Investing Glossary

A bond indenture is a contract between a bond issuer and a bondholder. The bond indenture specifies the terms of the bond, such as the bond’s maturity date, coupon amount, and payment frequency. The bond indenture also identifies any assets used as collateral for the bond issuance.  Bonds can be structured with various features, which […]

Cost of goods sold (COGS) is the direct cost of selling an item. For a retail business, cost of goods sold represents the inventory acquisition cost. For a manufacturing business, cost of goods sold is the direct costs of manufacturing the item.  Cost of goods sold is also called cost of sales or cost of

A common size statement presents financial statement items as a percentage of a total.  Common size statements are commonly used for the income statement and the balance sheet. A common size income statement presents each item on the income statement as a percentage of sales. A common size balance sheet presents each item on the

Bad debt expense is an expense account which represents accounts receivable the firm expects to go uncollected.  An accounts receivable is created when a firm sells a good or service and allows the customer to pay for the good or service at a future date. Some customers, however, are likely to default on their obligations. 

Allowance for doubtful accounts is a contra account that adjusts accounts receivable for the expected amount of uncollectible accounts.   The allowance for doubtful accounts contra account is associated with the allowance method, which is one of two ways for accounting for uncollectible receivables. The other method is the direct write-off method, in which bad accounts

An expense is a cost associated with the generation of revenue.   Some expenses, such as depreciation, represent  the reduction in the value of an asset. Such expenses are called noncash expenses because they have no immediate cash impact. Other expenses represent a current payment or the recognition of a future payment.   If the company uses

Revenue is payment or the promise of future payment for the rendering of goods or services.  If the company uses cash-basis accounting, the company will recognize revenue when payment is received from customers. If the company uses accrual-basis accounting, the company will recognize revenue when the revenue is earned, regardless of when payment is received. 

Dividends are distributions of cash, stock, or property made to a corporation’s shareholders.  When a company generates an operating surplus, the company must determine how to best use that surplus. A public company has five alternatives for its cash surplus. The company can (1) invest in future growth, (2) acquire other businesses, (3) pay down

The direct method cash flow statement presents operating cash flows from the “top down”, according to the sources and uses of cash. In contrast, the indirect method starts with net income and adds or subtracts changes in working capital accounts until net income is reconciled with operating cash flow.   Typical cash flow sources presented on

Under the indirect method cash flow statement, operating cash flow is calculated by reconciling net income to cash flow.  The reconciliation involves (a) adding back to net income any noncash expenses, such as depreciation and amortization, and (b) adding or subtracting changes in operating working capital accounts on the balance sheet.   An increase in a