Glossary (to module 3)

A document that must be published by public corporations, disclosing in full to shareholders and regulators the company’s operational and financial activities over the previous year. Annual reports must go unqualified by external auditors. In recent years, sustainability reports, as well as corporate governance reports, have become more popular.

An officially appointed person or team who is responsible for determining the accuracy of business records. Auditors can be independent, affiliated to the company they are audition, or even public officials. The main role of the auditor is to ensure companies are maintaining accurate and verifiable records and statements.

A balance sheet, otherwise termed a financial statement, lists a company’s assets, liabilities and shareholders’ equity at any given point in time. The constituents of the balance sheet are used to determine the net value of a business by combining shareholders’ equity and liabilities.

A legal petition filed by an individual or business that is unable to repay outstanding debts. The process sees all of the debtor’s assets evaluated and employed to repay a portion of the outstanding debts, after which time the debtor is relieved of all previous obligations. Bankruptcy offers businesses a fresh start by forgiving unaffordable debts, while allowing creditors to regain some degree of repayment.

This represents the price of an asset, including the cost it would take to acquire that asset. It also means that an expenditure is recorded as an asset, instead of as an expense, appearing on the balance sheet instead of the income statement.

A quarterly financial report providing aggregate date on all cash inflows a company receives from ongoing operations and investments, as well as cash outflows. All publicly traded companies are required to file a cash flow statement, as traditional income statements do not necessarily reflect changes in a firm’s cash arrangements.

A person or entity that extends credit to another person or entity, usually in the form of lending or advancing money. A ‘real’ creditor- bank or financial company- will have legal contracts allowing it to collect any of the debtor’s assets if he or she fails to pay back a loan.

The proportion of debt a company has relative to its assets. Calculated by a simple formula, a debt ratio above 1 means a company has more debt than assets. If the ratio is less than one, the company has more assets. The measure is useful to determine how leveraged a company is and its level of risk, when applied with other measures of financial soundness.

The interest rate used to determine a firm’s present value of future cash flows. This rate is set by taking into consideration the time value of funds and the risk of a company’s forecast for future cash flows. A discount rate also describes that interest rate a depository institution is charged to borrow short-term funds from a government’s central reserve bank, although this method of borrowing is relatively rare.

A measure used to determine how well a company uses its assets and liabilities internally. Efficiency ratios can calculate a number of measures from turnover of receivables to the quantity and usage of equity. These ratios are useful when compared to the same figures in similar companies in order to identify what businesses are better run, and target management improvements.