Accrual Basis Accounting

A method of accounting wherein income and expenses are recognized, with the statements, when the business first acquires the right to receive the income, or the obligation to pay the expense. Regular corporations are required to sue the accrual bases by the IRS. (Also see Cash Basis Accounting.)

Acknowledgement

A declaration by someone that something is true. A declaration before an official that one has executed a particular legal document. 

Aging Accounts Receivable

An analysis of the accounts receivable, usually alphabetized, as of the date of the balance sheet you are using, wherein each account receivable is shown in columnar form as either current, over 30 days, over 60 days, over 90 days, or over 120 days delinquent. Normally comments should be make regarding the accounts recent payment pattern and other indications regarding the probability of collection. 

Amortization

The charging to expense of the cost of an intangible asset. This is normally done over a period of years. (see Depreciation.)

Assets

Property that a business owns, including cash and receivables, inventory, etc. Assets are any possessions that have value in an exchange.

Balance Sheet

A statement of the financial status of the business on a certain date.

Blue Sky

That portion of a "claimed" value or requested price that cannot be supported, or generally show to exist, through the application of established valuation methodology.

Book Value

Mostly used as an accounting term, book value is the difference between the total assets and total liabilities. 

Broker

An intermediary that serves as a go-between for the buyer or seller.

Business Appraisal/Valuation

The process of estimating the value of a business. There are 3 approaches to valuing a company, Market Data, Income and Asset, and there are 8 methods within those 3 approaches including: Direct Market Data, M&A, Guideline Public Company, Capitalization of Benefits, Multiple of Discretionary Earnings, Discounted Future Benefits, Net Asset Accumulation and Excess Earnings method. 

Capital Expenditures

Or "capex" are the amounts spent for tangible assets that will be used for more than one year in the operations of a business. Capital expenditures can be thought of as the amounts spent to acquire or improve a company's fixed assets. Some examples include the purchase of machinery, equipment, furniture, building improvements, computer information systems, and leasehold improvements.

Capitalization Rate

Any divisor, usually expressed as a percentage, used to convert income to value.

Cash Basis Accounting

A method of accounting wherein income and expenses are recognized, within the statements, when the business receives the income, or pays the expense. (Also see Accrual Basis Accounting.)

Cash Equivalents

Investment assets that can be quickly converted into cash.

Cash Flow Statement

A financial statement that displays the sources and uses of cash. The Cash Flow Statement groups together funds in all activities whether they are in "Operations", "Financing", or "Investments".

Closing

The act of transferring ownership of a property from seller to buyer in accordance with a sales contract. 

Confidentiality Agreement

A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others. 

Covenant

A promise in an agreement or contract agreeing to performance or nonperformance of certain acts, or requiring or preventing certain acts or uses. 

Depreciation/Amortization

In an economic sense, as used in recasting of statements, a loss in value of a fixed asset as a result of wear and tear or obsolescence, which cannot be corrected by normal repairs. In accountants' financial statements, an expense item that permits the original cost to be written off against income over the assets' cost recovery period, as dictated from time to time by the IRS or GAAP. (In the context of the recasting of financial statements, the amount of accumulated depreciation could be much greater or much less than the amount shown on the accountants' statement. 

Considered a non-cash charge (sometimes called a book charge) as this expense is allowed in excess of the interest expense, if the acquisition of the asset was financed. The amount of depreciation taken as a non-cash charge in any given accounting period is almost always based upon number of years approved by the IRS for cost recovery. 

Discount Rate

A rate of return used to convert a monetary gain, payable or receivable in the future, into present value. 

Discretionary Earnings

Adjusted earnings before taxes, interest income or expense, non-operating and nonrecurring expenses, depreciation and other non-cash charges and prior to deducting an owner's/officer's compensation. 

Doing Business As (DBA) 

DBA stands for “Doing Business As,” which is a company name, also commonly called a “Fictitious business name.” When a sole proprietor operates a company using any name except his or her own given name, then the DBA or fictitious business name registration establishes the legal ownership to satisfy banks, local authorities, and customers.

Dividends 

Money distributed to the owners of a business as profits.

Earnings

The gross operation revenues of the business less expenses and other deductions applicable to the type of earnings your are defining:

Net Income - Earnings after the payment of all expenses including income taxes.

EBT - Earnings Before Taxes. Earnings of the business prior to income taxes paid.

EBIT - Earnings Before Interest and Taxes. Earnings of the business prior to Interest expense or income + corporate income Taxes paid. This definition recognizes interest as a cost of capital, and not as an operating expense; or the recasting is being done on a debt-free basis. 

EBITDA - Normalized Earnings Before Interest, Taxes, Depreciation and Amortization. Earnings of the business prior to Adjusted Net Income + Interest expense or income + corporate Taxes paid + all Depreciation and Amortization Expenses. 

