CIFHA key terms

A method that records revenue when earned and expenses when incurred, regardless of when cash changes hands. It gives a fuller picture of performance than cash receipts and payments alone.

A method that records transactions only when cash is received or paid out. It is simple but can mask obligations and earnings timing that accrual records would reveal.

The rule that expenses should be recognized in the same period as the revenues they helped generate. It underpins accrual accounting and improves comparability of profit across periods.

Obligations for goods or services already received but not yet invoiced or paid, such as wages earned or interest due. They appear on the balance sheet as current liabilities.

Money received from customers before the related goods or services are delivered. It is recorded as a liability until the obligation is fulfilled and revenue is recognized.

The cumulative profit a company has kept rather than distributed to owners. It links the income statement to the balance sheet and reflects the firm's reinvested capital.

An account that offsets a related account to show a net value, such as accumulated depreciation against gross fixed assets. It clarifies carrying amounts rather than inflating totals.

The systematic allocation of a tangible asset's cost over its estimated useful life. It spreads expense recognition and reduces reported asset value on the balance sheet.

The gradual write-off of an intangible asset's cost over its useful life, or the scheduled reduction of a loan principal through periodic payments. Context determines which meaning applies.

The profit remaining after all revenues, expenses, taxes, and interest are accounted for in a period. It is the bottom line that flows into retained earnings.

A measure of operating profit before financing costs and tax effects are deducted. Lenders use it to gauge how much earnings are available to cover obligations.

Earnings before interest, taxes, depreciation, and amortization. It approximates operating cash generation and is widely used in credit and valuation analysis despite ignoring capital spending needs.

Resources expected to be converted to cash or used up within one operating cycle, such as inventory, receivables, and cash. They form the basis for short-term liquidity measures.

Obligations due within one year or the operating cycle, including payables, short-term debt, and accrued expenses. They are the denominator of key liquidity ratios.

Current assets minus current liabilities. Positive working capital suggests the business can fund day-to-day operations; persistent shortfalls signal liquidity strain.

Current assets divided by current liabilities. It measures whether short-term resources are sufficient to cover near-term obligations, with higher values generally indicating stronger liquidity.

Cash, marketable securities, and receivables divided by current liabilities. Also called the acid-test ratio, it excludes inventory to test the most immediate ability to pay.

The ability of a business or asset to meet short-term obligations or be converted to cash quickly without significant loss of value. It is distinct from solvency, which concerns long-term viability.

A firm's capacity to meet its long-term obligations and survive over time. It depends on capital structure and earnings stability rather than short-term cash timing.

A measure comparing debt to equity or to total assets, showing how much of the business is financed by borrowing. High leverage magnifies both returns and financial risk.

Total liabilities divided by shareholders' equity. It expresses the relative claims of creditors versus owners and is a common gauge of financial risk.

Earnings before interest and taxes divided by interest expense. It shows how many times operating profit can absorb financing costs before earnings fall short.

Cash available for debt service divided by required principal and interest payments. Lenders use it to judge whether a borrower can comfortably meet scheduled repayments.

The total of principal repayments and interest payments due on debt over a period. It drives cash planning and is the denominator of coverage measures.

The owners' residual interest in a company's assets after liabilities are subtracted. It absorbs losses first and provides a cushion for creditors.

A technique comparing line items across successive periods to reveal growth or decline trends. It highlights changes in absolute or percentage terms over time.

A technique expressing each line item as a percentage of a base figure within the same period, such as revenue for the income statement. It aids comparison across firms of different sizes.

Financial statements where every item is shown as a percentage of a common base, enabling comparison across periods or companies regardless of scale.

Examining financial data over multiple periods to identify persistent patterns, direction, and momentum. It helps distinguish temporary fluctuations from structural changes.

Calculating and interpreting relationships among financial statement items to assess profitability, liquidity, efficiency, and leverage. Ratios are most useful when compared to benchmarks and history.

Comparing a company's ratios and performance against industry peers, historical results, or internal targets. It gives context that raw numbers alone cannot provide.

Cost of goods sold divided by average inventory, showing how many times stock is sold and replaced in a period. Low turnover may signal obsolescence or weak demand.

Average receivables divided by revenue, multiplied by the number of days in the period. It estimates how long it takes to collect cash from credit sales.

The time from acquiring inventory to collecting cash from its sale. A longer cycle ties up more working capital and raises financing needs.

Cash generated or used by core business operations during a period, before investing and financing activities. It is a key indicator of whether earnings are backed by real cash.

Operating cash flow minus capital expenditures. It represents cash available for debt repayment, dividends, or reinvestment after maintaining the asset base.

A financial statement that reports cash movements across operating, investing, and financing activities. It reconciles profit to changes in cash and reveals funding sources and uses.

Spending on long-term assets such as property, plant, and equipment to maintain or expand operations. It is an investing outflow that reduces free cash flow.

The degree to which reported profit reflects sustainable, cash-backed operating performance rather than accounting adjustments or one-off items. Low quality raises credit and valuation concerns.