.
Chart of Accounts
In an accounting system, the list of accounts to which transactions are posted.
A term used to refer to a financial statement in which all items are expressed as percentages of another item in the statement. For example, a common-sized balance sheet might show all values as a percentage of total assets.
Common Stock Equivalents
Convertible preferred stock plus convertible bonds, stock options, and warrants.
Accounts, such as Accumulated Depreciation, that offset a related account, usually an asset. The contra account is subtracted from the related account to arrive at the net book value.
The total amount paid to the business for its common and preferred stock.
The difference between revenue and the associated variable costs. This is an important concept in breakeven analysis.
Another term for expenditure. See also expenses.
Cost of Goods Sold
Another term for cost of sales.
Cost of Sales/Services (COS)
All the costs associated with the goods or services that were sold during a specified accounting period, including materials, labor, and overhead.
A set of conditions agreed to in a formal debt agreement and designed to protect the lender's interests. Covenants may include restrictions on debt/equity ratio, working capital, or dividend payments. See also management goals.
Assets that are convertible to cash within one year in the normal course of business. This usually includes cash, accounts receivable, inventory, and prepaid expenses. See also non-current assets.
Obligations that will come due within a year from the current date. These usually include accounts payable, accrued expenses, and the portion of long-term obligations due within one year. See also non-current liabilities.
Current assets divided by current liabilities. This ratio is a measure of a company's ability to meet its financial obligations in a timely manner.
Days Payable Outstanding (DPO)
The number of days a business takes to pay its accounts payable, on average.
Days Sales Outstanding (DSO)
The number of days a business takes to collect on its accounts receivable, on average.
A form of liability that represents money borrowed from banks or other institutions.
Debt to Equity Ratio
The ratio of total debt to owners' equity, used as a measure of leverage and ability to repay obligations.
Debt to Tangible Equity Ratio
The ratio of total debt to tangible equity, used as a measure of leverage andsolvency. Typical values for this ratio vary from one industry to another. Lower values for the ratio represent a better financial condition.
A liability that arises when a customer pays for goods or services before delivery is complete; for example, a one-year service contract billed in advance. Under accrual accounting, revenue must be booked when the obligation is fulfilled, not when cash is paid or received.
An entity defined for reporting purposes.
The recognition of part of an asset's cost as an expense during each year of its useful life. There are several acceptable methods for calculating this expense, including straight-line depreciation and various accelerated methods. See also double-declining balance, straight-line method, and sum of the years' digits.
Expenses, such as labor, overhead, and materials, that vary in direct proportion to units produced or services rendered.
Wages paid for activities directly related to production of units sold or services delivered, considered part of cost of sales. This does not include management and administrative salaries, which are treated as operating expenses or overhead. Also referred to simply as labor.
Double Declining Balance (DDB)
A method of recording accelerated depreciation. Also called the 200 percent declining balance method, this system applies twice the annual straight-line rate to the undepreciated balance of the asset's depreciable cost each year of the asset's useful life. For example, if the asset has a depreciable value of $1,000,000 and a useful life of five years, the double-declining balance method would record $400,000 of depreciation the first year, $240,000 the second year, $131,429 the third year, $114,286 the fourth year, and $114,285 the fifth year. See also straight-line method and sum of the years' digits.
Earnings Before Interest and Taxes (EBIT)
Net income before income tax expense and interest expense. This is a popular measure for comparing the earning power of companies, because it eliminates the impact of capital structure and effective tax rates, two non-operating factors.
Earnings Per Share (EPS)
Net income divided by the number of outstanding shares of common stock and equivalents.
Technical measures that analysts use to forecast events in economic systems; for example, Gross Domestic Product and Consumer Price Index.
A general term for various technical measures of profit in which adjustments are made to the traditional accounting definition of Net Income. Such adjustments are typically made in order to better estimate the future value of a business.
Also known as net worth or owners' equity. Equity is the net value of a company's total assets, less its total liabilities.
All purchases made by a business, whether in cash or on credit; not equivalent to expenses. Also known as costs.
Resources used to support the ongoing operations of a business for a specified time period; not equivalent to expenditures or costs.
Inventory ready for sale.
First In, First Out (FIFO)
A method of inventory valuation whereby the goods first purchased or manufactured are considered the first ones sold. During periods of inflation, the FIFO method shows inflated profits compared to the last in, first out (LIFO) method.
The 12-month period, not necessarily coinciding with the calendar year, chosen to constitute a single year for external financial reporting and taxes.
Fiscal Year End
The last month of a company's fiscal year.