DE/SDE/SDCF - Adjusted earnings before taxes, interest income or expense, non-operating and non-recurring income/expenses, depreciation and other non-cash charges and prior to deducting an owner's/officer's compensation. Seller's Discretionary Earnings and Seller's Discretionary Cash Flow are the same as Discretionary Earnings. 

FIFO

First In First Out. An accounting method of valuing inventory, based on the assumption that the "first" unit of an item of inventory purchased (the oldest) is the first unit sold out of inventory. In pricing the inventory under this valuation method, the ending inventory is the aggregate of the cost of the newest, most recently purchased units of each item. 

Fiscal Year 

Standard accounting practice allows the accounting year to begin in any month. Fiscal years are numbered according to the year in which they end. For example, a fiscal year ending in March of 1992 is Fiscal 1992, even though most of the year takes place in 1991.

Fixtures

A Fixture is an item of property which is physically attached to or closely associated with land as to be treated as part of the real estate, including, without limitation, physically attached items not easily removable without damage to the property, items specifically adapted to the property, and items customarily treated as fixtures. 

Going Concern Value

It is the value placed on a business for being in business and providing a service to it's customers.

Goodwill

That intangible asset that arises as a result of a name, reputation, customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits. For some, goodwill is synonymous with Blue-sky. This view results from a lack of understanding of the difference. (Also see Blue-sky.)

Gross Margin Percent 

Gross margin divided by sales, displayed as a percentage. Acceptable levels depend on the nature of the business.

Gross Profit

That portion of next sales that remains after the subtraction of the Cost of Goods Sold. 

Income

See Earning

Income Statement

A financial statement used to summarize the financial activities of a business during the period of time specified within the statement. AKA Income/Expense Statement, Profit & Loss, P&L. The Income Statement and Balance Sheet are normally issued together, as companion documents, each supplementing the other. 

Indemnification

A promise by one party to another to restore a loss by payment of money, replacement, or repair. It is used typically to cover the result of a warranty or representation that is or was not true

Inventory

Goods in stock, either finished goods or materials to be used to manufacture goods.

Inventory Turnover

Total cost of sales divided by inventory. Usually calculated using the average inventory over an accounting period, not an ending-inventory value.

Investment Value

The value to a specific buyer or acquirer as opposed to a buyer in general.

Letter Of Intent

An agreement between a buyer and a seller used in connection with the acquisition of a company. The letter of intent describes the basic terms and conditions of the transaction between the two parties, including price, due diligence periods, exclusivity, and the basic conditions to closing the deal. Customarily presented before a definitive purchase agreement is entered into, the letter of intent provides a road map for the parties involved in the transaction. 

Liability

A liability is a company's financial debt or obligations that arise during the course of its business operations. Businesses sort their liabilities into two categories: current and long-term. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

LIFO

List In First Out. An accounting method of valuing inventory, based on the assumption that the "last", most recent, unit of an item of inventory purchased is the first unit sod out of inventory.

Liquidation Value

The value if the business is closed and the assets are liquidated.

Market Share

Total sales of an organization divided by the sales of the market they serve.

Net Cash Flow

Net Cash income plus all non-cash charges (depreciation, amortization and depletion), less amounts needed for capital expenditures, plus/minus net change in working capital, plus/minus change in debt. (This would be net cash flow for equity, invested capital net cash flow would exclude the net change in debt and adjust net income to include interest expense, net of tax.)

Net Present Value (NPV)  

The method of discounting future streams of income using an expected rate of return to evaluate the current value of expected earnings. It calculates future value in today’s dollars. NPV may be used to determine the current value of a business being offered for sale or capitalized.

Operating Expenses 

Expenses incurred in conducting normal business operations. Operating expenses may include wages, salaries, administrative and research and development costs, but excludes interest, depreciation, and taxes.

Original Equipment Manufacturer (OEM)

The process that is facilitated through licensing or other financial arrangements where the initial producer of a product or service enters into an agreement to allow another entity to include, remanufacture, or label products or services under their own name and sell through their distribution channels. It typically results in a “higher volume, lower margin” relationship for the original producer, and offers access to a broader range of products and services the buyer can offer their consumers at more attractive costs.

Procuring Cause

A legal term that means the cause resulting in accomplishing a goal. Used in real estate or business brokering, to determine whether a broker is entitled to a commission. 

Pro Forma Statements

Financial statements that project the results of future business operations. Examples include a pro forma balance sheet, a pro forma income statement, and a pro forma cash flow statement.

Representation

An action or speech on behalf of a person, group, business house, state, or the like by an agent, deputy, or representative.

SIC Code

The Standard Industrial Classification SIC is a system for classifying industries by a four-digit code. Established in the United States in 1937, it is used by government agencies to classify industry areas.

Stipulation

A special demand for something as a condition of an agreement. 

Warranty

An expressed or implied statement that a situation or thing is as it appears to be or is represented to be.