DEFINITION OF STAKEHOLDER'S EQUITY
The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings. Stockholders' equity represents the equity stake currently held on the books by a firm's equity investors.
It is calculated either as a firm's total assets minus its total liabilities, or as share capital plus retained earnings minus treasury shares:
Stockholders' Equity = Total Assets - Total Liabilities
OR
Stockholders' Equity = Share Capital + Retained Earnings - Treasury Shares
Also known as "shareholders' equity".
DEFINITION OF 'BALANCE SHEET'
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders' Equity
DEFINITION OF 'CASH DIVIDEND'
Money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors and are taxable as income to the recipients.
DEFINITION OF 'ACCOUNTING EQUATION'
The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.
DEFINITION OF 'LIQUIDITY'
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the ASSET'S PRICE.
Market liquidity refers to the extent to which a market, such as a country's STOCK MARKET or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. There are several ratios that express accounting liquidity.
DEFINITION OF 'CASH EQUIVALENTS'
Investment securities that are short-term, have high credit quality and are highly liquid.
Also referred to as "cash and equivalents".
DEFINITION OF 'SHORT-TERM INVESTMENTS'
An account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that will expire within one year. For the most part, these accounts contain stocks and bonds that can be liquidated fairly quickly.
DEFINITION OF 'ACCOUNTS RECEIVABLE - AR'
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts.
DEFINITION OF 'INVENTORY'
The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.
DEFINITION OF 'PREPAID EXPENSE'
A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future.
DEFINITION OF 'INTANGIBLE ASSET'
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
DEFINITION OF 'ACCOUNTS PAYABLE - AP'
An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
Accounts payable are often referred to as "payables".
Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.
DEFINITION OF 'ACCRUED EXPENSE'
An accounting expense recognized in the books before it is paid for. It is a liability, and is usually current. These expenses are typically periodic and documented on a company's balance sheet due to the high probability that they will be collected.
DEFINITION OF 'RETAINED EARNINGS'
Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.
The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
Retained Earnings (RE) = Beginning RE + Net Income - Dividends
Also known as the "retention ratio" or "retained surplus".
DEFINITION OF 'WORKING CAPITAL'
Working Capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:
Working Capital = Current Assets - Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".
DEFINITION OF 'CURRENT RATIO'
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company’s total liabilities.
The formula for calculating a company’s current ratio, then, is:
Current Ratio = Current Assets / Current Liabilities
The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.
The current ratio is also known as the working capital ratio.
DEFINITION OF 'QUICK RATIO'
The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:
Quick ratio = (current assets – inventories) / current liabilities, or
= (cash and equivalents + marketable securities + accounts receivable) / current liabilities
The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the “acid-test ratio" or "quick assets ratio."
DEFINITION OF 'LEVERAGE RATIO' OR DEBT-EQUITY RATIO
Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.
DEFINITION OF 'DEBT-TO-CAPITAL RATIO'
A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.
DEFINITION OF 'EARNINGS'
The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to after-tax net income.Ultimately, a business's earnings are the main determinant of its share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run.
DEFINITION OF 'EXTRAORDINARY ITEM'
Gains or losses included in a company's financial statements, which are infrequent and unusual in nature. These are usually explained further in the "notes to the financial statements."
WHAT IS 'NET INCOME - NI'
1. A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.
Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".
2. An individual's income after deductions, credits and taxes are factored into gross income. Deductions and credits are subtracted from gross income to arrive at taxable income, which is used to calculate income tax. Net income is income tax subtracted from taxable income.
DEFINITION OF 'EARNINGS PER SHARE - EPS'
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.
Calculated as: EPS
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
WHAT IS 'GROSS MARGIN'
A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
DEFINITION OF 'OPERATING MARGIN'
Operating margin is a margin ratio used to measure a company's pricing strategy and operating efficiency.
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. It can be calculated by dividing a company’s operating income (also known as "operating profit") during a given period by its net sales during the same period. “Operating income” here refers to the profit that a company retains after removing operating expenses (such as cost of goods sold and wages) and depreciation. “Net sales” here refers to the total value of sales minus the value of returned goods, allowances for damaged and missing goods, and discount sales.
Operating margin is expressed as a percentage, and the formula for calculating operating margin can be represented in the following way:
Operating margin is also often known as “operating profit margin,” “operating income margin,” “return on sales” or as “net profit margin.” However, “net profit margin” may be misleading in this case because it is more frequently used to refer to another ratio, net margin.
DEFINITION OF 'HYBRID SECURITY'
A single financial security that combines two or more different financial instruments. Hybrid securities, often referred to as "hybrids," generally combine both debt and equity characteristics. The most common type of hybrid security is a convertible bond that has features of an ordinary bond but is heavily influenced by the price movements of the stock into which it is convertible.
DEFINITION OF 'CONVERTIBLE BOND'
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.
