A Guide To Learning Simple Finance And Treasury Management

Foreign Investment Committee(FIC) Being Disbanded effective 30 th June 2009

2009-07-02T08:50:00.000-07:00

The Malaysian Foreign Investment Committee(FIC) which was previously in charge of ensuring the 30% bumiputra quota shareholding requirement in listed companies and property transfer,etc has been officially disbanded on 30 th June 2009. This was announced by our Prime Minister, Dato Seri Najib Razak.

Moving forward, a new department set up at the Economic Planning Unit(EPU) would replace the FIC and would only process transactions involving:

the dilution of bumiputra interests and/or

Government interests in properties valued at RM20mil and above, whether bought directly or indirectly through acquisition of companies owning properties.All other property transactions would no longer require the approval of FIC.However, foreign investors cannot acquire properties below specified threshold limits, with the threshold amount for commercial properties at RM500,000. For the purchase of residential properties, the present threshold of RM250,000 is maintained until the end of 2009, with the threshold increased to RM500,000 effective of Jan 1, 2010.

Companies will still have to comply with Securities Commission’s 25% public spread requirement at the initial public offering (IPO) stage, of which half must be offered to bumiputras, this would be waived if there were insufficient bumiputra investors to buy the shares. This means that effectively, the bumiputra equity ownership requirement has been reduced to 12.5% at the IPO stage. There will no longer be any equity conditions imposed on companies post IPO, except in the case of reverse takeovers and backdoor listings

Free Cash Flow (FCF) Methodology Or Concept

2009-07-01T07:06:00.000-07:00

Free cash flow is a very common term used in Corporate Finance whether to assess the viability of capital investment, to value share and to understand the true cash flow position of a company.

This article seeks to give readers a better understanding of the Free cash flow concept by reviewing its formula and the rationale for the adjustments made in computing free cash flow of a company

The formula of Free cash flow is:

Net Income + Non Cash items-changes in net working capital (NWC)- Capital expenditure(Capex) + financial charges

Below are the rationales for such adjustments to net income to get to free cash flow of a company:

NET INCOME

Plus:
Depreciation, goodwill amortization, deferred income taxes, bond discount amortization, foreign exchange adjustments, earnings of non-consolidated firms and any other non-cash items

{Rationale: No cash involved; they hide the true cash generated by the firm.}

Minus:
Changes In Net Working Capital (NWC) like additional receivables and inventory net of payables and accruals

{Rationale:Increased credit sales and premature revenue recognition shows up in increased receivables, inventory accounting differences show up either in the income statement or inventory plus producing for inventory costs just as much as producing for goods sold for cash, payables are sometimes manipulated}

Minus:

Capex but not “diversifying” investments unrelated to existing operations

{Rationale: Adding depreciation(wearning down of capital) without subtracting capex overstates cash generated.}

Plus:

Financial charges (add back after tax interest charges using the marginal tax rate)

{ Rationale:Two otherwise identical firms will have different free cash flow if they have been financed differently}

Finance Terms:Alphabet Y

2009-07-01T07:02:00.002-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ Y ]

Yield

o the rate of return on an investment.

Finance Terms:Alphabet W

2009-07-01T07:02:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W ] [ X ] [ Y ] [ Z ]

[ W ]

Wasting assets

o assets of a fixed nature but as they are being used by the business are physically diminishing in size eg a mine

Working capital

o the total of current assets less the current liabilities

Work in progress

o semi-finished goods

Finance Terms:Alphabet V

2009-07-01T07:01:00.002-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ V ]

Variable overheads

o indirect expenses that vary directly with output eg power

Variances

o the difference between a budgeted performance and the actual performance achieved.

Finance Terms:Alphabet U

2009-07-01T07:01:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ U ]

Understandability

o Information provided in financial statements has the quality of understandability when is comprehensible to users who have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.

Finance Terms:Alphabet T

2009-07-01T07:00:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ T ]

Tangible asset

o a physical asset

Times interest earned

o the number of times that loan interest is covered by profits, ie earnings(profits) before tax and interest divided by the interest charge. It indicates how safe creditors interest charges are.

Trading on the equity

o whereby a company takes advantage of high gearing, paying a modest fixed interest charge for funds that are employed to earn a higher return for the ordinary shareholders.

Turnover( assets)

o the number of times that total assets are turned over to generate sales revenue ie the ratio of sales to assets

Turnover (sales)

o the total value of sales

Finance Terms:Alphabet S

2009-07-01T06:59:00.002-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ S ]

Sale and leaseback transaction

The sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package.

Solvency

The availability of cash over the longer term to meet financial commitments as they fall due.

Subsidiary

An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

Substance over form
The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

Share capital

o the amount raised from the shareholders of the business

Shareholders’ funds

o the total of ordinary and preference issued capital plus the total of revenue and capital reserves

Share premium

o a capital reserve owned by the shareholders arising when a company issues shares at a price in excess of the nominal value.

Sources and uses of funds

o see funds statement

Standard cost

o a predetermined cost, ie what it ought to cost to produce something.

Standard hour

o a hypothetical hour that measures the amount of work that ought to be carried out in the hour.

Stock turnover

o ratio of cost of sales to stocks. This measures the number of times stocks are turned over in the course of a year.

Finance Terms:Alphabet R

2009-07-01T06:59:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ R ]

Realisable value

o The amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal.