Another term for Property, Plant and Equipment. See also depreciation.
Fixed Assets to Tangible Equity Ratio
The ratio of net Property, Plant and Equipment book value to tangible equity, used as a type of efficiency ratio. Typical values for this ratio vary from one industry to another. Higher values for the ratio represent a more capital-intensive company, which may be good or bad depending on the industry and how well the assets are being used to generate revenues.
Expenses that are assumed not to vary with sales volume within the expected range of sales volumes, such as rent or administrative costs. This is an important concept in breakeven analysis and in distinguishing between gross margin and contribution margin. See also variable costs.
The period of time for which a business is modeled. Depending on the forecast start month, the first year of the forecast period may not be a complete forecast year. See also Forecast Year.
Forecast Start Date
The month and year on which the forecast period begins. See also Forecast Year.
Most people choose the forecast year to coincide with either the January-December calendar year or the fiscal year of the business, but this is not a requirement. Depending on the forecast start month, the first year of the forecast period may cover less than 12 months. In this case, assumption values that are entered for the first forecast year should represent the correct fraction of the 12-month totals.
Financial forecasting is the process of estimating future financial performance. The projected financial performance of a business is measured by using pro-forma financial statements as well as other indicators such as trend analysis, ratio analysis, and return on equity. Forecasting often takes a higher-level viewpoint than the related activity of budgeting. In broader terms, forecasting can also refer to estimates of broad economic activity in a country, industry, or financial area. For instance, analysts and economists release forecasts of where interest rates or stock market prices might go in the future.
An acronym for Generally Accepted Accounting Principles. Accountants follow GAAP standards, conventions, and rules in recording and summarizing financial transactions, and in preparing financial statements. GAAP standards are issued by the American Institute of Certified Public Accountants.
The accounting term for amounts paid for assets over and above their fair market value. Goodwill arises, for example, when a company purchases another business and pays a price higher than the value of the acquired assets alone. Goodwill theoretically represents the value of the business's name, reputation, and customer relations, which increase the true value of the business beyond the value of its assets alone.
Net Sales less cost of sales (including both fixed and variable costs), often expressed as a percentage of sales. Also referred to as gross profit.
The total of amounts received (sales for cash) and amounts expected (sales on credit) in return for products sold or services rendered during the given time period. Gross sales reflects sales at invoice values, before sales discounts and credit card fees.
Another term for net income.
A financial report that shows a company's performance over a specified period of time by subtracting expenses from revenue to obtain net income. Also known as a profit and loss statement (P&L) or an earnings report.
Income Tax Expense
Levies on the income of a business imposed by federal and state governments. This expense appears on the income statement simply as Taxes.
A long-term asset that represents a financial, legal, or accounting concept rather than a physical item. Examples of intangible assets include: Goodwill , the value of a patent, copyright, or trademark, the value of a franchise or operating rights. Under accounting rules, an intangible asset must have a useful life greater than one year, and a portion of its value must be amortized over time as an expense. Near the end of the useful life of an intangible asset, when its remaining life is less than one year, the asset must still be classified as a long-term asset. See also tangible asset.
The interest rate, such as prime or LIBOR, that is used as a reference point for quoting borrowing rates. For example, using the prime rate as the interest basis, a loan might be offered at prime plus one percent. See also Prime Rate and London Interbank Offered Rate.
Money paid by a business in exchange for the use of capital for a specified time period. On the income statement, "Interest Expense (Income)" is a single account that is the net amount of interest income and interest expense.
Money received by a business in exchange for the use of capital for a specified time period. On the income statement, "Interest Expense (Income)" is a single account that is the net amount of interest income and interest expense.
The cost of borrowing money, expressed as a percentage per period of time, usually one year.
Goods purchased or manufactured by a business and held for production or sale. Inventory is often subdivided into raw materials, work in progress, and finished goods. See also Inventory Targets.
The numbers of months of inventory that the user requires to be in stock at a given point in time. For Raw Materials, this amount represents the number of months of future production. For Finished Goods, the amount represents the number of months of future sales.
The ratio of annual cost of sales to inventory, commonly used as a rough measure of inventory management efficiency. Also known as inventory turnover ratio or simply turns.
The expenditure of cash to create additional capital. Investment can be in income-producing vehicles such as stocks and bonds, or more risk-oriented ventures such as the purchase of another company.
Another term for direct labor. See also salaries and benefits.
