NFSI key terms

A method of recording revenue when earned and expenses when incurred, regardless of when cash changes hands. It gives a more accurate picture of a company's economic activity than cash timing alone.

The accounting rule that expenses should be recognized in the same period as the revenues they helped generate. It prevents shifting costs between reporting periods and smooths comparability of results.

Cash received from a customer before the good or service is delivered, recorded as a liability. It converts into revenue only as the performance obligation is satisfied over time.

An expense that has been incurred but not yet paid or recorded in the accounts, such as unpaid wages. It is recorded as a liability and an expense at period end.

An intangible asset created when a buyer pays more than the fair value of a target's identifiable net assets. It is not amortized but tested periodically for impairment.

A write-down recorded when an asset's carrying amount exceeds its recoverable or fair value. It reduces reported earnings and the asset's balance on the statement of financial position.

The value at which an asset or liability is reported on the balance sheet, net of accumulated depreciation, amortization, or impairment. It is the book value used in many ratio calculations.

The systematic allocation of a long-lived tangible asset's cost over its useful life. It is a non-cash expense that reduces reported profit but not operating cash flow.

A depreciation approach that spreads an asset's depreciable cost evenly across each year of its useful life. It produces a constant annual expense and is simple to apply.

A financial statement that reports cash inflows and outflows classified as operating, investing, and financing activities. It reconciles accrual profit to actual cash movement during the period.

Cash generated by operations after subtracting capital expenditures needed to maintain and grow the asset base. It represents funds available for debt repayment, dividends, and reinvestment.

A technique that expresses each line of a financial statement as a percentage of a common base, such as total revenue or total assets. It allows comparison across firms of different sizes and over time.

The practice of computing relationships between financial statement items to assess liquidity, profitability, leverage, and efficiency. Ratios are most useful when compared with peers or historical trends.

Current assets divided by current liabilities, measuring a firm's ability to meet short-term obligations. A value above one suggests sufficient near-term resources, though too high may signal idle assets.

Cash, marketable securities, and receivables divided by current liabilities, excluding inventory from the numerator. It is a stricter liquidity test than the current ratio.

A method where each item on a single financial statement is shown as a percentage of a base figure within that same statement. It highlights cost structure and margin composition.

The blended required return on a firm's debt and equity, weighted by their market-value proportions. It serves as the discount rate for projects of average risk in valuation.

The return investors demand for holding a company's shares, often estimated with the capital asset pricing model. It reflects the risk-free rate plus a premium for systematic risk.

A measure of how sensitive a stock's returns are to movements in the overall market. A beta above one implies greater volatility than the market, and below one implies less.

A valuation method that projects future cash flows and discounts them to present value using an appropriate required return. The result estimates the intrinsic worth of an asset or business.

The total value of a business including debt and excluding cash, often expressed as market capitalization plus net debt. It is the appropriate measure when comparing firms with different capital structures.

A stock's market price divided by its earnings per share, indicating how much investors pay per unit of profit. It is a common relative valuation multiple but is distorted by accounting choices.

A valuation approach that values a share as the present value of its expected future dividends. It is most suitable for mature firms paying stable, predictable dividends.

The theory that security prices quickly incorporate available information, making consistent excess returns difficult. Its weak, semi-strong, and strong forms differ in the information assumed to be reflected.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Longer duration means greater price volatility for a given shift in yields.

A measure of how a bond's duration changes as yields change, capturing the curvature of the price-yield relationship. Positive convexity means price gains exceed losses for equal yield moves.

The annualized return an investor earns by holding a bond to maturity and reinvesting all coupons at that same rate. It equates the bond's price with the present value of its cash flows.

The difference in yield between a corporate bond and a comparable risk-free government bond. It compensates investors for default risk, liquidity, and other issuer-specific factors.

A contract giving the buyer the right, but not the obligation, to purchase an underlying asset at a set price before or on expiration. The buyer pays a premium for this right.

A contract giving the buyer the right, but not the obligation, to sell an underlying asset at a specified price by expiration. It typically gains value when the underlying price falls.

The price paid by the buyer to acquire an option contract. It consists of intrinsic value plus time value and reflects volatility, time to expiry, and moneyness.

Spreading investments across assets whose returns are not perfectly correlated to reduce portfolio risk without proportionally lowering expected return. It mainly removes unsystematic risk.

The portion of total risk driven by broad market or economic factors that cannot be eliminated through diversification. It is the risk that commands a return premium in equilibrium.

The process of dividing a portfolio among asset classes such as equities, bonds, and cash. It is a primary driver of long-run portfolio risk and return.

Periodically adjusting portfolio holdings back to target weights after market movements shift them. It controls risk drift and enforces a disciplined buy-low, sell-high behavior.

A model stating that expected return equals the risk-free rate plus beta times the market risk premium. It links required return to systematic risk alone.

A legal obligation to act solely in the best interest of a client or beneficiary, placing their interests above one's own. It encompasses duties of loyalty, care, and full disclosure.

A situation where personal, financial, or firm interests could improperly influence professional judgment or advice. Such conflicts must be disclosed, managed, or avoided to protect client trust.

The state of being free from influences or relationships that could compromise objectivity in professional judgments. It supports unbiased analysis, recommendations, and reports to clients or employers.

An investment approach that seeks to outperform a benchmark through security selection, timing, or allocation decisions. It relies on the belief that markets are not fully efficient.