Recognition

o The process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:
a. it is probable that any future economic benefit associated with the item will flow to or from the entity; and
b. the item has a cost or value that can be measured with reliability.

Relevance

o Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.

Reliability

o Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.

Revenue

o The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.

Reserves

o these represent the build-up of undistributed profits and consist either of revenue or of capital reserves

Retained profits

o see ploughed-back profits

Revenue reserves

o these trading profits are distributable as dividend to the shareholders in a restricted manner, ie basically by the issue of fully-paid bonus shares.

Rights issue

o an issue of shares for cash to existing holders of share capital in the company. Normally the issue is at a price lower than the current market price acting as an inducement to existing holders to take up the shares.

Finance Terms:Alphabet Q

2009-07-01T06:58:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ Q ]

Quick assets

o see liquid assets

Quick ratio

o the ratio of liquid assets to current liabilities . A test of liquidity:1 is the general norm

Finance Terms:Alphabet P

2009-07-01T06:57:00.002-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ P ]

Parent

o An entity that has one or more subsidiaries.

Profit

o The residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. Any amount over and above that required to maintain the capital at the beginning of the period is profit.

Profit or loss for the period

o A separate line item on the face of the income statement in which all items of income and expense recognised in a period are included unless a Standard or Interpretation requires otherwise.

Property, plant and equipment

o Tangible items that:
a. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
b. are expected to be used during more than one period.

Provision

o A liability of uncertain timing or amount

Prudence

o The inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

Paid-up capital

o a “ fully-paid” share is one where the nominal value has been fully subscribed; whereas a share of,say, nominal value of $1, if only 50 cent has been subscribed per share, is described as “ partly paid”

Par value

o when issued “at part” the issue price is equal to the nominal value. When issued at a “premium” the issue price is in excess of the nominal value, and when at a “discount” below the nominal value.

Ploughed-back profits

o profits retained in the business

Preference shares

o that part of the share capital preferred to the remainder of the ordinary share capital for the payment of dividend and/or for the repayment of capital on a winding up.

Price earning (P/E)

o current market price of the share divided by the last reported earnings attributable to the share.

Prime costs

o the total of direct materials, labor and expenses

Private company

o a company whose Articles of Association restrict the transfer of its shares, limit its members to fifty and prohibit public advertisements for capital

Profit/volume ratio (P/V)

o the rate at which profits change with a change in output

Provision

o a charge against profit that provides for the reduction in value of an asset or a liability whose value is uncertain eg provision for depreciation, provision for doubtful debt

Public company

o a company that is not a private company

Finance Terms:Alphabet O

2009-07-01T06:57:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ O ]

Operating activities

o The principal revenue-producing activities of an entity and other activities that are not investing or financing activities

Operating cycle

o The time between the acquisition of assets for processing and their realisation in cash or cash equivalents.

Ordinary share

An equity instrument that is subordinate to all other classes of equity instruments.

Ordinary shareholders’ fund

o the total of issued ordinary share capital plus the total of the revenue and capital reserves

Ordinary shares

o the part of the share capital subscribed for by shareholders not entitled to a fixed rate of dividend and not entitled to any preference for repayment of capital in the event of the winding up of the company

Finance Terms:Alphabet N

2009-07-01T06:56:00.002-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ N ]

Net realisable value

o The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
o Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell.

Non-current asset

o An asset that does not meet the definition of a current asset.

Notes

o Notes contain information in addition to that presented in the balance sheet, income statement, statement of changes in equity and cash flow statement. Notes provide narrative descriptions or disaggregations of items disclosed in those statements and information about items that do not qualify for recognition in those statements.

Net assets

o the total of the fixed and current assets less the current liabilities of the business.

Net worth

o the “equity” of a business representing the total ordinary share capital made up of paid-up ordinary share capital and reserves owned by the ordinary shareholders.

Finance Terms:Alphabet M

2009-07-01T06:56:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ M ]

Matching of costs with revenues

o A process in which expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income. This process involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events. However, the application of the matching concept does not allow the recognition of items in the balance sheet which do not meet the definition of assets or liabilities.

Materiality

o Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Marginal cost

o the cost of producing one extra unit = variable cost

Marginal revenue

o the revenue from one extra sale

Margin of safety

o the excess of sales over the break-even volume.

Market value of a share

o the market value has no meaning in Balance Sheet terms, merely representing the price which a share will realize if sold at any particular point in time

Memorandum of Association

o the constitution of the company, enabling outsiders to assess its structure and powers

Minority interest

o these represent the capital and built-up reserves of a group fo companies owed by shareholders outside the group.

Finance Terms:Alphabet L

2009-07-01T06:55:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ L ]

Liability

o A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Liquidity

o The availability of cash in the near future after taking account of financial commitments over this period.

Losses

o Decreases in economic benefits and as such they are no different in nature from other expenses.

Last in first out (LIFO)

o a basis for costing the material content of a job on the basis that the newest stocks are used first.

Leverage

o refer to gearing

Liabilities

o amounts that a business owes to shareholders and outsiders. These may include debts of either a short-term or long-term nature.

Limited liability company

o a company limited by shares or guarantee is one where members are responsible only to the extent of their share capital or guarantee in the event of liquidation.

Liquid assets

o current assets minus stocks, being the least-liquid current asset

Finance Terms:Alphabet J

2009-07-01T06:54:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ J ]

Joint venture

o A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.