Last In, First Out (LIFO)
A method of inventory valuation whereby the goods most recently purchased or manufactured are considered the first ones sold. In periods of rising prices, the LIFO method shows a lower profit than the first in, first out (FIFO) method.
A long-term contract granting use of real estate, equipment or other fixed assets in exchange for payment. All leases entered in the Property, Plant and Equipment Detail are considered capital leases; operating leases should be entered as expenses in the Expenses Detail. See also mortgage.
The relationship between debt and equity. A company is considered highly leveraged if its levels of debt are high compared to its equity.
Obligations used to fund the operations of a business, including bank loans, accounts payable, and accrued expenses.
Line of Credit
The amount of short-term credit available to a business from banks.
A company's ability to generate cash in a timely manner in order to meet its obligations, often measured by the quick ratio or the current ratio.
London Interbank Offered Rate (LIBOR)
The interest rate used among the most creditworthy international banks for large loans in eurodollars. LIBOR is an important reference number, because loans to businesses can be tied to it on a percentage basis. See also prime rate and interest basis.
Any asset that has an economic life greater than one year. Liquid items such as cash are considered to be current or short-term assets. Under accounting rules, intangible assets must always be classified as long-term assets, even if their remaining life is less than one year.
Liabilities that represent money borrowed from banks or other lenders to fund the ongoing operations of a business and that will not come due within one year.
A set of conditions a business is striving to achieve. These may include requirements for debt/equity ratio, working capital, or dividend payments. See also covenants.
The price at which an asset would pass from an informed and willing seller to an informed and willing buyer, assuming that goodwill played no role in the transaction.
Securities that can readily be converted into cash, including government securities, bankers' acceptances, and commercial paper.
The physical inputs to manufacturing, treated as part of cost of sales. Also known as raw materials.
Miscellaneous Current Assets
An account for current assets that do not fall into the following categories: cash, marketable securities, accounts receivable, other receivables, inventory, and prepaid expenses.
Miscellaneous Current Liabilities
An account for current liabilities that do not fall into any of the categories already defined. Examples of predefined categories are accounts payable, accrued expenses, and short-term notes payable.
An account for operating expenses that do not fall into any of the predefined categories such as salaries, utilities, advertising, and depreciation.
Miscellaneous Non-Current Assets
An account for assets not including current assets, property, plant and equipment, intangibles, deposits, and loans made.
Miscellaneous Non-Current Liabilities
An account for non-current liabilities not including long-term debt (mortgage debt, lease debt, long-term borrowing, and shareholder loans) and deferred taxes.
A long-term debt instrument for the purchase of property by which the borrower uses the property itself for collateral.
Net Book Value
The acquisition cost of an asset less any accumulated depreciation. See also book value and contra accounts.
Net Cash Provided By Operations
On a cash flow statement, net income plus non-cash transactions and the net amount of changes in operating assets and liabilities.
Total revenues minus total expenses, including taxes and depreciation, for a specified time. Also known as profit, net profit, or net earnings.
Net Income Before Taxes
Total revenues minus total expenses except the income tax expense, for a specified time. Also known as pretax income.
Net Operating Loss (NOL)
The excess of business expenses over income in a given tax year.
Net Operating Loss (NOL) Carry forward
The amount of Net Operating Losses accumulated over past tax years that is available for offsetting taxable income in the current and future tax years.
Net Present Value (NPV)
A measure of a project's future value in current dollars. Future income and expenses are summed and then discounted using a required rate of return to adjust for the time value of money. Net present value is, theoretically, the best method for evaluating projects.
Net Property, Plant and Equipment
Gross property, plant and equipment minus accumulated depreciation. This number represents that portion of PP&E acquisition cost that has not yet been recognized as an expense. It is not the same as externally determined measures such as market value.
Sales revenue less sales discounts and credit card fees.
Assets that are not convertible to cash within one year in the normal course of business. Property and Goodwill are examples of non-current assets. See also current assets.
Obligations that will not come due within one year of the current date. See also current liabilities.
Expenses not related to the ongoing operations of a company; for example, interest expense, one-time events, and taxes.
Income not related to the ongoing operations of a company; for example, interest income and sale of fixed assets.
All expenses related to the ongoing operations of a company, including research and development, sales and marketing, and administrative expenses. Any costs directly attributable to producing goods or services are not included. See also cost of sales.
Sales revenue minus the cost of sales and operating expenses. Similar to earnings before interest and taxes, operating income is examined when the earnings of the core business are analyzed. Also referred to as operating profit, operating earnings, and income from operations.
