Accounting Jargons - 3

• Labor hour rate: a method of absorption where the costs of a cost centre are shared out amongst products on the basis of the number of hours of direct labor used on each product.
• Leverage: another word for gearing.
• LIFO: Last in first out - a valuation method for fungible items where the newest items are assumed to be used first. Means stocks will be valued at old prices. Not used in certain jurisdictions such as the U.K for tax reasons.
• Limiting or key factor: a factor of production which is in limited supply and therefore constrains output.
• Liquidation: the procedure whereby a company is wound up, its assets realized and the proceeds divided up amongst the creditors and shareholders.
• Liquidity: the ease with which funds can be raised by the sale of assets.
• Liquidity ratios: ratios which purport to indicate the liquidity of a business. They include the current ratio and the acid test ratio.
• Listed companies: companies whose shares are traded on the stock exchange.
• Machine hour rate: a method of absorption of the costs of a cost center where the costs are shared out among the products which use the centre in proportion to the use of machine hours by the relevant products.
• Management accounting: the provision and interpretation of information which assists management in planning, controlling, decision making, and appraising performance.
• Management by exception: control and management of costs and revenues by concentrating on those instances where significant variances by actual from budgets have occurred.
• Manufacturing accounts: financial statements which measure and demonstrate the total costs of manufacturing in a period. They are followed by Trading and Profit and Loss (P&L) Accounts.
• Marginal costing: a system of cost analysis which distinguishes fixed costs from variable costs.
• Marginal cost: the additional cost incurred by the production of one extra unit.
• Margin of safety: the excess of budgeted activity over breakeven activity. Usually expressed as a percentage of budgeted activity.
• Mark-up: gross profit expressed as a percentage of cost of goods sold.
• Matching convention: the idea that revenues and costs are accrued, matched with one another as far as possible so far as their relationship can be established or justifiably assumed, and dealt with in the Profit and Loss (P&L) Account of the period in which they relate. An example is the matching of sales of a product with the development costs of that product. The appropriate periods would be when the sales occur.
• Master budgets: the overall budgets of an enterprise comprising cash budget, forecast Profit and Loss (P&L) Account and forecast Balance Sheet (BS). They are made up from subsidiary budgets.
• Materiality: the accounting convention that recognizes that accounting is a summarizing process. Some items and transactions are large (i.e. material) enough to merit separate disclosure rather than inclusion with others in a lump sum. Examples are an exceptionally large bad debt or an exceptionally large loss on sale of a fixed asset.
• Minority interest: the interests in the assets of a Group relating to shares in group companies not held by the holding company or other members of the group.
• Modified accounts: financial statements which are shortened versions of full accounts. Small and medium sized companies can file these with the Registrar of Companies instead of full accounts.
• Money measurement: the convention that requires that all assets, liabilities, revenues and expenses shall be expressed in money terms.
• Net: usually means after deductions. For example net current assets current assets less current liabilities and net cash flow means cash inflows less cash outflows. Contrast gross.
• Net book value: the valuation on the Balance Sheet of an asset. Also known as the carrying value or written down value.
• Net present value: the value obtained by discounting all cash inflows and outflows attributable to a proposed capital investment project by a selected discount rate.
• Net realizable value: the actual or estimated selling price of an asset less all further costs to completion (e.g. Cost of a repair if it needs to be repaired before sale) and all costs to be incurred before and on sale (e.g. commission).
• NIFO: Next in first out - a pricing policy where costs are collected on the basis that the cost of materials and components is the next input price.
• Nominal value: the face value of a share or debenture as stated in the official documents. Will not usually be the same as the issue price which may be at a premium and which will almost never correspond to actual value.
• Objectivity: the convention of using reliable and verifiable facts (e.g. the input cost of an asset) rather than estimates of ‘value’ even if the latter is more realistic.
• Operating cycle: the period of time it takes a firm to buy inputs, make or market a product and sell to and collect the cash from a customer.
• Opportunity cost: the value of a benefit sacrificed in favor of an alternative course of action.
• Ordinary shares: the equity capital of a company.
• Outsourcing: the use of services (such as administration or computing) from separate outside firms instead of using the enterprise’s own employees.
• Overheads: Indirect cost.
• Overtrading: a paradoxical situation when a company does so much business that stocks and debtors rise leading to working capital and liquidity difficulties.