THE A-Z OF COMMONLY USED FINANCIAL TERMS Financial documents are full of strange acronyms and terminology which can be intimidating to the reader. James Wright , independent financial adviser, explains some of the most commonly used terms. “as a general rule you should always ask what the language on your documents means,” says James. “All of the independent financial advisers and specialists at Scrutton Bland are happy to explain, and if it has confused one person then there are probably others who are equally baffled!” Part One (A-E)
Debt to equity ratio A company’s level of debt (any type of borrowed money) divided by equity (the shareholders’ money in the business). Defined benefit pension a specific income derived from a pension pot built up using your contributions made whilst working (deducted before tax) and your employer’s contributions (if applicable) plus investment returns and tax relief. Defined contribution pension As above, however a defined contribution scheme depends on other factors such as the performance of the pension fund, the amount you pay in, and other choices. Depreciable amount The cost of a non- current (fixed) asset minus its residual value. Depreciation The allocation of the depreciable amount of an asset over its useful life. Derivative The collective term used for a wide variety of financial instruments whose price derives from, or depends on, the performance of other underlying investments. Diversification A risk management strategy which mixes an assortment of investments within a portfolio. Dividend The part of a company’s profits that are distributed to shareholders. The amount of dividend paid is proportionate to the number of shares held. Dividend yield The dividend per share (total dividends paid out, divided by total number of shares) expressed as a percentage of the market value of the share. Earnings per share Shows how much of a firm’s profits (after tax) is attributable to each share. It is one of the means of determining a share’s true value. Entity Something that exists independently, such as a business, and which has a separate legal personality.
Bond A type of IOU issued by a government or a company to raise money. Capital The financial sum which enables a business to acquire assets and sustain its operations. Capital expenditure (Capex) The money spent on the acquisition of fixed assets such as land, buildings and equipment. Capital Gains Tax (CGT) The tax on the gain made when an asset is sold. CGT is payable when the overall gains exceed your annual tax- free allowance (currently £11,100). Capitalisation issue The issue of new shares to existing shareholders, who do not pay for the new shares. It raises no new finance but changes the mix of share capital and reserves. (also known as a bonus issue.) Cash The cash on hand such as money held in a safe or as deposits in a bank that may be withdrawn on demand. Cash flow projections Statements of the cash expected to flow into and out of a business over a particular period. Contingent liability A potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded if the contingency is probable and the amount of the liability can be reasonably estimated. Corporation Tax payable by companies, based on the taxable profits of a financial period. Cost of equity The annual rate of return that an investor expects from a firm in exchange for bearing the risk of owning its shares. Current assets Anything that is expected to be converted into cash within 12 months of the date of the balance sheet. Current liabilities Monies owed by the business which are due for payment within 12 months of the date of the balance sheet. This includes overdrafts, taxes and payments due to creditors. Debtor A person or organisation that owes money to another person or entity.
Accounts payable The amount due for payment to a supplier of goods or services, also described as a trade creditor. Accounts receivable is the amount due from a customer, also described as a trade debtor. Accruals basis The effect of transactions and other events when they occur, and not when cash is received or paid. Accumulated depreciation The total depreciation of a non-current (fixed) asset, deducted from original cost to give a net value. Agricultural property relief A form of relief from inheritance tax, based on how the land or property has been used, and for how long. Annuity a financial product that can provide you with a lifetime income, usually on retirement. Annual percentage rate (APR) The annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. ‘Representative’ or ‘typical’ APR is the rate that at least 51% of people who are accepted for that product will pay. Articles of association A document which, along with the memorandum of association (in cases where that exists) form a company’s constitution, defines the responsibilities of its directors, the kind of business to be undertaken, and the means by which the shareholders exert control over the board of directors. Assets Things owned by a company which have a monetary value. ‘Fixed’ assets include buildings, plant, machinery etc. ‘Intangible’ assets include trademarks and brand names. ‘Current’ assets include stock, debtors and cash. Auditor An independent person legally authorised to sign off a firm’s financial statements as “true and fair” and prepared using the relevant legislation. Balance sheet A ‘snapshot’ statement of the financial position of a company showing assets, liabilities and ownership interest.
Look out for our next instalment of financial terms in the next issue of ADVISER .
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