Accounting Terms

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Pro Forma vs GAAP Accounting

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In accounting, pro forma earnings are those earnings of companies in addition to actual earnings calculated under the Generally Accepted Accounting Principles (GAAP) in their quarterly and yearly financial reports.

The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" when stating how much money the company actually made.

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Defined benefit vs defined contribution plan

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In a defined benefit plan, the plan sponsor promises a specific future benefit, with no specific present obligation. In a defined contribution plan, the sponsor’s present contribution is specified but the future benefit is not.

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Vesting

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An ERISA guideline stipulating that employees must be entitled to their benefits from a pension fund, profit-sharing plan or Employee Stock Ownership Plan, within a certain period of time, even if they no longer work for their employer.

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Service Cost

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The annual cost of paying interest on a company’s outstanding debt.

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Actuary

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An actuary is a business professional who deals with the financial impact of risk and uncertainty.

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Off balance sheet financing

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A form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants.

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Allowance for bad debts

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Offset to Accounts Receivable, with amounts that can be expected to be uncollectible.

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Factoring

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Financial transaction in which a business sells its accounts receivable (its invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.

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Asset impairment

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Impairment occurs when the sum of the expected cash flows from the asset is less than the book value of the asset. Accounting practices require that long-term assets be evaluated for impairment. If a reduction is made in the carrying value because of impairment, it is recorded as a loss

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Depreciation

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A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence.

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Intangible asset

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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.

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Translation

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he exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheets. The greater the proportion of asset, liability and equity classes denominated in a foreign currency, the greater the translation risk.

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Proxy Statement

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A document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual stockholder meeting.

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Days sales outstanding

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A measure of the average number of days that a company takes to collect revenue after a sale has been made. A

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Audit

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1. An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm).

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Lease: Operating vs Capital

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he Financial Accounting Standards Board has ruled that a lease should be treated as an capital lease if it meets any one of the following four conditions -
(a) if the lease life exceeds 75% of the life of the asset
(b) if there is a transfer of ownership to the lessee at the end of the lease term
(c) if there is an option to purchase the asset at a "bargain price" at the end of the lease term.
(d) if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market
value of the asset.

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Special Purpose Entity

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A special purpose entity (SPE) (sometimes, especially in Europe, "special purpose vehicle" or simply SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives

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Preferred Stock

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Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation.

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Earnings per share

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Total earnings divided by the number of shares outstanding.