Finance Terms:Alphabet I

2009-07-01T06:53:00.004-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ I ]

Income

o Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Intangible asset

o An identifiable non-monetary asset without physical substance.

Interim financial report

o A financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period.

Interim period

o A financial reporting period shorter than a full financial year.

Inventories

o Assets:
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of services.
o Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process. In the case of a service provider, inventories include the costs of the service for which the entity has not yet recognised the related revenue.

Investing activities

o The acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Insolvency

o Inability to meet debts

Intangible assets

o an intangible asset is not physical, yet has long-term value to the business eg goodwill, patent, trademarks

Introduction

o a method of issuing shares onto the share exchange

Finance Terms:Alphabet H

2009-07-01T06:53:00.003-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ H ]

Historical cost
o A measurement basis according to which assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

Holding company

o A company that owns the share capital of other companies

Finance Terms:Alphabet H

2009-07-01T06:53:00.001-07:00

Finance Terms:Alphabet G

2009-07-01T06:52:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ G ]

Gains

o Increases in economic benefits and as such are no different in nature from revenue.

Going concern

o The financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.

Goodwill
o Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

Group

o A parent and all its subsidiaries.

Gearing

o the relationship between the loan capital, preference capital and ordinary capital of a business. A high-geared companhy is one where the prior charges, ie loan and preference capital, are high in relation to the ordinary capital. The reverse is described as low-geared.

Goodwill

o the net value of a business after deduction of tangible assets;also the excess of the purchase price over the value of the net assets of a purchased company ( an intangible asset)

Finance Terms:Alphabet F

2009-07-01T06:51:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ F ]

FIFO (first-in, first-out)

o The assumption that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.

Finance lease

o A lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred

Foreign currency

o A currency other than the functional currency of the entity.

Foreign currency transaction

o A transaction that is denominated in or requires settlement in a foreign currency.

Foreign operation

o An entity that is a subsidiary, associate, joint venture or branch of the reporting entity, the activities of which are based or conducted in a country other than the country of the reporting entity.

Functional currency

o The currency of the primary economic environment in which the entity operates.

Future economic benefit

o The potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. The potential may be a productive one that is part of the operating activities of the entity. It may also take the form of convertibility into cash or cash equivalents or a capability to reduce cash outflows, such as when an alternative manufacturing process lowers the costs of production.

Fictitious assets

o these items appear on the Balance Sheet because they have not been written off against the profits of the business eg long-term advertising expenditure which is written off over the expected period of benefit from the expenditure.

First in first out (FIFO)

o a basis for costing the material content of a job on the basis the oldests stocks are used first.

Fixed overheads

o Expenses that do not vary with output

Free depreciation

o Whereby a company can write off the cost of fixed assets how it wishes

Finance Terms:Alphabet E

2009-07-01T06:50:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ E ]

Earnings per share

o the post-tax profits figures available for the ordinary shareholders divided by the number of shares

Earning yield

o this measure how much an investor could get at current earnings if he invested $100 in the company’s shares at their current price ie earnings per share divided by current market price.

Economic life

Either:
a. the period over which an asset is expected to be economically usable by one or more users; or
b. the number of production or similar units expected to be obtained from the asset by one or more users.

Equity

o The residual interest in the assets of the entity after deducting all its liabilities.

o Also refer to Net Worth

Events after the balance sheet date

o Those events favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue. Two types of events can be identified:
a. those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and
b. those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date).

Exchange difference

o The difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Exchange rate

o The ratio of exchange for two currencies.

Expenses

o Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Finance Terms:Alphabet D

2009-07-01T06:49:00.001-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ D ]

Debenture

o a certificate issued under seal by a company acknowledging a debt.

Deferred liabilities

o a subdivision of long-term liabilities eg tax payable next year and not of a fund-raising nature such as debentures

Deferred taxation

o corporation tax payable by a company in the longer term ie not within a year

Depreciation (amortisation)

o The systematic allocation of the depreciable amount of an asset over its useful life.

o The reduction in value of an asset due to obsolescence, wear and tear or the passing of time

[ In the case of an intangible asset, the term ‘amortisation’ is generally used instead of ‘depreciation’. The two terms have the same meaning. ]

Directors’ emoluments

o payments to directors for services in this capacity

Discounted cash flow

o the present value of future cash inflows and outflows

Dividends

o Distributions of profits to holders of equity investments in proportion to their holdings of a particular class of capital or

o profits paid to shareholders expressed as a percentage of the nominal value of their shares

Dividend cover

o earnings per share divided by dividend per share, ie the number of times that earnings cover the declared dividend.

Dividend yield

o refer current yield

Finance Terms:Alphabet C

2009-07-01T06:47:00.000-07:00

[ A ] [ B ] [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ C ]

Capital

o Under a financial concept of capital, such as invested money or invested purchasing power, the net assets or equity of the entity. The financial concept of capital is adopted by most entities.

o Under a physical concept of capital, such as operating capability, the productive capacity of the entity based on, for example, units of output per day.

Capitalization

o Recognizing a cost as part of the cost of an asset.

Capital employed

o the total of the shareholders’ funds, loan capital and any other long-term sources of fund; generally, intangible and fictitious assets are excluded

Capital reserve

o a reserve that does not arise from retention of trading profits eg share premium, capital redemption reserve fund.