Convertibles are sometimes called "CVs."
WHAT IS 'ACCRUAL ACCOUNTING'
Accrual accounting is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.
The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings. Stockholders' equity represents the equity stake currently held on the books by a firm's equity investors.
It is calculated either as a firm's total assets minus its total liabilities, or as share capital plus retained earnings minus treasury shares:
Stockholders' Equity = Total Assets - Total Liabilities
OR
Stockholders' Equity = Share Capital + Retained Earnings - Treasury Shares
Also known as "shareholders' equity".
DEFINITION OF 'BALANCE SHEET'
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders' Equity
DEFINITION OF 'CASH DIVIDEND'
Money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors and are taxable as income to the recipients.
DEFINITION OF 'ACCOUNTING EQUATION'
The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.
DEFINITION OF 'LIQUIDITY'
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the ASSET'S PRICE.
Market liquidity refers to the extent to which a market, such as a country's STOCK MARKET or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. There are several ratios that express accounting liquidity.
DEFINITION OF 'CASH EQUIVALENTS'
Investment securities that are short-term, have high credit quality and are highly liquid.
Also referred to as "cash and equivalents".
DEFINITION OF 'SHORT-TERM INVESTMENTS'
An account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that will expire within one year. For the most part, these accounts contain stocks and bonds that can be liquidated fairly quickly.
DEFINITION OF 'ACCOUNTS RECEIVABLE - AR'
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts.
DEFINITION OF 'INVENTORY'
The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.
DEFINITION OF 'PREPAID EXPENSE'
A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future.
DEFINITION OF 'INTANGIBLE ASSET'
An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.
DEFINITION OF 'ACCOUNTS PAYABLE - AP'
An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
Accounts payable are often referred to as "payables".
Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.
DEFINITION OF 'ACCRUED EXPENSE'
An accounting expense recognized in the books before it is paid for. It is a liability, and is usually current. These expenses are typically periodic and documented on a company's balance sheet due to the high probability that they will be collected.
DEFINITION OF 'RETAINED EARNINGS'
Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.
The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
Retained Earnings (RE) = Beginning RE + Net Income - Dividends
Also known as the "retention ratio" or "retained surplus".
DEFINITION OF 'WORKING CAPITAL'
Working Capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:
Working Capital = Current Assets - Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".
DEFINITION OF 'CURRENT RATIO'
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company’s total liabilities.
The formula for calculating a company’s current ratio, then, is:
Current Ratio = Current Assets / Current Liabilities
The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.
The current ratio is also known as the working capital ratio.
DEFINITION OF 'QUICK RATIO'
The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:
Quick ratio = (current assets – inventories) / current liabilities, or
= (cash and equivalents + marketable securities + accounts receivable) / current liabilities
The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the “acid-test ratio" or "quick assets ratio."
DEFINITION OF 'LEVERAGE RATIO' OR DEBT-EQUITY RATIO
Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.
DEFINITION OF 'DEBT-TO-CAPITAL RATIO'
A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.
DEFINITION OF 'EARNINGS'
The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to after-tax net income.Ultimately, a business's earnings are the main determinant of its share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run.
DEFINITION OF 'EXTRAORDINARY ITEM'
Gains or losses included in a company's financial statements, which are infrequent and unusual in nature. These are usually explained further in the "notes to the financial statements."
WHAT IS 'NET INCOME - NI'
1. A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.
Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".
2. An individual's income after deductions, credits and taxes are factored into gross income. Deductions and credits are subtracted from gross income to arrive at taxable income, which is used to calculate income tax. Net income is income tax subtracted from taxable income.
DEFINITION OF 'EARNINGS PER SHARE - EPS'
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.
Calculated as: EPS
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
WHAT IS 'GROSS MARGIN'
A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
Operating margin is a margin ratio used to measure a company's pricing strategy and operating efficiency.
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. It can be calculated by dividing a company’s operating income (also known as "operating profit") during a given period by its net sales during the same period. “Operating income” here refers to the profit that a company retains after removing operating expenses (such as cost of goods sold and wages) and depreciation. “Net sales” here refers to the total value of sales minus the value of returned goods, allowances for damaged and missing goods, and discount sales.
Operating margin is expressed as a percentage, and the formula for calculating operating margin can be represented in the following way:
DEFINITION OF 'HYBRID SECURITY'
A single financial security that combines two or more different financial instruments. Hybrid securities, often referred to as "hybrids," generally combine both debt and equity characteristics. The most common type of hybrid security is a convertible bond that has features of an ordinary bond but is heavily influenced by the price movements of the stock into which it is convertible.
DEFINITION OF 'CONVERTIBLE BOND'
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.
Convertibles are sometimes called "CVs."
WHAT IS 'ACCRUAL ACCOUNTING'
Accrual accounting is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.
