Know thy meaning - 6

Know Thy Meaning - 6

Asset   
Definitions (2)

1. Something valuable that an entity owns, benefits from, or has use of, in generating income.

2. Accounting: Something that an entity has acquired or purchased, and that has money value (its cost, book value, market value, or residual value). An asset can be (1) something physical, such as cash, machinery, inventory, land and building, (2) an enforceable claim against others, such as accounts receivable, (3) right, such as copyright, patent, trademark, or (4) an assumption, such as goodwill.
Assets shown on their owner's balance sheet are usually classified according to the ease with which they can be converted into cash. 
Net Present
Value (NPV)   
Definition
The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.
For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at net present value which here is zero ($1,000-$1,000). A zero net present value means the project repays original investment plus the required rate of return. A positive net present value means a better return, and a negative net present value means a worse return, than the return from zero net present value. It is one of the two discounted cash flow techniques (the other is internal rate of return) used in comparative appraisal of investment proposals where the flow of income varies over time.
Fixed cost   
Definition
A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages.
While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the organization as well as its pricing and profits. The breakeven point in such organizations (in comparison with high variable cost organizations) is typically at a much higher level of output, and their marginal profit (rate of contribution) is also much higher.
Financial leverage   
Definition
The use of borrowed money to increase production volume, and thus sales and earnings. It is measured as the ratio of total debt to total assets. The greater the amount of debt, the greater the financial leverage.
Since interest is a fixed cost (which can be written off against revenue) a loan allows an organization to generate more earnings without a corresponding increase in the equity capital requiring increased dividend payments (which cannot be written off against the earnings). However, while high leverage may be beneficial in boom periods, it may cause serious cash flow problems in recessionary periods because there might not be enough sales revenue to cover the interest payments. Called gearing in UK. See also investment leverage and operating leverage.
Problem   
Definition
A perceived gap between the existing state and a desired state, or a deviation from a norm, standard, or status quo.
Although many problems turn out to have several solutions (the means to close the gap or correct the deviation), difficulties arise where such means are either not obvious or are not immediately available.
SAP   
Definition

A German software company whose products allow businesses to track customer and business interactions. SAP is especially well-known for its Enterprise Resource Planning (ERP) and data management programs. SAP is an acronym for Systems, Applications and Products.

Revenue   
Definition

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover.

Pro forma invoice   
Definition

An abridged or estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods. It notes the kind and quantity of goods, their value, and other important information such as weight and transportation charges. Pro forma invoices are commonly used as preliminary invoices with a quotation, or for customs purposes in importation. They differ from a normal invoice in not being a demand or request for payment.

Accounting Concepts   
Definition
Rules of accounting that should be followed in preparation of all accounts and financial statements. The four fundamental concepts are

(1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out;

(2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;

(3) Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future;

(4) Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is reasonable 'possibility' of incurring them.

Other concepts include:

(5) Accounting equation: total assets equal total liabilities plus owners' equity;

(6) Accounting period: financial records pertaining only to a specific period are to be considered in preparing accounts for that period;

(7) Cost basis: asset value recorded in the account books should be the actual cost paid, and not the asset's current market value;

(8) Entity: accounting records reflect the financial activities of a specific business or organization, not of its owners or employees;

(9) Full disclosure: financial statements and their notes should contain all relevant data;

(10) Lower of cost or market value: inventory is valued either at cost or the market value (whichever is lower);

(11) Maintenance of capital: profit can be realized only after capital of the firm has been restored to its original level, or is maintained at a predetermined level;

(12) Matching: transactions affecting both revenues and expenses should be recognized in the same accounting period;

(13) Materiality: minor events may be ignored, but the major ones should be fully disclosed;

(14) Money measurement: the accounting process records only activities that can be expressed in monetary terms (with some exceptions);

(15) Objectivity: financial statements should be based only on verifiable evidence, including an audit trail;

(16) Realization: any change in the market value of an asset or liability is not recognized as a profit or loss until the asset is sold or the liability is paid off;
(17) Unit of measurement: financial data should be recorded with a common unit of measure (dollar, pound sterling, yen, etc.).
Also called accounting conventions, accounting postulates, or accounting principles.