A type of lease, normally involving equipment, classified as a rental, not as a purchase over time. An operating lease must be shown as an expense in the Expenses Detail, unlike a capital lease, which is treated as a long-term debt.
Another term for operating income.
Assets exclusive of current assets and property, plant and equipment. Other assets can include intangibles, deposits, loans made, and miscellaneous non-current assets.
Expenses due to activities outside the normal operations of the business, for example, loss from foreign exchange and loss from investments.
Income due to activities outside the normal operations of the business, for example, dividends from investments and gain from foreign exchange.
Liabilities other than debt, line of credit, and accounts payable, for example, deferred taxes, accrued expenses, and customer deposits.
Expenses incurred in operating a business, such as rent, executive salaries, and insurance, that are not directly related to the manufacture of a product or delivery of a service. A portion of overhead can be attributed to cost of sales, usually on a percentage basis; the remainder is considered an operating expense.
Another term for equity.
The stated value of a share of stock. Par is usually a minimal value (such as $.01) and bears no relation to the market value of the shares. See also Contributed Capital.
Another term for accounts payable.
The total wages, not including benefits, paid by a business during each forecast year.
A term for expenses recorded in the period in which they occur regardless of whether or not they pertain to a prior or later period. R&D and advertising expenditures are examples of costs that benefit future periods but must be treated as period expenses according to Generally Accepted Accounting Principles (GAAP).
The level of detail in terms of time at which data is forecast or reported, specified as months, quarters, or years.
Discrete intervals of time. The word period generally refers either to the interval of the entire forecast (as in forecast period) or the granularity of data in financial statements (as in periodicity).
Another term for Forecast Period.
See Property, Plant & Equipment.
The scale at which forecast numbers are displayed. Choices include dollars, hundreds, thousands, and millions.
Services, goods, and intangibles paid for prior to the period in which they provide benefit. Prepaid expenses are accounted for as assets until their benefit is realized.
A schedule that associates prices with individual products. This list allows you to forecast sales in units and still create projections in dollars. See also Discount List.
Price/Earnings Ratio (P-E)
The market value of a company's stock divided by net income.
The interest rate that banks charge to their most creditworthy customers. The prime rate is an important reference number because loans to companies are often tied to it on a percentage basis. See also London Interbank Offered Rate and interest basis.
Pro-Forma Financial Statements
A set of financial statements and other schedules that show projected results for a future period. They are called proforma financial statements because they have the form of financial statements, but are not prepared from actual operating results. The three major financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. For external reporting, these statements must conform to Generally Accepted Accounting Principles (GAAP).
Another term for net income.
Profit & Loss Statement (P&L)
Another term for the income statement.
Prompt Payment Discounts
Discounts that a business gives to credit customers who pay within a specified period of time; also called sales discounts. On an income statement, this amount is subtracted from Gross Sales to yield Net Sales.
Property, Plant and Equipment (PP&E)
Assets used in the operations of a business that have a useful life greater than one year, including land, buildings, machinery, equipment, and furniture. Also known as fixed assets. See also depreciation.
Purchases of PP&E
The acquisition cost of new property, plant and equipment assets in a given year, minus the proceeds from the sale of existing PP&E. See also depreciation.
Current assets, excluding inventory and prepaid expenses, divided by current liabilities. Also known as the acid test ratio. Like the current ratio, the quick ratio is used as a measure of a company's liquidity. It helps estimate a company's ability to meet its current obligations using assets that can easily be converted into cash. Although typical ratios vary from one industry and company size to another, financial authorities recommend that the Quick Ratio should be 1.0 or greater.
A comparison of financial statement elements in the form of a quotient. Ratios such as the price/earnings ratio, return on assets, and quick ratio is often used for analyzing financial statements.
Another term for materials.
Another term for accounts receivable.
Net profits kept within a business in the Owners' Equity account after stock dividends are paid.
Debt paid off within a given period of the forecast.
Retirement of Long-Term Debt
The repayment of a non-current liability.
Return on Assets (ROA)
Net income for a time period divided by total assets. This ratio is often used to measure profitability or the efficiency with which assets are being employed. Higher values for this ratio indicate better financial performance. The specific value obtained for a business should be evaluated in relation to the returns that can be obtained from alternative investments of capital.
Return on Tangible Equity
Net income for a time period divided by tangible equity. This ratio is sometimes used to measure profitability or the efficiency with which the owners' financial investments are being employed. The value of intangible assets such as goodwill is excluded from this ratio in order to better reflect actual operating profitability. Higher values for this ratio indicate better financial performance. The specific value obtained for a business should be evaluated in relation to the returns that can be obtained from alternative investments of capital. An alternate form of this ratio can also be computed using pre-tax income instead of net income.