Cash Equivalents

o Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash flow

o retained profit plus depreciation

o Inflows and outflows of cash and cash equivalents

Circulating assets

o “current assets” the most liquid of assets that will be converted into cash within the short term eg stocks, debtors

Close company

o a company controlled by five or fewer shareholders

Collateral security

o any security offered in support of a debt

Consolidated financial statements

o The financial statements of a group presented as those of a single economic entity.

Consolidated Balance Sheet

o the Balance Sheet showing the financial state of affairs of a group of companies

Contingent liabilities

o a possible liability rather than one of a definite nature, shown as a note to the Balance Sheet, eg the contingent liability arising from a contract agreed but not yet executed.

Convertible loan stock

o loan stock that may be converted into ordinary shares at a predetermined time and price

Cost

o The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other FRSs, eg FRS 2 Share-based Payment.

Cost of inventories

o All costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition

Cost of purchase

o All of the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of the item. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

Cost unit

o a cost unit of quantity of output or service.

Coupon

o the stated rate of interest on a loan security

Cumulative preference shares

o preference shares where any arrears of dividend are paid prior to other shareholders

Current Asset

o An asset which satisfies any of the following criteria:

a. it is expected to be realised in, or is intended for sale or consumption in, the entity’s normal operating cycle;

b. it is held primarily for the purpose of being traded;

c. it is expected to be realised within twelve months after the balance sheet date; or

it is cash or a cash equivalent (as defined in FRS 107₂₀₀₄ Cash Flow Statements) unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date.

Current liability

o A liability that satisfies any of the following criteria:

a. it is expected to be settled in the entity’s normal operating cycle;

b. it is held primarily for the purpose of being traded;

c. it is due to be settled within twelve months after the balance sheet date; or

d. the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

o All other liabilities shall be classified as non-current.

Current ratio

o a measure of liquidity, ie current assets to current liabilities. A test of liquidity : 2 is a general norm.

Current taxation

o company corporation tax that is to be paid within the year

Current yield

o the dividend expressed as a percentage of the current price of the security

Finance Terms:Alphabet B

2009-07-01T06:41:00.000-07:00

[ A ] [ B [ C ] [ D ] [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K] [ L ] [ M ]

[ N ] [ O ] [ P ] [ Q ] [ R ] [ S] [ T ] [ U ] [ V ] [ W] [ X ] [ Y ] [ Z ]

[ B ]

Bad Debts

o Amount owing by customer(s) which is not collectible despite all collection efforts.

o Needs to be written off and the value of the Accounts Receivable should be reduced according

Balance Sheet

o A financial statement which show the assets, liabilities and shareholders’ equity of an enterprise AT a particular point in time.

Bank Reconciliation Statement

o Normally a monthly statement reconciling the differences between a bank statement and the cash book. An adjusted bank statement should agree with the adjusted cash book balance. The cash book is adjusted for items not recorded in the cash book but recorded in the bank statement.

Basic earnings per share

o Profit or loss that is attributable to ordinary equity holders of the parent entity (the numerator) divided by the weighted average number of ordinary shares outstanding during the period (the denominator).

Base Stock

o The minimum inventory level necessary to maintain effective and continuous operations

Bear

o An investor who believes that prices of securites will fall.

Behavioural Accounting

o Approach to accounting that stresses psychological consideration in decision-making

Blue Chip

o Securities/shares of reputable or nationally known companies that give a lot of confidence to investors in terms of their long record of profit growth, dividend payout, quality of management, Generally, their share market price are very high hence having low yield.

Board of Directors

o Group of individuals appointed by the company’s shareholders at the annual general meeting. These people are empowered with certain rights and responsibilities. The board of director may comprise executive directors and non-executive directors

Bond

o Written promise by a company, government or other institution to pay the face value of a stated amount at maturity date. Periodic interest payments are usually made. Deep discounted bonds are issued well below the nominal value with nil or low interest rate. Bonds are referred to as debentures in companies.

Bonus issue

o the free issue of shares to existing ordinary shareholders on a proportionate basis, paid for out of the built-up undistributed profits of the business.

Book value

o the value of an asset as shown in the Balance Sheet; usually cost less total depreciated to date.

Bookkeeping

o is the most basic of all accounting function which involves the process of recording monetary transactions in the various books of accounts and preparing a trial balance.

Borrowing costs

o Interest and other costs incurred by an entity in connection with the borrowing of funds.

Break-Even Analysis

o It is a point where no gain or loss is made and it is where the volume of sales equal total cost.

[ Refer article on break-even analysis written on this ]

Break-up value/ordinary share

o the residual value of net assets accruing to each ordinary share if the company went into liquidation.

Budget

o a quantitative plan expresses in terms of revenue, costs, assets and liabilities. It express a company’s financial and operating objectives

Budgetary Control

o to determine whether a company’s operations are carried out according to plan/budget. The budget is the standard/plan against which actual performance is compared to ensure that company’s objectives are running well.

[ Refer article for difference between Budget and Budgetary Control]

Bull

o an investor who believes that the price of securities will rise.

Bull Market

o continuous rise in the price of securities which involve heavy trading as investors believe that the prices of securities will rise.

Business

o An integrated set of activities and assets conducted and managed for the purpose of providing:

a return to investors; or lower costs or other economic benefits directly and proportionately to policyholders or participants.

o A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.

Business Combination

o For reporting purpose, where there is the combining of more than one business enterprise into a single business entity.

