Appendix

Glossary

accounts payable: An account that tracks the money a company owes to its suppliers, vendors, contractors, and others who provide goods and services to the company.

accounts receivable: An account that tracks individual customer accounts, listing money that customers owe the company for products or services they've purchased.

accrual accounting: An accounting method in which a company records revenues and expenses when the actual transaction is completed rather than when cash is received or paid out.

accrued liabilities: The expenses a company has incurred but not yet paid for at the time the company closes its accounting books for the period to prepare its financial statements.

amortize: To reduce the value of an intangible asset by a certain percentage each year to show that it's being used up.

arm's length transaction: A transaction that involves a buyer and a seller who can act independently of each other and have no financial relationship with each other.

assets: Things a company owns, such as buildings, inventory, tools, equipment, vehicles, copyrights, patents, furniture, and any other items it needs to run the business.

audit: The process by which a certified public accountant verifies that a company's financial statements have met the requirements of the generally accepted accounting principles.

auditors’ report: A letter from the auditors stating that a company's financial statements have been completed in accordance with the generally accepted accounting principles; the company includes this letter in its annual report.

balance sheet: The financial statement that gives you a snapshot of a company's assets, liabilities, and shareholders’ equity as of a particular date.

buy-side analysts: Professionals who analyze the financial results of companies for large institutions and investment firms that manage mutual funds, pension funds, or other types of multimillion-dollar private accounts.

C corporations: Separate legal entities formed for the purpose of operating a business and to limit the owners’ liability for actions the corporation takes.

capital expenditures: Money a company spends to buy or upgrade major assets, such as buildings and factories.

capital gain: The profits a company makes when it sells an asset for more than it originally paid for that asset.

cash-basis accounting: An accounting method in which companies record expenses and revenues in their financial accounts when cash actually changes hands rather than when the transaction is completed.

cash-equivalent accounts: Asset accounts that a company can easily convert to cash, including checking accounts, savings accounts, and other holdings.

cash flow: The amount of money that moves into and out of a business.

cash flow from operations: Cash a company receives from the day-to-day operations of the business, usually from sales of products or services.

Chart of Accounts: A listing of all a company's open accounts that the accounting department can use to record transactions.

common stock: A portion of a company bought by investors, who are given the right to vote on board membership and other issues taken to the stockholders for a vote.

consolidated financial statement: A report that combines the assets, liabilities, revenues, and expenses of a parent company with the assets, liabilities, revenues, and expenses of any companies that it owns.

contingent liabilities: Possible financial obligations that a company needs to report when it determines that an event is likely to happen.

convertibles: Shares of stock promised to a lender who owns bonds that can be converted to stock.

corporate governance: The way a board of directors conducts its own business and oversees a corporation's operations.

cost of goods sold: A line item on the income statement that summarizes any costs directly related to selling a company's products.

current assets: Things a company owns that it will use up in the next 12 months.

current liabilities: Payments on bills or debts that a company owes in the next 12 months.

depreciate: To reduce the value of a tangible asset by a certain percentage each year to show that the asset is being used up (aging).

discontinued operations: Business activities that a company halts, such as the closing of a factory; can also refer to the sale of a division within a company.

dividends: The portion of a company's profits that it pays out to investors according to the number of shares that the investor holds.

double-entry accounting: An accounting method that requires a company to record every transaction using debits and credits to show both sides of the transaction.

durable goods: Goods that last for more than one year.

earnings per share: The amount of net income that a company makes per share of stock available on the market.

EBITDA: An acronym for earnings before interest, taxes, depreciation, and amortization, which is a line item on the income statement.

equity: Claims, such as shares of stock, that investors make against the company's assets.

expenses: Any costs not directly related to generating revenues. Expenses fall into four categories: operating, interest, depreciation/amortization, and taxes.

Financial Accounting Standards Board (FASB): A private-sector organization that establishes standards of financial accounting and reporting that the Securities and Exchange Commission and the American Institute of Certified Public Accountants recognize.

financial statements: A company's reports of its financial transactions over various periods, such as monthly, quarterly, or annually. The three key statements are the balance sheet, income statement, and statement of cash flows.

fixed costs: A company's expenses for assets it holds long term, such as manufacturing facilities, equipment, and labor.

fraudulent financial reporting: A deliberate attempt by a company to distort its financial statements to make its financial results look better than they actually are.

generally accepted accounting principles (GAAP): Rules for financial reporting that dictate that companies’ financial reporting is relevant, reliable, consistent, and presented in a way that allows the report reader to compare the results to prior years, as well as to financial results for other companies.

going-concern problem: An indication in an auditors’ report that the auditors have substantial doubt that a company has the ability to stay in business.

goodwill account: An account that appears on the balance sheet when a company has bought another company for more than the actual value of its assets minus its liabilities. Goodwill includes things such as customer loyalty, exceptional workforce, and a great location.

gross margin: A calculation of one type of profit based solely on sales and the cost of producing those sales.

gross profit: The revenue earned minus any direct costs of generating that revenue, such as costs related to the purchase or production of goods before any expenses, including operating, taxes, interest, depreciation, and amortization.

income statement: A document that shows a company's revenues and expenses over a set period of time; an income statement is also known as a profit and loss statement or P&L.

initial public offering (IPO): The first time a company's stock is offered for sale on a public stock market.

