GLOSSARY OF BANKING TERMS Rodger Stone, Sun West Bank

Accountant: See Certified Public Accountant. Accounts Payable: A current liability that is the amount owed to vendors/suppliers for inventory purchases made on account. Accounts Payable Aging: An accounting report that groups accounts payable according to due dates, such as current (within terms), 30-60, 60-90, and over 90 days. Accounts Payable Turndays: A measure of the number of days on average it takes a company to pay its vendors/suppliers. [(Accounts Payable divided by COGS) times 365]. Accounts Receivable: A current assets that is the amount owed to a company by its customers who purchase on account. Accounts Receivable Aging: An accounting report that groups accounts receivable according to due dates, such as current (within terms), 30-60, 60-90, and over 90 days. Accounts Receivable Turndays: A measure of the number of days on average from sales to collect on accounts [(accounts receivable divided by net sales) times 365]. Accrual Basis Accounting: An accounting practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later. Accrued Expenses: Expenses incurred during a fiscal period but not actually paid by the end of that fiscal period. Adjustable Interest Rate: An interest rate that changes from time-to-time based on a pre-determined spread over a base rate. Adjustable rates can vary as often, such as daily, or infrequently such as at a pre-determined five-year period. Also known as Variable Interest Rate. Adjusted Gross Income (AGI): The amount used in the calculation of an individual's income tax liability; one's income after certain adjustments are made, but before standardized and itemized deductions and personal exemptions are made. Administrative Expenses: Also referred to as Operating Expenses or Overhead. They include, but are not limited to, rent, utilities, advertising, legal and accounting, etc.

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Amortization: The gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity. When the debt involves real property, often the periodic payments include a sum sufficient to pay taxes and hazard insurance on the property. Also refers to the write-off of intangible assets such as copyrights and goodwill. Appraisal: A report written by a professional, known as appraiser, that estimates the market value of a subject property, usually real estate. Appreciation: The increase in the value of an asset in excess of its cost or book value, which is due to economic, and other conditions, as distinguished from increases in value due to improvements or additions made to it (value added). Annual Percentage Rate (APR): The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (points), expressed as a percentage. Annual Percentage Yield (APY): The rate of return on an investment for a one-year period. For an interest-bearing deposit account, such as a savings account, APY is equal to one plus the periodic rate (expressed as a decimal) raised to the number of periods in one year. Due to compounding, the APY will be greater than the periodic interest rate multiplied by the number of periods in the year. Articles of Incorporation: A document, filed with a U.S. state by a corporation's founders, describing the purpose, place of business, and other details of a corporation. Also called charter. Asset: Anything owned by an individual or business, which has commercial or exchange value. Assets may consist of specific property or claims against others. Average Tax Rate: The sum of all the tax rates that are applied to your income divided by the number of rates applied. Bad Debt: An amount due on open accounts that have been proved uncollectible. Balance Sheet: A statement of financial position that shows the assets, liabilities and net worth of the business. Balloon Loan: A long-term loan, often a mortgage, that has one large payment (the balloon payment) due upon maturity. Banker's Acceptance (BA): A financial draft drawn on a bank and used extensively as a form of payment in import/export business. BAs often qualify as money-market instruments and can be resold as short-term cash-management investments.

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Bankruptcy: A proceeding in a federal court in which an insolvent debtor's assets are liquidated and the debtor is relieved of further liability. Chapter 7 of the Bankruptcy Reform Act deals with liquidation, while Chapter 11 deals with reorganization Barter: The exchange of products and/or services without the use of money Base Rate: The interest rate that banks charge to their best customers. Similar to the prime rate. Basis Point: One hundredth of a percentage point (0.01%). Board of Directors: Individuals elected by a corporation's shareholders to oversee the management of the corporation. Bond: A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Book Value: The cost of an asset. In terms of a business, book value refers to the sum of all the business assets minus the liabilities. In terms of stock ownership, the term refers to the amount arrived at above divided by the number of common shares, or book value per share. Break Even: To have no profit and no loss; the point at which revenues exactly cover expenses. Bridge Financing: Financing extended to a person, company, or other entity, using existing assets as collateral in order to acquire new assets. Bridge financing is usually short-term and is intended to be refinanced with a permanent, or long-term, loan in the near future. Budget: An itemized listing of the amount of all estimated revenue which a given business anticipates receiving, and the listing, and frequently the segregation, of the amount of all estimated costs and expenses that will be incurred in obtaining the abovementioned income during a given period accounting, or fiscal, period. Capital: The amount of money invested in the business by stockholders. Also referred to as Paid in Capital. Capital Assets: A collective term which includes all fixed assets, consisting of vehicles, furniture and fixtures, land, buildings, machinery, equipment, etc. Capital Budget: This is the estimated amount planned to be expended to acquire capital assets.