Return on Equity (ROE)
Net income divided by equity. This ratio is often used as a measure of the return on funds invested in a business.
The total income received in exchange for goods or services during a specific accounting period. Revenue can be recorded using either the cash basis (as received) or the accrual basis (as earned). Also referred to as sales or sales revenue.
Compensation provided by a business to employees, excluding benefits. On an income statement, Salaries refers only to that portion of compensation (such as administrative and management costs) that does not vary in direct proportion to sales. See also labor.
Another term for revenue.
The scrap value of an asset. Acquisition cost minus salvage value yields the total amount that an asset is depreciated over its useful life.
Another term for equity.
Liabilities that represent money borrowed from banks or other institutions to fund the ongoing operations of a business that will come due within one year.
The four-digit code prescribed by the Standard Industrial Classification System to categorize businesses according to the types of activities they perform.
A company's ability to satisfy its obligations to creditors when they are due. A company is "technically insolvent" if it has enough assets to pay creditors, but cannot liquidate them quickly enough to meet payment deadlines.
A target or average cost that can be used either to value inventory or as a basis of comparison with actual costs. Standard costs can often be used to calculate cost of sales, in which case standard cost refers to the average amount of materials, direct labor and overhead required to produce a single product or service unit.
Standard Costs Plus Variances
The method of calculating the cost of sales that compares the amounts of materials, direct labor and overhead projected in the Cost of Sales assumption (the standard costs) to expenses allocated to the Production department in the Expenses, Property, Plant and Equipment, Payroll and Benefits, and Other Assets assumptions (the variances).
Statement of Cash Flows
Another term for cash flow statement.
Another term for equity.
The simplest form of depreciation, in which an equal expense is recorded in each year of an asset's useful life. For example, if the asset has a purchase price of $1,200,000, a useful life of four years and a salvage value of $200,000, straight-line depreciation would record $250,000 of depreciation each year. See also sum of the years' digits and double-declining balance.
Sum of the Years' Digits (SYD)
A method of recording accelerated depreciation. Also called the sum-of-digits method, it allows the depreciation of an asset based on an inverted scale of the total digits of the asset's useful life. For example, if the useful life is four years, the years' digits (1, 2, 3, and 4) are summed to produce ten, and 4/10ths of the asset's depreciable cost is recognized as an expense the first year, 3/10ths the second year, and so on. See also straight-line method and double-declining balance.
An asset that represents a physical object such as land, furniture, and buildings. Under accounting rules, a tangible asset must have a useful life greater than one year, and must be used in business operations rather than being held for resale. The following types of assets are not considered to be tangible assets: items held for resale, which are considered to be inventory, cash and other liquid assets which are considered as current assets, and abstract assets such as goodwill, which are intangible assets. See also tangible equity.
Equity less intangible assets. See the ratios of debt to tangible equity, fixed assets to tangible equity, and return on tangible equity.
Levies on the annual income of a business imposed by federal and state governments. On the income statement, this figure does not include property taxes, which are considered an operating expense.
Stock that has been reacquired by the company that issued it and is available for retirement or resale. Also called reacquired stock and treasury shares.
Another term for inventory turns.
Typical Collection Pattern
A method used to calculate accounts receivable. This allows you to break down receivables into categories that indicate what percentage of the total is paid within specified lengths of time from the sales date. See also days sales outstanding.
Typical Payment Pattern
A method used to calculate accounts payable. It allows the user to break down payables into categories that indicate what percentage of the total is paid within specified lengths of time from the purchase date. See also days payable outstanding.
An estimate of the period of time over which an asset will be of use to a company. Along with acquisition cost and salvage value, this measure is used to calculate the amount that the asset is depreciated each year.
Expenditures that change in proportion to increases or decreases in sales or production volumes. See also fixed costs.
The difference between actual and targeted numbers for revenues, expenditures, or productivity. Variances are usually described as either favorable or unfavorable. See also standard costs.
The net amount of current assets and current liabilities. This is equivalent to a company's liquid assets.
A bankruptcy predictor based on the formula derived by Dr. Edward Altman. According to the Altman model, a Z-Score of 3.0 or higher indicates that the company is most likely safe based on the financial data; a score below 1.8 means that the firm is probably headed for bankruptcy. In studies, the Z-Score has been shown to have 90% accuracy of prediction of bankruptcy in the first year of the forecast, and 80% accuracy in the second year.