Business Segment

o A distinguishable components of a business that produces asset or service or a group of related products or services

A Self Check list Before You Consider For Any Investment Products

2009-06-30T21:04:00.000-07:00

Before you get tempted to go for investments other than placing time deposit, you should seriously consider your own personal profile for investments.

Append below is the self check list:

SELF CHECK LIST:

1.0 First understand how much net worth you have before you even start investing. Are you really having positive net worth or are you still mounted with debts which you need to pay in the near or medium future

2.0 Know what are your investment objectives and risk appetite:

Conservative re: investment must be 100% principal protected
Willing to take a little investment risk with some potential capital gains
Willing to take a large amount of investment risk in exchange for higher potential capital gains

3.0 Understand what is your investment horizon:

Short term: less than or equal to 1 year
Medium term: between 1 to 5 years
Long term: between 5 to 10 years
Greater than 10 years

4.0 What sort of investment experience and number of years of investment experience you have for the following products:

Bonds and commercial papers
Equities
Non-principal protected unit trusts
Principal protected unit trusts
Non-principal protective derivative linked investment
Principal protected derivative linked investment
Others:……….
None

5.0 How well you understand the features and risks involved in your selected product(s) ( item 4)

How To Improve Your Company's Tight Cash Flows Situation

2009-06-30T08:12:00.000-07:00

In earlier article, we have discussed the harm derived from overtrading in a business.

This article looks at ways and means to improve the company's tight cash flows situation.Without the right level of liquidity ( cash is not equal to profit), a company might be not able to survive.Hence, the company’s immediate task is to improve its cash flows. The company needs to review all its cash flow projections whether cash inflow or outflows and must be able to PLAN, TIME or MATCH it accordingly. This might “help” to alleviate some challenges posed by the immediate cash flow deficit though this is a short term gap measure.

The following are some of the ways to improve the company’s tight cash flow situations:

RELOOK AT YOUR CAPITAL EXPENDITURE BUDGET AND FOCUS ON BETTER UTILIZATION OF NON CURRENT ASSETS

Manage your cash outflow of capital expenditure by ensuring that the fixed assets are absolutely necessary before incurring it. For a business, there is a need to weigh profitability and cash flow in investment appraisal .Hence, payback basis might be one answer to improve cash flow.

Defer projects that cannot achieve acceptable cash paybacks.

Defer unnecessary and unproductive capital expenditures

Focus on short or quick payback though profitability level might not be the desirous level. Perhaps, balancing this cash flow with other projects that give higher yields might be more appropriate

A business cash flow can be improved if top management exercise less risk appetite and are more conservative/ prudent so that cash flow can be conserved within the business instead of aggressive investments into the projects.

Hive off or dispose off unwanted, surplus fixed assets and investments

Plan strategically by looking at innovative means of unlocking cash out of your fixed assets like Sale and Leaseback, creating Real Estate Investment Trust (REIT)

Make your fixed assets investment turn faster. For example, convert it into warehousing facilities to lease out to others or sub-lease your office which has surplus space or share common facilities and leave balance for rental, etc

FOCUS ON IMPROVING OVERALL COMPANY’S PROFITABILITY

Improving Pricing policy

With more innovative pricing, higher gross profit margin can be achieved and assuming constant cost hence when the money is collected , there is then a larger quantum of “liquid profits”

Attempt to increase Sales Volume

Again, the impact means a higher sales and assuming costs maintained. So,if cash are collected back, then there is a larger quantum of “liquid profits”

Reduce or manage effectively the business expenses.

With this, cash outflow in terms of payment of goods or services can be smaller hence overall net cash flow can be saved/improved

Eliminate or simplify unwanted business operations to reduce costs of operations

Seek to eliminate goods or services which are really value-adding to the company’s business hence reducing costs

FOCUS ON SOURCING ALTERNATIVE FINANCE

Strategically, when the business is expanding drastically and to prevent overtrading or under-capitalized ,it is critical that the shareholder need to put additional money in the form of paid up capital into the business instead of relying on external parties

Obtain other sources of financing like bank overdrafts, term loans, debentures, and longer credit terms from suppliers.

Use factoring facility to convert your billings to customers into cash.

Instead of using one lump sum to paid for fixed assets, go for leasing or hire purchase terms to alleviate cash flows problems

FOCUS ON CONVERTING SHORT TERM BORROWINGS TO LONGER TERM BORROWINGS

Try to convince your bankers to convert some of short term borrowings into longer term loans. Also see whether repayment can be staggered or pay at tail-end of project instead of up-front loading.

FOCUS ON MINIMIZING OR DELAYING YOUR CASH OUTFLOWS FOR THE TIME BEING

Minimize your cash dividend payout by issuing script dividend or bonus issue.

Seek to extend/re-negotiate debt repayment periods & banking facilities.

Apply for tax installments to the Authority for the payment of any income tax payable

Seek deposits or multiple stage payment.

FOCUS ON IMPROVING YOUR DAILY WORKING CAPITAL CYCLE

Improve your Order to Cash cycle by simplification, standardization and automation leading to error free process flows to enable money to be collected without much disputes

Review any cash term with our creditors, if need be to extend the credit terms by ensuring long term relationship and promise to pay timely

Make prompt payments only when we need to enjoy discount from the creditors.

Use barter to acquire goods and services.

Establish better planning and forecasting to reduce the lead time of inventories from suppliers.

Use the 80/20 rule to manage current assets.