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Capital Gains or Losses: The difference, gain or loss, between the book value and that value realized from the sales or disposition of capital assets. Capital Stock: The shares of a corporation authorized by its articles of incorporation, including preferred and common stock. Capitalized: The accounting practice of showing the value of a purchased service or product as an asset, rather than passing that cost through the income statement as an expense in the period in which it was acquired. As some later point in time, all capitalized costs (assets) need to be released off the balance sheet as they are either used-up (like depreciation expense) or sold like (COGS). Cash Basis Accounting: A system of tracking income and expenses based on when cash is actually exchanged. Income is recognized only when cash is received, and expenses are recognized only when cash is paid. Cash Budget: A projected accounting of the cash inflows and outflows for a given period a projection of what the business check book will look like. Cash Flow: A term describing the amount of cash that is generated over a period of time. It can come from one of three sources; a decrease in assets, an increase in debt, or an increase in equity. Depending which and how many assets, liabilities and equity account changes are included, the end result can be very different. Cash Management: The strategy for administering cash and investing any excess, usually on a short-term basis. Financial cash managers will manage investment portfolios for a fee. Cash Position: The difference between cash inflows and outflows for any given period without borrowing short-term. How much cash the business has (or how much it is short) for the period. Certified Public Account (CPA): A professional that prepares financial statements or tax returns according to generally accepted accounting principals. Generally referred to as an accountant. Chattel: An item of personal property that is not freehold land and that is not intangible. Chattels are typically movable personal property, such as furniture or cars, but may also be interests in real property, such as a lease. Collateral: Assets that are pledge in support of a loan. Property or goods used as security against a loan and forfeited if the loan is not repaid. Contribution Margin: The amount left after variable costs are paid. The amount that is left to contribute to covering fixed costs (and profits).

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Contribution Margin Percentage: The percent of each dollar of sales that is left after variable cost percentage has been deducted; the amount from each dollar of sales that is contributed to cover fixed costs and profits. Corporation: A type of business organization chartered by a state and given legal rights as a separate entity. Cost of Goods Sold (COGS): It represents the cost-basis of what is released out of inventory and sold. It is usually determined as follows: beginning inventory plus purchases minus ending inventory. Covenants: Any of several agreements to perform or not perform (negative covenant). Credit: That granted by a lender, typically taking the form of a loan or line of credit. Credit Life Insurance: Insurance issued to cover the payment of a loan, installment purchase, or other obligation if the borrower dies (e.g., mortgage insurance). Current Assets: What the business owns that is expected to be turned into cash within one year such as accounts receivable and inventory. Current Liabilities: Obligations which are due to be repaid within one year. Current Portion Long Term Debt (CPLTD): The current (due within the next 12 months) liability account identifying the principal amount of a term debt that is due within a year. The source of that payment is normally operational profits. Current Ratio: Current assets divided by current liabilities. Measures solvency, a companys ability to pay its bills. Debt: Generally referred to as loans; also known as liabilities. Used along with equity to support the assets of a company. Debt Coverage Ratio: Cash flow available to service debt divided by debt servicing requirements (interest plus CPLTD). Debt-to-Worth Ratio: Measure of financial leverage. Total liabilities divided by Net Worth. Depreciation: The process of allocating the cost of a fixed asset (such as equipment) to the period that it benefits the business writing off its cost over it useful life. Dividend: That portion of a corporations earnings which is paid to the stockholders.

