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BASIC FINANCIAL TERMS A-Z
A
AGM - Annual General Meeting, it is the year meeting held by every registered company. Agenda is
to explain the performance during the year, presentation of annual financial statements, voting on
important financial decisions. Any shareholder can participate in AGM.
Asset turnover ratio - This ratio can be explained as Net assets / Total turnover or sales. This ratio
measures the operational efficiency of business assets. In simple terms this measures how many
time total assets turned in a year and how efficiently the assets are used in a business.
Acid test ratio - This is one of the important ratio to measure business liquidity. Business liquidity
is defined as ability of a business to pay it;s short term debts. Acid test ratio = Highly liquid assets /
current liabilities
American Depository Receipts - This is the way non-US companies raises money from US
investors. These shares can be traded in US stock exchanges and denominated in US $.
Amortization - It is an accounting technique by which intangible assets are written off over a
period of time. For example provision for doubtful debts or preliminary expenses are written off
over a certain period of time.
Annuity - It is an investment scheme under which investor makes recurring investments and lump
sum payment is made to him at the end. Common example is Recurring deposit account at a post
office where people makes small monthly deposits and gets their money back at the end of period.
Benefit of Annuity is investor gets compound interest over a period of time.
Asset Management Company - AMC is a company that pools and invests investor money in pre-
determined goals. Pool of funds is known as Mutual fund.
Audit - Financial statement and physical stock is checked annually by professional auditor (
Chartered Accountant affiliated by ICAI in India )
B
Book-keeping - Recording of financial transactions in books of account.
Bear market - A market situation in which most of the investors thinks that markets will fall.
Balance of Payment - BOP is the difference between a country's exports and imports.
C
Capital - Wealth invested by an entrepreneur on his business. Capital = Assets - Liabilities
Capital gain - Gain by selling a capital asset in which a person is not doing business. Income by
selling a house by a bank employee is a capital gain whereas when a builder do the same thing it is
Income from business and professional.

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Current asset - An asset that can be converted into cash with 12 months. For example - debtors,
stock etc.
Credit rating - A ranking applied to an individual, business or a nation based upon its credit history
and current financial position. There are various credit rating companies in India such as CRISIL.
CPI - Consumer price index is measure to find price of a bundle of commodities. CPI is used to
measure the inflation in a country.
D
Debt consolidation - Debt consolidation is a process by which various loans and converted into a
single loan to reduce interest rate and instalment value.
Depreciation - Depreciation is reduction in value of an asset due wear and tear over a period of
time. For example a company purchased a machine in 2005 and planned to charge 20%
depreciation. In 2010 the machine will be written off from the books of account.
Dividend - Dividend is the amount per share paid by a company to its shareholders. Dividend value
is based upon company's profitability.
Dividend payout ratio - It is the ratio of dividend paid per share and EPS ( Earning per share )
Double entry bookkeeping - It is a method of bookkeeping in which every transaction is recorded
two accounts. Once in debit side and once in credit side.
E
Earning per share - Earnings made by a company in a financial year divided by number of issued
shares.
Equity - Value of a business. Equity = Total assets - Total liabilities
Ex-divided - Ex-dividend means without dividend. When a seller makes a ex-dividend sales
contract then he is entitled to get dividend or interest payment.
EBIT - Earning before interest and taxes
EBT - Earning before tax
EAT - Earning after tax
F
Face value - The amount mentioned on face of a bond certificate.
Fixed assets - Assets which can be seen such as machinery
Financial year - A period of 12 months from 1st April to 31st march

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