Encourage suppliers to keep stock for us ( just in time concept) or on a consignment basis

Convert raw materials into work-in progress to anticipate for sale to customers. This needs great efforts for both production,sales department and the customers.

Sell off or return obsolete/excess inventory(even with a loss just to generate the cash flow)

Improve systems for billing and collection.

Review credit terms with our customers wherever possible

Be more selective (if possible) when granting credit.

Offer a well structure cash discounts scheme to enable faster collections from customers (add deterrent charges like late payment charges /fees if debtors have not settled on time).

The Importance Of Understanding Overtrading, Its Causes, Symptons or Signs And Its Remedies

2009-06-30T07:56:00.000-07:00

There is one critical destructive term known as "overtrading" in business which justify a detailed explanation.

This common word “Overtrading” is more often used by bankers, credit rating organizatio, analysts and accountants.

This article looks at what is Overtrading, its causes and the serious repercussions that will happen and what we should do to remedy it.

Overtrading basically,

Denotes a condition in which the resources in particular the liquid resources of a business are insufficient to maintain the existing level of trading. This particularly happens during the booms when companies increase revenue without considering it means to finance the increase turnover.

In colloquial terms, we can also say that the management has failed to cut their coat according to their cloth.

Some of the Causes of Overtrading are as follows:

Internal Factors:

By expanding turnover without the correspondingly increase in working capital. For example, assuming the present turnover is $12 million and average debtors of $250,000. If turnover increase by 30% and assuming the same credit terms on the new turnover, its debtors are likely to rise by 30% i.e. $750,000. So this $750,000 needs to be obtain from existing working capital resources or injection of share capital. If management ignores this point by “overstretching”, it will face the “Overtrading situation”,
By increased investment in fixed assets like land and building, machinery, etc and acquiring investments in a subsidiary or associated companies without a corresponding increase in equity or borrowings. Any increase in the above-mentioned capital expenditure will then deplete the net current assets,
By allowing a longer than usual cash conversion cycle namely by the increase in stock levels and extending exceptionally long credit,
Through trading losses which will reduce the net current assets. This also happened in cases of abnormal losses like redundancy payments, additional contribution to pension funds, payments of damages and others.

External Factors:-

Changes in taxation rates or system. Higher amount of tax payable will deplete the net current assets,
Changes in the date of payment of taxes.If the date of payment is brought forward, working capital will fall which causes financial strain during the period,
Cutbacks in bank lending. In the event there is cutback where the company cannot find the funds to meet its debt, an Overtrading situation can occur,
Inflation and Price Control. Inflation will basically mean the need to have increased investment to maintain the existing physical monetary inventories like raw materials, work in progress and finished goods whilst price control will erode margins hence reducing net cash flow.

Next step is to understand whats repercussions will happen to the company if this overtrading trend is still not curbed:

Inability to pay creditors on time, hence the reputation will be at stake,
Increased purchase cost due to inability to benefit from cash discounts from the suppliers, unable to buy in bulk hence losing quantity discount and choosing suppliers who are willing to extend credit terms but with higher prices and or lower quality,
Due to the need for cash to pay creditors and others, we might pressurize the debtors to pay early,
Reduce stocks level unnecessarily which affects the business operation,
By offering too liberal discounts to encourage prompt payment from debtors hence affecting the bottom-line results,
Deferring the crucial investment in capital expenditures or delaying the maintainance of important facilities infrastructure which are crucial to generate incomes from these fixed assets,
Inability to pay the salaries of the employees hence delaying the time of payment until money is received from the debtors. This will cause very low morale to the employee which will affects productivity and others,
Inability to pay taxes which will put the company in bad book of the authority,

To spot overtrading, we can notice some danger signs/warnings:

Pressure on existing cash
Exceptional cash generating activities like offering very high discounts for early cash payment or selling off of company assets which are not idling
Bank overdraft exceeds authorized limit
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies
Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank to help pay wages, pending receipt of a cheque
The liquidity ratio namely the quick assets and current assets ratio are deteriorating quite badly,
Turnover/equity shareholders funds rises excessively,
Trade creditors increasing faster than turnover. Also, we can see that the ratio for average credit days from creditor trend is increasing dramatically,
Progressive reduction in liquid resources. Positive cash balances turning into negative bank overdrafts facilities or trade facilities like bill payables and others,
Borrowings increases without corresponding increase or injection of share capital. If the gearing ratio rises excessively we needs to analyze the reasons or cause,
The charging of more and more assets to secure loans as more and more is borrowed,

To remedy overtrading, the obvious answers are

To cut the coat smaller or

To obtain some more cloth/finance

( See another article on how to alleviate overtrading by managing the business's cashflow)

Basic Understanding of the term:Cash Conversion Cycle/Daily Operating Cycle or Day Working Capital

2009-06-30T04:53:00.000-07:00

A business besides focussing on making profit should consider its cash flow. One of the key performance metrics to assist management in gauging the "cash" performance is to fine-tune or quicken the pace of the company's cash conversion cycle or daily operating cycle or day working capital.

Below article looks at the some details of the aforesaid terms in the context of managing business finance of a company:

(a) The importance of understanding cash conversion cycle or daily operating cycle or day working capital:

it is actually another simple way of looking at working capital management,
by improving CCC, we are able to balance sales growth with the required liquidity to fuel the growth,
with an adverse CCC, survival of the company is at stake particularly when the company is overtrading and recession is around.

