Accounting Jargons - 2

• Earnings: another word for profits, particularly for company profits.
• Earnings per share: an investor ratio, calculated as after tax profits from ordinary activities / number of shares.
• Economic Order Quantity (EOQ): that purchasing order size which takes into account the optimum combination of stockholding costs and ordering costs.
• Equity convention: the convention that a business can be viewed as a unit that is a separate entity and apart from its owners and from other firms.
• Equity: the ordinary shares or risk capital of an enterprise.
• Exceptional items: material items which derive from events or transactions that fall within the ordinary activities of the reporting entity and which need to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair view. Examples are profits or losses on termination of an operation, costs of a fundamental reorganization and profits and losses on disposal of fixed assets.
• Expense: a cost which will be in the Profit and Loss (P&L) Account of a year.
• Exposure draft: a document issue on a specific accounting topic for discussion.
• Extraordinary items: material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the reporting entity and which are not expected to recur. They should be disclosed but are very rare indeed.
• Factoring: the sale of debtors to a factoring company to improve cash flow. Factoring is a method of obtaining finance tailored to the amount of business done but factoring companies also offer services such as credit worthiness checks, sales and debtor recording, and debt collection.
• FIFO: first in first out - a method of recording and valuation of fungible assets, especially stocks, which values items on the assumption that the oldest stock is used first. FIFO stocks are valued at most recent input prices.
• Finance lease: a leasing contract which transfers substantially all the risks and rewards of ownership of an asset to the lessee. In effect the lessee is really buying the assets with the aid of a loan and the lease installments are really payments of interest and repayments of capital. They are accounted for as such in accordance with the accounting convention of substance over form.
• Financial statements: Balance Sheets, Profit and Loss Account, Income and Expenditure Accounts, Cash Flow Statements and other documents which formally convey information of a financial nature to interested parties concerning an enterprise. In companies, the financial statements are subject to audit opinion.
• Fixed assets: business assets which have a useful life extending over more than one year. Examples are land and buildings, plant and machinery, vehicles.
• Fixed cost: a cost which in the short term, remains the same at different levels of activity. An example is rent.
• Flexible budget: a budget which is flexed to recognize the difference in behavior of fixed and variable costs in relation to levels of output. Total budgeted costs changed to accord with changed levels of activity.
• Floating charge: an arrangement whereby a lender to a company has a floating charge over the assets generally of the company gives the lender priority of repayment from the proceeds of sale of the assets in the event of insolvency. Banks frequently take a floating charge when lending.
• Format: a specific layout for a financial statement. Several alternatives are often prescribed by the prevailing governing authority or law of the country in which the enterprise operates or reports its financial performance.
• Funds flow statement: a financial statement which links Balance Sheets at the beginning and end of a period with the Profit and Loss (P&L) Account for that period. Now replaced by the cash flow statement.
• Fungible assets: assets which are substantially indistinguishable from each other. Used for stocks which can then be valued on FIFO or AVCO principles. LIFO is also possible but often not usually for tax reasons.
• Gearing: also known as leverage, the relationship between debt and equity in the financing structure of a company.
• Gilt-edged securities: securities and investments which offer a negligible risk of default. Principally government securities.
• Goal congruence: the situation in which each individual, in satisfying his or her own interests, is also making the best possible contribution to the objectives of the enterprise.
• Going concern: the accounting convention which assumes that the enterprise will continue in operational existence for the foreseeable future. This means in particular that the Profit and Loss (P&L) Account and Balance Sheet (BS) assume no intention or necessity to liquidate or curtail significantly the scale of operation.
• Goodwill: an intangible asset which appears on the Balance Sheet of some businesses. It is valued at (or below) the difference between the price paid for a whole business and the fair value of the net assets acquired.
• Gross: usually means before or without deductions. For example Gross Salary or Gross Profit.
• Gross profit: sales revenue less cost of sales but before deduction of overhead expenses. In a manufacturing company it is sales revenue less cost of sales but before deduction of non-manufacturing overheads.
• Gross margin: (or gross profit ratio), gross profit expressed as a percentage of sales.
• Group: a set of interrelated companies usually consisting of a holding company and its subsidiary and sub-subsidiary companies.
• Group accounts: the financial statements of a group wherein the separate financial statements of the member companies of a group are combined into consolidated financial statements.
• HIFO: highest in highest out, a pricing policy where costs are collected for a job on the basis that the cost of materials and components is the highest recent input price.
• Historical cost: the accounting convention whereby goods, resources and services are recorded at cost. Cost is defined as the exchange or transaction price. Under this Convention, realizable values are generally ignored. Inflation is also ignored. The almost universal adoption of this convention makes accounting harder to understand and lessens the credibility of financial statements.
• Hurdle: a criteria that a proposed capital investment must pass before it is accepted. It may be a certain interest rate, a positive NPV or a maximum payback period.
• Income and expenditure account: the equivalent to Profit and Loss (P&L) Accounts in nonprofit organizations such as clubs, societies and charities.
• Indirect costs: costs which cannot be traced to particular products. An example is rent or management salaries. They are usually shared by more than one product and are called overheads.
• Insolvency: the state of being unable to pay debts as they fall due. Also used to describe the activities of practitioners in the fields of bankruptcy, receivership and liquidations.
• Intangible assets: assets which have long term value but no physical identity. Examples are goodwill, patents, trade marks and brands.
• Interim dividend: a dividend paid during a financial year, generally after the issue of un-audited profit figures half way through the year.
• Internal rate of return: the rate of discount which will just discount the future cash flows of a proposed capital investment back to the initial outlay.
• Inventory: a detailed list of things. Used by accountants as another word for stock.
• Investment appraisal: the use of accounting and mathematical methods to determine the likely returns for a proposed investment or capital project.
• Key factor: a factor of production which is in limited supply and therefore constrains production.