Understanding Financial Terms

19 June 2012 DueDil Team

For those not familiar with financial terms it can be a little difficult to understand the importance and application of the financial figures included in annual accounts.

Following up our recent post where we explained why companies have differing levels of financial information, I wanted to run you through a list of the accounting terms found on the financials tab on every company profile on Duedil.

I’ve listed below all the financial metrics we draw from a company’s annual accounts, with a brief explanation that I hope will help you derive more meaning from them.

It might help to look at the accounts of Marks & Spencer as we go through this as their 2011 accounts are very comprehensive.

General

Accounts Date
This is the date the accounts are made up to, that is the end of the accounting year for that set of accounts. Accounts are generally filed at Companies House a number of months after the accounts date.

Accounts Type
As we wrote in yesterday’s blog, there are three sizes of companies as determined by Companies House and the size of the company will dictate what type of accounts they file, which include:

Group – for large companies with subsidiary businesses.
Full Accounts – Large companies filing full accounts.
Total Exemption Full – small or medium sized companies filing full accounts.
Total Exemption Small – small or medium sized companies who have chosen to abbreviated accounts.
Dormant – a company that is not actively trading and has no accounting transactions.

Key Financials

Employees
Number of employees that the company identified in its most recent account filing with Companies House.

Turnover
The income a company receives from normal business activities. Internationally known as “Revenue”.

Cost of Sales
The cost of acquiring and producing goods for sale.

Gross Profit
The sales revenue minus the cost of sales. Gross profit doesn’t include administrative, financial, or distribution costs.

Operating Profit
Profit generated by principal trading activities. Operating profit is calculated by subtracting operating expenses from trading profit. Trading profit is company’s profit before deductions like directors’ and auditors’ fees, interest, etc.

Pre-Tax Profit
Gross profit minus any other costs not included in cost of sales, such as administrative, financial, and distribution costs. Does not include any taxes paid.

Post-Tax Profit
Gross profit minus any other costs not included in cost of sales, such as administrative, financial, distribution costs, and taxes.

Ledger

Net Assets
The difference between a company’s assets and its liabilities. In other words, the value of everything the business owns if all debts were to be taken care of.

Total Assets
This is the monetary value of assets as shown in the accounts, which may differ to real market value. Assets owned by the company include physical plant, machinery, patents, and goodwill. Goodwill refers to the difference in value between net assets and market value. In a private company, goodwill will not be apparent until a company is sold. For public companies, goodwill can easily be calculated by looking at the difference between net assets and market value, as determined by share price.

Total Liabilities
This is the sum of total long term liabilities and current liabilities, and represent total debt obligations of a business.

Cash
Included as part of current assets, cash refers to the amount held in current or deposit bank accounts.

Tangible Assets
A company’s assets that have a physical presence, such as property, machinery, bank deposits and investments (as opposed to intangible assets such as patents and goodwill).

Intangible Assets
A company’s assets that have no physical presence, such as copyrights, patents, and brand name. These are not to be confused with tangible assets, those which do have physical presence such as property or machinery.

Fixed Assets
Also known as capital assets, fixed assets are assets intended for continued use (unlike short term current assets), and are classified in the balance sheet as investments or tangible intangible assets.

Current Assets
All assets belonging to a company that can be converted easily into cash and are expected to be used (sold or consumed) within a year. The current asset position of a company is important, both for assessing its financial strength and for gauging its operational efficiency.

Stock
Also known as capital stock, this represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business, since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business, which may fluctuate in quantity and value. Equity includes share capital, share premium, and reserves.

Other Current Assets
The value of non-cash assets not already defined, e.g. a company’s inventories, accounts receivable, and other current assets aside from cash.

Assets Current Misc
A company’s assets that are in the process of changing form from cash to goods and back again.

Current Liabilities
Debt obligations due to creditors and suppliers within one year.

Creditors
Also known as accounts payable, this refers to the amount owed by a company to its suppliers, and is considered to be a part of current liabilities on the balance sheet. However, trade creditors does not include accruals and other non-trade creditors (such as HMRC).

Trade Debtors
This refers to the total amount invoiced that is owed to a company by its customers, but doesn’t include prepayments and non-trade debtors.

Overdraft
Current company bank overdraft.

Misc Current Liabilities
Money due to be paid, within one year (e.g. goods and services, unpaid payroll expenses, taxes, and interest accrued).

Other Long Term Finance
A company’s loans to be paid in a year or more.

Total Long Term Liabilities
Total sum of long-term bank loans and obligations to be paid by a company.

Salaries And Dividends

Wages Salaries
Total money paid to employees.

Director Emoluments
Payments made to directors (salary, bonuses etc).

Shareholder Funds
Shareholders’ funds is the total of capital and reserves which is normally equal to a company’s assets less its liabilities.

Dividends
The portion of a company’s profit that is given to its shareholders. Whether or not a dividend is paid and how much, depends on company performance (board may decide to reinvest profit into company). In larger companies, it is common for an interim dividend to be paid at the half-year point. The dividend is calculated per share: the more a shareholder owns, the more return they get.

Other

Audit Fees
Total of fees paid to auditor.

Tax
Amount paid to the government in corporation tax, which for UK companies is between 21-28%.

Retained Profit
The amount from net profit that hasn’t been distributed as dividends.

Net Worth
Net worth is calculated by minusing intangible assets from shareholders’ funds. Net worth generally comprised of all the money a company has invested since its inception and is used as a measure of the value of a company.

Depreciation
The cost of deriving economic benefit from a tangible fixed asset consumed during an accounting period. Includes any reduction in the useful economic life of a tangible fixed asset, such as wear and tear. Useful economic life refers to the period during which the present owner of the asset with derive economic benefits.

Capital Employed
A difficult term to define, but generally refers to the investment required to invest for a business to function.

Audit

Auditors
Accountancy firm in charge of auditing the company’s accounts.

Audit Date
Date accounting audit was carried out.

Audit Qualification
Comments left by the auditors in relation to their audit of accounts filed to Companies House.

Did this blog help you to interpret company accounts? If you would like us to write in more detail on any of the above or any other financial topic please leave us a note in the comments section.