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Down Payment: The portion of the total cost of a purchase that you pay in cash. Down payment are typically required on real estate or capital asset purchase transactions since a lender will usually not finance 100% of the purchase price. Entrepreneur: One who assumes the financial risk of the initiation, operation and management of a given business or undertaking. Equity: The net worth or ownership interest in a company. It is the difference between the assets and the liabilities of a company. In a corporation, net worth or owners equity consists of capital stock, capital surplus and retained earnings. Estate: the entire group of assets owned by an individual at the time of his/her death. The estate includes all funds, personal effects, interest in business enterprises, real estate and chattels, and evidences of ownership such as stocks, bonds and mortgages owned, notes receivable, etc. All claims against and estate must be duly filed with the executor of the estate, and approved by the court of law under which the will is being probated. Estate Tax: The Federal tax levied on the transfer of property from the deceased to his or her heirs. Executor: An individual or a bank, who is named in the testators will to carry out the desires of the deceased after his/her death as designated in the will. Executors must be approved by the court of law probating the will. Expense: Something paid out, usually money, to attain something else. Costs associated with a business activity. Expiration Date: Typically refers to a line of credit. The date at which a line of credit is no longer made available by the lender to the borrower. All outstanding principal and interest becomes due and payable upon that date. Financial Statements: A collection of financing records reporting a companys performance generally including a balance sheet, income statement, statement of cash flows. Financing Gap: The difference between the funds needed to buy new assets and the funds available. The amount that the company will have to borrow in order to support increased sales. Financing Patterns: The relationship between the need for funds to support sales and the availability of those funds. The relationship between the use of profits, the use of debt, and the repayment of debt in acquiring assets to support sales. First-In-First-Out (FIFO): A method of accounting for inventory. This system assumes that the first item received is the first item sold.

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Fiscal Period: A period of time that represents an accounting period. Fiscal periods are typically one month, one quarter or one year. A fiscal quarter is commonly accepted as a period of three consecutive months. Fixed Assets: Those assets that tend to be of a more permanent, long-term nature, such as equipment, vehicles, buildings, etc. Fixed Costs: Expenses that do not vary with sales; those costs that are incurred whether or not any sales are made. Foreclosure: The legal process by which a lender takes title to property, usually because a borrower defaults on a loan. General Partner: In a limited partnership, the partner with unlimited legal responsibility for debts and liabilities. Goodwill: An intangible asset that arises when assets are purchased for more than their fair market value. Generally accepted accounting principles dictate that goodwill should be amortized over a period not less than four nor more than forty years. This amortization is not deductible for tax purposes. Goodwill is created on the books of a newly purchased company to the extent that the purchase price of the company is greater than the fair market value of the assets. Gross Profit: Sales minus the Cost of Goods Sold, which is the cost of buying raw materials and producing finished goods. Gross Profit Margin: Describes the difference between sales revenue and the cost of goods sold as a percentage. (gross profit divided by net sales revenue) times 100. Guarantor: A individual or entity, not the borrower, that agrees to repay the lending in the event that the borrower defaults on the required repayment of a loan. Income Statement: The summary of the revenues, costs and expenses of a company during an accounting period. Inheritance Tax: Tax levied by several states upon the right to receive property by inheritance. Intangible Assets: Items of non-physical nature such as goodwill, patents, and trademarks that are of value to a company as a going concern, the value being dependent upon the rights and earning power they confer upon the owner. Interest: The cost of using money; the fee which is charged for the use of the principal.

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Interest Rate Risk: The degree of uncertainty in the prices of securities associated with changes in interest rates; the value of the securities move in inverse relation to interest rates. This term is generally associated with bond prices, but applies to all investments. Inventory: Goods purchased for resale either directly or after value has been added. Inventory Turndays: A measure of how much inventory a company is holding. A measure of the number of days it takes to convert purchases in to sales, or the number of days of supply. [(Inventory divided by COGS) times 365]. Joint Tenancy with Right of Survivorship: Co-ownership of property by two or more people in which the survivor(s) automatically assumes ownership of a decedent's interest. Keyman Life Insurance: Life insurance take out on an individual, typically the president or high ranking management of a company, that pays a beneficiary in the event of that persons death. The payment of benefit may be attached as a source of repayment for a loan. Last-In-First-Out (LIFO): A method of accounting for inventory. This system assumes the last item received the first item sold. Letter of Credit: A negotiable instrument issued by bank that guarantees payment by the bank on behalf of the banks customer. Common terms are stand-by letter of credit and documentary letter of credit. A stand-by letter of credit is typically designed to be payable to the holder, also known as the beneficiary, if the applicant, usually the banks customer, does not perform on some pre-arranged agreement. Stand-by letters of credit are generally used domestically. Documentary letters of credit are generally expected to be collected upon as a form of collection between parties doing business who are unfamiliar with each other and the vendor or supplier is unable or unwilling to provide terms. Documentary letters of credit are generally used internationally. Letters of credit can also be converted to a Bankers Acceptance. Leverage: The increased rate of return that is made on net worth when by using debt to acquire assets. Liabilities: What the business owes to creditors to non-owners who supply funds that must be repaid. Debt is another term for liability. Limited Liability Company (LLC): A type of business organization chartered by a state and given legal rights as a separate entity. The owners of an LLC are referred to as Members.

