Sole Proprietorship: an unincorporated business owned by one individual.

Partnership: an unincorporated business owned by two or more persons.

Corporation: A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.

Earning per share (EPS): Net Income divided by the number of shares of common stock outstanding.

Balance Sheet: A statement of the firms financial position at a specific point in time

Common Stockholders' Equity (Networth): The capital supplied by common stockholders-common stocks, paid-in capital, retained earnings, and occasionally, certain reserves. Total equity is common equity plus preferred stock.

Retained Earning: That portion of the firms earnings that has been saved rather than paid out as dividend.

Income statement: A statement summarizing the firms revenues and expenses over an accounting period, generally a quarter or a year.

Depreciation: The charge to reflect the cost of assets used up in the production process. (It is not a cash outlay)

Tangible assets: Physical assets such as plant and equipment.

Amortization: A noncash charge similar to depreciation except that it is used to write off the cost of intangible assets.

Intangible assets: Assets sucj as patents copyrights, trademarks, ...

EBITDA: Earnings before interest, taxes, depreciation and amortization.

Net Cash Flow: The actual net cash, as opposed to accounting net income, that a firm generates during some specified period.

Accounting profit: A firm's net income as reported on its income statement.

Statement of cash flow: a statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting period.

Operating Assets: The Cash and marketable securities, accounts receivable, inventories, and fixed assets, necessary to operate the business.

Nonoperating Assets: Cash and marketable securities above the level required for normal operations, investments in subsidiaries, land held for future use, and other nonessential assets.

Operating Working Capital: Current assets used in operations.

Non Operating Working Capital: Operating working capital less accounts payables and accruals. It is the working capital acquired with investors-supplied funds.

Non Operating Working Capital = All current assets (minus) All current liabilities that do not charge interest.

NOPAT (Net Operating Profit After Taxes): The profit a company would generate if it had no debt and held no nonoperating financial assets

Free Cash Flow: The cash flow actually available for distribution to investors after the company has made all the investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.

Operating Cash Flow: Equals to NOPAT plus any non-cash adjustments.

Market value added (MVA): The difference between the market value of the firm’s stock and the amount of equity capital investors have supplied.

Economic Value Added (EVA): Value added to shareholders by management during a given year.

Taxable Income: Gross Income minus exemptions and allowable deductions as set forth in the Tax Code.

Marginal Tax Rate: The tax rate applicable to the last unit of a person’s income.

Average Tax Rate: Taxes paid divided by taxable income.

Bracket Creep: A situation that occurs when progressive tax rates combine with inflation to cause a greater portion of each taxpayer’s real income to be paid as taxes.

Capital Gain or Loss: The profit (loss) from the sale of a capital asset for more (less) than its purchase price.

Tax Loss Cary Back and Carry Forward: Ordinary corporate operating losses can be carried backward for 2 years or forward for 20 years to offset taxable income in a given year.

Improper Accumulation: Retention of earnings by a business for the purpose of enabling stockholders to avoid personal income taxes.

S Corporation: a small corporation that, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

Liquid Asset: An asset that can be converted to cash quickly without having to reduce the asset’s price very much.

Liquidity Ratio: Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities.

Current Ratio: Calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.

Current Ratio = (Current Assets)/(Current Liabilities)

Quick Ration (Acid Test Ratio): Calculated by deducting inventories from current assets and dividing the remainder by current liabilities.

Quick Ration (Acid Test Ratio)= (current assets – Inventories) / Current liabilities

Asset Management Ratios: a set of ratios that measure how effectively a firm is managing it assets.

Inventory Turnover Ratio: Calculated by dividing sales by inventories.

Fixed Asset Turnover Ratio: The ratio of sales to net fixed assets.

Total Assets Turnover Ratio: Calculated by dividing sales by total assets.

Financial Leverage: The use of debt financing.

Debt Ratio: The ratio of total debt to total assets

Times Interest Earned (TIE) Ratio: Ratio of earnings before interest and taxes (EBIT) to interest charges. This is a neasure of the firm’s ability to meet its annual interest payments.

EBITDA Coverage Ratio: A ratio whose numerator includes all cash flows available to meet fixed financial charges and whose denominator includes all fixed financial charges.

EBITA Coverage Ratio = (EBITDA + Lease Payments)/(Interest + Loan Repayments + Lease Payments)

Profitable Ratio: A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.

Profit Margin on sales: Calculated by dividing net income by sales. This Ratio measures net income per dollar of sales.

Basic Earning Power (BEP) Ratio: EBIT/Total Assets. Indicates the ability of the firm’s assets to generate operating income.

Return on Total Assets (ROA): The ratio of net income to total assets.

Return on Common Equity (ROE): The ratio of net income to common equity. Measures the rate of return on common stockholders’ investment.

Market Value Ratio: A set of ratios that relate the firm’s stock price to its earning, cash flow, and book value per share.

Price/Earning (PE) Ratio: The ratio of the price per share to earnings per share. Shows the dollar amount investors will pay for $1 of current earning.

Price/Cash Flow Ratio: The ratio of price per share divided by cash flow per share. Indicates the dollar amount investors will pay for $1 of cash flow.

Market/Book (MB) Ratio: The ratio of stock’s market price to its book value.

Trend Analysis: An analysis of a firm’s financial ratios over time. Used to estimate the likelihood of improvement or deterioration in the firm’s financial conditions.

Du Pont Chart: A chart designed to show the relationship among return on investment, asset turnover, the profit margin, and leverage.

Du Pont Equation: A formula which shows that the rate of return on assets can be found as the product of the profit margin times the total assets turnover.

Du Pont Equation: ROA = Profit Margin * Total asset turnover

Benchmarking: Proces of comparing a particular company with a group of “benchmark” companies.

“window Dressing” Techniques: techniques employed by firms to make their financial statements look better than they really are.

Pro Forma (projected) Financial Statements: Finacial Statements that forecast the company’s financial position and performance over a period of years. Used for business planning.

Mission Statement: A condensed version of a firm’s strategic plan.

Sales Forecast: a forecast of a firm’s unit and dollar sales for some future period. Usually based on recent sales trends plus forecasts of the economic prospects.

Percent of sales method: a method of forecasting future financial statements that express each account as percentage of sales. These percentage can be either constants or vary with time.

Constant Ratio Method of forecasting: A forcasting approach in which the forecasted percentage of sales for each item is constant.

Spontaneously Generated Funds: Funds that are obtained automatically from routine business transactions.

Additional Funds Needed (AFN): Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

Capital Intensity Ratio: The amount of assets required per dollar of sales.

Lumpy Assets: Assets that cannot be acquired in small increments but must be obtained in large discrete units.