insolvent: No longer able to pay bills and debt obligations.

in-store credit: Money lent directly by a company to its customers for purchases of its products or services.

intangible assets: Anything a company owns that isn't physical, such as patents, copyrights, trademarks, and goodwill.

intellectual property: Works, products, or marketing identities for which a company owns the exclusive rights, such as copyrights, patents, and trademarks.

interest expenses: Charges that must be paid on borrowed money, usually a percentage of the debt.

internal financial report: A summary of a company's financial results that's distributed only inside the company.

liabilities: Money a company owes to its creditors for debts such as loans, bonds, and unpaid bills.

liquidity: A company's ability to quickly turn an asset to cash.

long-term assets: Holdings that a company will use for more than a 12-month period, such as buildings, land, and equipment.

long-term debt or liabilities: Financial obligations that a company must pay more than 12 months into the future, such as mortgages on buildings.

majority interest: The position a company has when it owns more than 50 percent of another company's stock.

managing earnings: Using legitimate accounting methods in aggressive ways to get the bottom-line results that a company needs.

marketable securities: Holdings that companies can easily convert to cash, such as stocks and bonds.

material changes: Changes that may have a significant financial impact on a company's earnings.

material misstatement: An error that significantly impacts a company's financial position.

net assets: The value of things a company owns after the company has subtracted all liabilities from its total assets.

net business income: Business income or profit after a company has subtracted all its business expenses.

net marketable value: The book value of securities, adjusted for any gains or losses.

net profit: A company's bottom line, which shows how much money the company earns after it deducts all its expenses.

net sales or net revenue: Sales a company makes minus any adjustments to those sales.

nonoperating income: Income from a source that isn't part of a company's normal revenue-generating activities.

notes to the financial statements: The section in the annual report that offers additional detail about the numbers provided in those statements.

operating cash flow: Cash generated by company operations to produce and sell company products.

operating expense: Any expense that goes into operating a business but isn't directly involved in selling the product, such as advertising, dues and subscriptions, or equipment rental.

operating lease: A rental agreement for equipment that offers no ownership provisions.

operating margin or profit: A company's earnings after it subtracts all costs and expenses directly related to the core business of the company — its sales of products or services.

operating period: A specific length of time — which may be a day, month, quarter, or year — for which financial results are determined.

parent company: A major corporation that controls numerous smaller companies that it has bought in order to build the company.

partnership: A business that's owned by more than one person and isn't incorporated.

physical capacity: The number of facilities a company has and the amount of product the company can manufacture.

preferred stock: A type of stock that gives its owners no voting power in the company's operations but guarantees their dividends, which must be paid before common stockholders can get theirs.

profit: The amount of money the company earns.

proxies: Paper ballots sent to shareholders so they can vote on critical issues that impact the company's operations, such as members of the board of directors and executive compensation programs.

receivership: A type of bankruptcy in which a company can avoid liquidating itself and, instead, work with a court-appointed trustee to restructure its debt so it can emerge from bankruptcy.

recognize: To record a revenue or expense in a company's books.

related-party revenue: Revenue that comes from a company selling to another entity where the seller controls how the company operates and makes a profit.

restate earnings: To correct “accounting errors” by changing the numbers originally reported to the general public.

restructure: To reorganize business operations by means such as combining divisions, splitting divisions, dismantling an entire division, or closing manufacturing plants.

retained earnings: Profit that a company doesn't pay to stockholders over the years it accumulates in the retained earnings account.

revenue: Payments a company receives for its products or services.

royalties: Payments a company makes for the use of intellectual property owned by another company or individual.

secondary public offerings: The sale of additional shares of stock to the general public by a company that already sells shares on the public stock market.

secured debt: Money borrowed on the basis of collateral, which is usually a major asset such as a building.

securities: Stocks and bonds sold on the public financial markets.

shareholders’ equity: The value of the stocks held by company shareholders.

short-term borrowings or debt: Lines of credit or other debt that a company must repay within the next 12-month period.

side letters: The agreements a company makes with its regular customers outside the actual documentation it uses in a formal contract to purchase or sell the goods.

sole proprietorship: A business started and owned by an individual that's not incorporated.

solvency: A company's ability to pay all its outstanding bills and other debts.

statement of cash flows: One of the key financial statements, a document that reports a company's performance over time, focusing on how cash flows through the business.

stock incentives: Shares of company stock that a company offers as part of an employee compensation package.

stock option plan: An offer a company gives to employees and board members to buy the company's stock at prices below market value.

tangible asset: Any asset that you can touch, such as cash, inventory, equipment, or buildings.

tax liability account: An account that tracks tax payments that a company has made or must still make.

trading securities: Securities that a company buys primarily as a place to hold on to assets until the company decides how to use the money for its operations or growth.

unrealized losses or gains: Changes in the value of a holding that hasn't sold yet but has a market value that has increased or decreased since the time it was bought.

variable costs: Costs that change based on the amount needed, such as raw materials or employee overtime.

venture capitalist: A person who invests in start-up businesses, providing the necessary cash in exchange for some portion of company ownership.

volume discount: A reduced rate received by a business that agrees to buy a large number of a manufacturer's product.

wholly owned subsidiary: A company whose stock is purchased in full by another company.

working capital: A company's current assets minus its current liabilities; this figure measures the liquid assets the company has at its disposal to continue building its business.