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Limited Partnership (LP): A business organization with one or more general partners and one or more limited partners. The general partners manage the business and assume legal debts and obligations; the limited partners contribute cash or property to finance the business, but, in contrast to the responsibilities of general partners, bear limited legal responsibilities and don't participate in management. Line of Credit: An agreement between a bank, or other lender, and a customer whereby the lender agrees to lend the customer funds up to a previously agreed maximum amount. A line of credit is widely used by companies for seasonal needs to finance inventory, accounts receivable, and/or operating expenses. Liquidation Value: The value of a business that will be realized if all of the assets are sold and liabilities paid. Liquidity: Related to working capital, current ratio, and quick ratio. Liquidity generally refers to cash and near cash available to be deployed by management. Loan: Money borrowed from an other with the agreement that it will be paid back later. Long-Term Debt: Obligations which will not be due for at least one year. Long-Term Financing: Debt that is scheduled to be completely repaid at some point past one year in the future. Majority Interest: Ownership of more than 50% of the shares of a corporation. Margin: The difference between the cost and the selling price of merchandise. Expressed as a percentage, the difference is the numerator and cost is the denominator. Marginal Tax Rate: The amount of tax paid on each additional dollar of income. Markup: The difference between the cost and the selling price of merchandise. Expressed as a percentage, the difference is the numerator and the selling price is the denominator. Matching Principal: An accounting term that represents both the recognition of when revenue is earned and when expenses are paid. It is also related to structuring liabilities such that long term assets are supported (or matched) with long-term liabilities and shortterm assets are supported (or matched) to short-term liabilities. Maturity Date: The date at which a debt, or loan, becomes due. On that date, the remaining principal balance as all unpaid accrued interest must be paid. Minority Interest: Ownership of less than 50% of the shares of a corporation.

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Mortgage: A written obligation to pay with property pledged as security. Net Cash after Operations: Cash remaining after adjusting cash operating profit to reflect net cash outlays (or inflows) arising from changes in income taxes and miscellaneous assets, liabilities, income, and expenses. Net Loss: The excess of total expenses over the total income for a fiscal period. Net Profit: The amount remaining after all expenses have been met. The difference between total sales and total costs and expenses. Net Profit Margin: Net profit after taxes expressed as a percentage of net sales. It is the ultimate measurement of success in business. The ratio tells what part of each sales dollar remains with the company after all sources of income and types of expenses have been accounted for. Net Worth: What the business owes to the owners the investment that the owners have in the company. Also called owners equity. Note Payable: Written promise to person or business to pay a certain amount at a certain time. Operating Expenses: Those expenses pertaining to the normal operation of the business. Interest expense and non-recurring expenses or losses, such as the loss on the sale of equipment, are not included. See Administrative Expenses. Also known as Overhead. Operating Profit: The difference between the gross profit and operating expenses. Overhead: See Administrative Expenses. Also known as Operating Expenses. Partnership: A business organization where two or more people join together by contract. Permanent Current Assets: The base level of current assets that the company maintains at all times. The level of cash, accounts receivable, and inventory that the company requires regardless of seasonal requirements. Point: A unit that measures a security's price fluctuations in the market. In stocks a point is $1 per share; in bonds, 1% of the Face Value. (In real estate, a point is 1% of the loan paid by the borrower to the lender.) Preferred Stock: Corporation stock which grants its owner certain preference rights over other stockholders on payment of dividends and the distribution of assets.

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Present Value: The discounted value of a certain sum due and payable at a certain specific future date. Prime Rate: The interest rate major banks charge their most creditworthy borrowers. Also referred to as index rate. Principal: The face value of an obligation (such as a loan) that must be repaid at maturity, separate from interest. Probate: The legal certification of the validity of a will. Profit Plan: The profit plan for the fiscal year is a complete financial picture of the sales, expenses and the resulting profit. See Projections. Projections: A written state estimating what is believed will happen in the future. For example, what level of sales is anticipated. Quick Assets: Cash, accounts receivable and marketable securities. Quick Ratio: An indication of the ability of a company to retire its liabilities from sources other than inventory (cash plus accounts receivable plus cash equivalents) divided by current liabilities. A measure of liquidity. Real Estate: Also referred to as Real Property. A piece of property that includes land and any improvements such as physical structure, building, landscaping, etc., and that which is permanently in the ground below it or in the air above it. Refinance: The arrangement, or taking out, of a loan for the purpose of paying off another loan. Retained Earnings: Net profits that are kept accumulating in the business (as opposed to being paid out to owners). These profits are generally not cash; instead, they have been used to purchase assets in the course of normal operations. Return on Assets (ROA): The ratio of assets to stockholders equity or net worth. A measure of efficiency in employing all the assets of a company in the generation of profit. Return on Equity (ROE): The ratio of profit (before taxes) to stockholders equity or net worth. A measure of profitability as related to an invested amount. Useful for making decisions relating to the allocation of capital. Revenue: Synonymous with sales. Usually used in a service business. Sales: The value or amount received for products sold. An exchange of goods or services for an agreed amount of money.