Is the CCC a new thing?

No, the CCC’s existence is as old as when accountants were looking into ways of how to reduce or manage the dollars tied up in the working capital of accounts receivable and stocks and optimizing the period owing to accounts payables.

(b) Definition of Cash conversion cycle:

it represents the amount of time in terms of the number of days between the purchase of materials by a company to produce its end products and the receipt of payment for those end products in the supply chain, it represents the amount of time it takes to turn a dollar spent with a supplier into a dollar received from an end customer. It sounds familiar isn’t it , it is really the operating cycle of a company we are talking about.

Logically, the CCC is so critical as a company with a low CCC is more efficient as it is able to turns its products into cash more efficiently, minimizing the non productive working capital tied up in its business & making more cash available to fund growth and create shareholder value

A basic model of the CCC is as follows :

DSO (Days Sales Outstanding) plus: DIO (Days Inventory Outstanding) less: DPO (Days Purchases Outstanding) = CCC (Cash Conversion Cycle / Day Working Capital)

Let’s try to understand the various definitions involved:

Days Sales Outstanding or DSO represents number of days, the Accounts Receivable (AR) is outstanding in term of number of days of sales.

Days Inventory Outstanding or DIO is then represents the number of days, the Inventory is outstanding in term of number of days of Cost of sales.

Days Purchases Outstanding or DPO represents no of days, the Accounts Payable is outstanding in term of number of days of Purchases

Now, it sounds familiar like it is another ratio of working capital. The difference is that CCC is represented in terms of time or number of days.

CCC as a performance metric is indeed a very simple, easy to understand and to use & is a flexible tool for understanding the favourable or adverse changes in working capital management.
Surveys conducted by reputable accountancy bodies like CFO Asia.com includes CCC as part of their key performance metric to rank good performers amongst companies in similar industry.

Warrants-Basic Understanding And Warrant Strategies

2009-06-30T04:52:00.000-07:00

This article deals with the following:

Warrants and the concept of Gearing effect;
Advantages of buying warrants instead of other instruments and
Some strategies when buying warrants

Warrant’s unique power is pertaining to the concept of gearing. Unlike the the reduced board lots for share trading it only helps investor with the issue of affordability but does nothing on the side of gearing and heightening exposure.

If you bought 1000 shares of X and it gained RM1, your 100 shares investment of X will only provide you with a gain of 10sen which is proportionate to the amount you invested. If the former elicits a return of 10%, the latter should likewise and be no different.

Warrants and Gearing Effect:

On the other hand, if you invested in a warrant that is ten times geared (for example, warrant B is RM1 when share B is RM10), a RM1 gain in share B will likely to result in a similar gain of RM1 in warrant B if the warrant is just `at the money’ (that is, the price of share B = exercise price of warrant B). In this instance, you will find that the gearing effect of the warrant has kicked in to enable the investor to make 100% returns when the investor in the mother share has made only 10%!

Although the same gearing effects can be found when trading in financial futures, financial futures do not provide inherent downside protection like in the case of warrants. In fact, the mechanics of financial futures trading requires the maintenance and topping up of margin accounts as and when the margin level falls below the minimum required by the futures house.

Advantages of Buying Warrants:

Warrants like stocks do not require any further capital outlay unless the warrant holder chooses to exercise the warrant on or before expiration date;
provide excellent gearing capabilities in bullish markets;
As it confers the right but without the obligation to acquire a fixed quantity of assets such as shares for a specified price within a limited period of time, your downside is therefore limited to the initial investment whilst you still continue to enjoy possibility of upside potential from the investment;
Additionally, the need to only pay a small amount for the `right to ownership’ rather than ownership itself also permits the investor to leverage and increase market exposure for the same amount of capital invested;
For a sum of less than one seventh of the market value of core component blue chips like Maybank and Tenaga, investors are able to gain the same amount of exposure to mimic and benefit from gains in the KLCI over the next four and the half years but without having to be fully exposed to the vagaries in owning these stocks per se.

The balance capital not invested in these warrants can then be invested in fixed income securities like the all-time favourite fixed deposits and corporate bonds to provide the capital protection that most investors yearn for in today’s volatile market conditions.

Warrants and strategies:

Invest in long dated warrants. Basically, avoid those that are close to expiry and as the element of time decay kicks in, such warrants lose their premium value quickly. In the case of short dated and `out of money’ warrants where the exercise price of the warrant is higher than the current price of the mother share, investors stand the likelihood of losing all of their capital outlay when the warrant expires worthless!

Buy warrants that are `at or in the money’. Such warrants will experience sharp increases in their delta value for investors to enjoy hefty gains. As the delta value of the warrants captures the sensitivity of the warrant movement against the movement of the mother share, the higher the delta value the better the gearing benefit for the warrant holder. Typically, once a warrant becomes way `in the money’, the movement of the warrant will almost mirror the movement of the mother share, moving about one to one.

Do not pay excessive premiums. The warrant premium is calculated as the ratio of the sum of the warrant and exercise price against the price of the mother share. Investors are willing to fork out such premiums for the benefit of gearing. Typically, the higher the volatility of the mother share, the higher the premium for the warrant but once this premium becomes excessive, it runs the risk of becoming over-valued.

The higher the gearing effect, the better.

Investing in lowly geared warrants simply defeats the primary reason of investing in this instrument. Where possible, look for warrants that are at least three times geared. Gearing is simply the ratio of the mother share price to the warrant price.

