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Importance of finance_terminology

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acid test
A stern measure of a company's ability to pay its short term debts, in that stock is excluded from asset
value. (liquid assets/current liabilities) Also referred to as the Quick Ratio.
assets
Anything owned by the company having a monetary value; eg, 'fixed' assets like buildings, plant and
machinery, vehicles (these are not assets if rentedand not owned) and potentially including intangibles
like trade marks and brand names, and 'current' assets, such as stock, debtors and cash.
asset turnover
Measure of operational efficiency - shows how much revenue is produced per £ of assets available to
the business. (sales revenue/total assets less current liabilities)
balance sheet
The Balance Sheet is one of the three essential measurement reports for the performance and health of
a company along with the Profit and Loss Account and the Cashflow Statement. The Balance Sheet is
a 'snapshot' in time of who owns what in the company, and what assets and debts represent the value
of the company. (It can only ever nbe a snapshot because the picture is always changing.) The Balance
Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt
to equity), reserves, stock values (materials and finsished goods), capital assets, cash on hand, along
with the value of shareholders' funds. The term 'balance sheet' is derived from the simple purpose of
detailing where the money came from, and where it is now. The balance sheet equation is
fundamentally: (where the money came from) Capital + Liabilities = Assets (where the money is
now). Hence the term 'double entry' - for every change on one side of the balance sheet, so there must
be a corresponding change on the other side - it must always balance. The Balance Sheet does not
show how much profit the company is making (the P&L does this), although pervious years' retained
profits will add to the company's reserves, which are shown in the balance sheet.
budget
In a financial planning context the word 'budget' (as a noun) strictly speaking means an amount of
money that is planned to spend on a particularly activity or resource, usually over a trading year,
although budgets apply to shorter and longer periods. An overall organizational plan therefore
contains the budgets within it for all the different departments and costs held by them. The verb 'to
budget' means to calculate and set a budget, although in a looser context it also means to be careful
with money and find reductions (effectively by setting a lower budgeted level of expenditure). The
word budget is also more loosely used by many people to mean the whole plan. In which context a
budget means the same as a plan. For example in the UK the Government's annual plan is called 'The
Budget'. A 'forecast' in certain contexts means the same as a budget - either a planned individual
activity/resource cost, or a whole business/ corporate/organizational plan. A 'forecast' more commonly
(and precisely in my view) means a prediction of performance - costs and/or revenues, or other data
such as headcount, % performance, etc., especially when the 'forecast' is made during the trading
period, and normally after the plan or 'budget' has been approved. In simple terms: budget = plan or a
cost element within a plan; forecast = updated budget or plan. The verb forms are also used, meaning
the act of calculating the budget or forecast.
capital employed

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The value of all resources available to the company, typically comprising share capital, retained
profits and reserves, long-term loans and deferred taxation. Viewed from the other side of the balance
sheet, capital employed comprises fixed assets, investments and the net investment in working capital
(current assets less current liabilities). In other words: the total long-term funds invested in or lent to
the business and used by it in carrying out its operations.
cashflow
The movement of cash in and out of a business from day-to-day direct trading and other non-trading
or indirect effects, such as capital expenditure, tax and dividend payments.
cashflow statement
One of the three essential reporting and measurement systems for any company. The cashflow
statement provides a third perspective alongside the Profit and Loss account and Balance Sheet. The
Cashflow statement shows the movement and availability of cash through and to the business over a
given period, certainly for a trading year, and often also monthly and cumulatively. The availability of
cash in a company that is necessary to meet payments to suppliers, staff and other creditors is essential
for any business to survive, and so the reliable forecasting and reporting of cash movement and
availability is crucial.
cost of debt ratio (average cost of debt ratio)
Despite the different variations used for this term (cost of debt, cost of debt ratio, average cost of debt
ratio, etc) the term normally and simply refers to the interest expense over a given period as a
percentage of the average outstanding debt over the same period, ie., cost of interest divided by
average outstanding debt.
cost of goods sold (COGS)
The directly attributable costs of products or services sold, (usually materials, labour, and direct
production costs). Sales less COGS = gross profit. Effetively the same as cost of sales (COS) see
below for fuller explanation.
cost of sales (COS)
Commonly arrived at via the formula: opening stock + stock purchased - closing stock.
Cost of sales is the value, at cost, of the goods or services sold during the period in question, usually
the financial year, as shown in a Profit and Loss Account (P&L). In all accounts, particularly the P&L
(trading account) it's important that costs are attributed reliably to the relevant revenues, or the report
is distorted and potentially meaningless. To use simply the total value of stock purchases during the
period in question would not produce the correct and relevant figure, as some product sold was
already held in stock before the period began, and some product bought during the period remains
unsold at the end of it. Some stock held before the period often remains unsold at the end of it too.
The formula is the most logical way of calculating the value at cost of all goods sold, irrespective of
when the stock was purchased. The value of the stock attributable to the sales in the period (cost of
sales) is the total of what we started with in stock (opening stock), and what we purchased (stock
purchases), minus what stock we have left over at the end of the period (closing stock).
current assets

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acid test A stern measure of a company's ability to pay its short term debts, in that stock is excluded from asset value. (liquid assets/current liabilities) Also referred to as the Quick Ratio. assets Anything owned by the company having a monetary value; eg, 'fixed' assets like buildings, plant and machinery, vehicles (these are not assets if rentedand not owned) and potentially including intangibles like trade marks and brand names, and 'current' assets, such as stock, debtors and cash. asset turnover Measure of operational efficiency - shows how much revenue is produced per ? of assets available to the business. (sales revenue/total assets less current liabilities) balance sheet The Balance Sheet is one of the three essential measurement reports for the performance and health of a company along with the Profit and Loss Account and the Cashflow Statement. The Balance Sheet is a 'snapshot' in time of who owns what in the company, and what assets and debts represent the value of the company. (It can only ever nbe a snapshot because the picture is always changing.) The Balance Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt to equity), reserves, stock values (materials and finsished goods), capital assets, cash on hand, along with the value of shareholders' funds. The term 'balance sheet' is derived from the simple purpose of detailing where the money came from, and where it is now. The balance sheet equation is fundamen ...
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