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Sales Growth: The dollar amount or percentage change in sales from one period to the next. Sales Growth can be positive or negative. Percentage is calculated as follows: (sales year 2 minus sales year 1 divided sales year 1) times 100. Seasonal Pattern: Seasonality; the rise and fall in sales, profits and cash caused by seasonal demands for a product or service. Secured Loan: A loan, that if the borrower does not repay the debt as agreed, the lender has rights to claim and sell, or liquidate, the collateral to achieve repayment. Secured loans may be either long-term or short-term loans. Short-Term Financing: Debt that is scheduled to be completely repaid within one year. Sole Proprietor: A business structure in which the individual proprietor and the company are considered one entity for tax purposes. Sources and Uses of Funds Statement: A financial statement that details changes in financial position for a given period. It presents the sources of funds for operations (transactions that increase working capital, such as net profit) and the way funds were used (as buying inventory or equipment or repaying debt). Also called Sources And Application Of Funds Statement. Spontaneous Financing: The increase in accounts payable due to purchases of inventory. Trade financing. Stockholder: A person owning shares of the capital stock of a corporation. Structuring Liabilities: Matching the life of the asset to the length of the financing. Subordinated Debt: Debt owed by a borrower to Lender B wherein Lender B agrees to allow the borrower to repay Lender A prior to repaying Lender B. Lender B is typically related to the borrower such as an owner of the borrower. Sustainable Sales Growth Rate: The rate at which a company can grow while maintaining a targeted debt-to-worth ratio. (In other words, how fast a company can grow from internally generated sources if it is to maintain a specified level of financial risk.) Tax: Money paid to the government for doing absolutely nothing. The pound of flesh. Tenants in Common: Co-ownership by two or more people, each owning a defined percentage of the whole. There are no survivorship rights. Term: When referring to a loan, it is the length of time between the issuance or note date and maturity or expiration date.

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Term Loan: A long-term loan (more than one year) with a tenure running usually not more than ten years. Testamentary Trust: A trust which is established through a will. The executor or some other legal entity, such as a trust company, is specified in the will to take possession of certain property of the deceased, and to carry out this administration for the benefit of the parties named in the will as beneficiaries. Testator: Somebody who has made a legally valid will. Trading Assets: Typically accounts receivable and inventory. Considered to be selfliquidating assets used to generate the profit for most distribution and manufacturing companies. Trading Liabilities: Typically accounts payable. Amounts owed to creditors which spontaneously fund growth in trading assets. Trust: The legal holding and managing of the property or money belonging to another. A legal document that defines instructions for the holding and managing of someones property and/or money. Variable Asset: An asset that increases (or decreases) as sales rise or fall. For example, more sales would mean more accounts receivable even though the company was collecting them just as efficiently as before the sales increase. Variable Costs: Expenses that vary directly with sales; those costs that are incurred only if sales are made. Examples include commissions, direct labor, raw materials and bad debt. Variable Interest Rate: See Adjustable Interest Rate. Variable Liability: A liability that increases to support the variable assets, which increase as a result of a sales increase. For example, more sales would require that more inventory be kept on hand (to avoid stock-out). This, in turn, would mean carrying more accounts payable if the company maintained its accounts payable turnover at the same rate as before the increase. Also see spontaneous financing. Venture Capital (VC): Financing provided by a wealthy investor, bank or finance company to help new businesses get started, reach a new level or size, or go public. In return for their investment they typically take an ownership stake in the business. Will: A legal document used to transfer the assets of a deceased person to their heirs. Working Capital: Current assets minus current liabilities. Related to liquidity. This amount equals the equity in trading assets.

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Yield: The rate of return earned on an investment, paid in dividends or interest and expressed as a percentage.

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