Buy as many types of warrants as possible: as we do not know which warrants price will shoot up, it’s good to buy as many different types of warrants in different industries;

Buying warrants in a bullish market: it’s important to know that warrants works extremely well in the bullish market environment. Investors can reap benefits from its gearing effect.

Above all, make sure we are comfortable with the fundamentals of the mother share. There is no point having a geared play on share which will fall in value rather than rise.

For any investors, it is important to understand that the gearing effect works both ways i.e. on the upside as well as on the downside!

FINANCE TERMS-Alphabet A

2009-06-30T04:45:00.000-07:00

ALPHABET [ A ]

Arbitrage

Trading strategies designed to profit from price differencesfor the same or similar goods in different markets. Historicall, the term implied little or no risk in the trade, but more recently it has come to suggest some risk of loss or uncertainty about total profits.

Accounting

Accounting is the process of identifying, recording, classifying and reporting information on economic events in a logical manner for the purpose of providing financial information for decision making.

Accounting policies

The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

Accounting rate of return

Measures the profit earned on investment expressed as a percentage of the average investment.

Does not take into consideration cash flows

Accounting profit

Profit or loss for a period before deducting tax expense

Accounting ratios

Terms used to describe the different types of financial calculation use to measure the performance of a business.

Acid Test Ratio

refer quick ratio

Acquisition Cost

costs directly related to the acquiring of assets. Includes all costs like purchase price and all incidental costs including transport, duties, taxes, packaging, preparation and installation.

Accrual basis of accounting

The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Or it is a method of accounting whereby revenue is recorded when earned (regardless of when received) and expenses are recorded when incurred.

Accounts Payable and Accrued Liabilities

A short-term liability account reflecting amounts due to individuals or organizations for goods and services purchased.

Accounts Receivable

An asset account reflecting amounts due from individuals or organizations for goods and services rendered.

Activity ratios

financial ratio which measures how fast a business is able to meet its current liabilities. This depends on the rate at which the debtors and stocks can be converted into cash.

Allotment of shares

relates to new share issues whereby the applicants receive an allotment letter detailing how many shares they have been allocated/given.

Application and allotment account

the account to which monies are credited when prospective shareholders apply for shares (on application) and when shares haven been allocated to them (on alloment)

Allotee

a prospective shareholder who has been allotted shares in a limited company.

Allowable expenses

that portion of expenses which are tax deductible which are included in the income statement.

Amortization

Gradual reduction over time of the cost or value of an intangible asset.

Amortize

Process of writing off a regular portion of the cost /value of an intangible asset over a period of time. In line with the matching concept.

Term is also used to provide for extractive or wasting assets such timber tracts, oil fields and tin mines.

Amalgamation

two or more businesses join together to form a new business.

Analyze

To evaluate the condition of an accounting-related item and discover possible reasons for discrepancies.

Annualize

To extend the cost into a twelve month or yearly basis. Say rental expense is $1,000 for 4 months. If we want to annualize it then the total rental expense is $1,000 x 3 =$3,000 a year.

Annual Report

A financial report prepared annually that includes chairman’s report, director’s report, financial statements and the auditor’s report.

Annual Return

Annual documents sent to the Registrar of Companies which gives particulars of directors and members plus a copy of the last balance sheet and income statement.

Annuity

An annual payment made to a person normally a retiree in return for a lump-sum investment. The annual payment made will depend on the amount invested and the age of the person when the investment was initially made.

Appropriation

Distribution of net income after tax to various reserves and persons such as the shareholders as dividends.

Application of funds

Outlines the way that the managers of a business have spent the funds available to them during an accounting period.

Arbitrage

The method of profiting from price differences when the same asset is traded in different markets.

Asset

A resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity

Asset backed

Generally for shares where they are backed by company’s assets.

Arm’s Length Transaction

Transactions entered into by willing, knowledgeable and unrelated parties, each acting in its own interest. Generally prices transacted will be a fair market price.

Articles of Association

Is a document filed with the Registrar of Companies by the promoter of a company.

It includes the internal rules and regulation of a company that stipulate the rights and duties of shareholders and directors and procedures for meetings.

Asset turnover

the ratio of sales to assets, i.e. the number of times that assets are utilized in a year.

Indicates the company’s efficiency of using its assets to generate sales.

High ratio shows favorably the company’s ability to effectively employ its assets.

Associated Company

A company over which an investor is able to exercise influence and not control. Generally, an investee company is considered an associated company if the investor holds at least 20% but less than 50% of its voting rights.

At Par

Shares issued at their nominal or face value.

At sight

When a financial instrument is payable on presentation

Authorized Share Capital

The maximum amount of shares that can be issued by the company.

Audit

the process where an independent person namely the auditor check the financial records of a business to ensure that the records show a true and fair view.

Auditors

people usually trained accountants who specialize in checking financial accounts that have been prepared by someone else. External auditors are appointed by the shareholders of the company. The external auditors are from outside the organization.

Auditors’ remuneration

amount paid to the auditors for the work done in checking the financial records( final accounts) of the business.

Auditors’ report

prepared by the auditor which will indicate whether the financial statements have been audited and the auditors’ opinion about the financial statements. Report is normally quite bried and contain not much information.

Authorized signatories

people who have the authority to sign cheques on behalf of an organization

Average rate of return

another term to describe the accounting rate of return