Category: Financial Terms

Administrative Expenses Administrative expenses are overhead costs incurred to support a company’s overall operations but are not directly tied to producing a specific product or delivering a specific service. They enable the business to function and are typically reported below cost of goods sold (COGS) on the income statement. Key takeaways Administrative expenses support the…

Adjusting Journal Entry Definition An adjusting journal entry is a general ledger entry made at the end of an accounting period to record revenue or expenses that have been earned or incurred but not yet recorded. These entries align recorded transactions with the accrual accounting principles of revenue recognition and matching. How they work Adjusting…

Adjusted Present Value (APV): Definition, Formula, and Use Adjusted Present Value (APV) separates a firm’s value into two parts: – the value if the firm were financed entirely with equity (the unlevered value), and – the net present value of financing effects (tax shields, subsidies, costs of financial distress, hedging, etc.). APV is useful when…

Adjusted Gross Income (AGI) What is AGI? Adjusted gross income (AGI) is your total annual income after specific adjustments, and it’s the starting point the IRS uses to determine tax liability. AGI affects whether you qualify for many deductions, credits, and certain government programs. Why AGI matters Determines eligibility for tax credits and deductions (and…

Adjusted Funds From Operations (AFFO) Adjusted Funds From Operations (AFFO) is a cash-flow metric used to assess the recurring, maintainable earnings of a real estate investment trust (REIT). Building on Funds From Operations (FFO), AFFO adjusts for capital expenditures and other items to better reflect the REIT’s ability to generate cash and pay dividends. Why…

Adjusted EBITDA Adjusted EBITDA is a non‑GAAP measure that starts with EBITDA (earnings before interest, taxes, depreciation, and amortization) and then adds or removes items to produce a “normalized” view of operating earnings. It aims to remove one‑time, unusual, non‑cash, or owner‑specific items so analysts can better compare performance across companies or periods. Formula Adjusted…

Adjusted Closing Price What it is The adjusted closing price is a stock’s reported closing price modified to reflect corporate actions—such as stock splits, dividends, and rights offerings—so historical prices show the true economic return to shareholders. Adjusted closes are used to compare performance over time and across assets by incorporating distributions and share-count changes…

Adjustable-Rate Mortgage (ARM) Key takeaways * An adjustable-rate mortgage (ARM) is a home loan with an interest rate that is fixed for an initial period and then adjusts periodically based on a benchmark index plus a fixed margin. * ARMs typically start with lower rates than comparable fixed-rate mortgages but expose borrowers to future rate…

Adjustable Life Insurance Adjustable life insurance (commonly used interchangeably with universal life insurance) is a form of permanent life insurance that combines lifelong death benefit protection with a flexible premium structure and an interest‑bearing cash‑value account. It’s designed for people who want permanent coverage but need the ability to change policy features as their financial…

Adjudication: Definition, Process, Types, and Practical Points What is adjudication? Adjudication is the formal process by which an authorized decision‑maker—typically a judge—resolves a dispute between parties and issues a binding judgment or ruling. It can apply to court cases, administrative decisions (for example, insurance or unemployment claims), and other formal processes that result in the…

Adhesion Contract What it is An adhesion contract (also called a standard, standardized, or boilerplate contract) is a “take it or leave it” agreement drafted by the stronger party in a transaction. The weaker party—typically a consumer—has little or no ability to negotiate terms and must accept the contract to obtain the product or service….

Addition Rule for Probabilities The addition rule for probabilities describes how to calculate the probability that at least one of two events occurs. There are two forms: one for mutually exclusive events (no overlap) and a general form that accounts for overlap. Formulas For mutually exclusive events Y and Z: P(Y or Z) = P(Y)…

Additional Paid-In Capital Additional paid-in capital (APIC), also called contributed capital in excess of par, is the amount investors pay for newly issued shares above the stock’s par value. It appears in the shareholders’ equity section of the balance sheet and represents capital the company receives from issuing stock at a premium. How APIC works…

Additional Child Tax Credit (ACTC) Key takeaways The ACTC is the refundable portion of the Child Tax Credit (CTC). For tax years 2024 and 2025, up to $1,700 per qualifying child can be claimed as ACTC. The CTC maximum is $2,000 per child; the refundable portion is limited and subject to income phaseouts. Phaseouts begin…

Add-On Interest What it is Add-on interest is a loan pricing method that calculates total interest on the full principal for the entire loan term up front, adds that interest to the principal, and divides the combined amount into equal payments. Because interest is computed on the original principal for the full term (rather than…

Ad Valorem Tax: Definition, How It Works, and Where It Applies What is an ad valorem tax? An ad valorem tax is a tax based on the assessed value of property. The Latin phrase ad valorem means “according to value.” These taxes are levied periodically (usually annually) and the amount owed varies with the property’s…

Actuarial Science Actuarial science applies mathematics, probability, statistics, finance, economics, and computer science to assess and manage financial risk. Actuaries use quantitative techniques to estimate the likelihood of future events and their financial impact, helping insurers, pension plans, and other institutions set prices, reserve funds, and design risk-transfer strategies. Key takeaways Actuarial science quantifies uncertain…

Actuarial Life Table Key takeaways An actuarial life table (also called a mortality table or life table) shows the probability that a person of a given age will die before their next birthday and related survival statistics. Insurers use life tables to estimate remaining life expectancy, set premiums, and project future insured events. Two main…

Actuarial Gain or Loss Definition An actuarial gain or loss is the change in a pension plan’s projected benefit obligation (PBO) caused by updates to the actuarial assumptions used to value the plan. These assumptions include economic factors (discount rate, expected return on plan assets, salary growth) and demographic factors (life expectancy, retirement age, employee…

Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) Tests Overview The ADP and ACP tests are nondiscrimination checks that employers must run on 401(k) plans to ensure the plans do not disproportionately favor highly compensated employees (HCEs) over non‑highly compensated employees (NHCEs). Passing these tests is required to maintain a plan’s qualified tax status…

Activity Ratios Key takeaways Activity ratios (also called efficiency ratios) measure how effectively a company uses its assets to generate revenue. They are most useful for comparing companies within the same industry and for tracking efficiency over time. Common activity ratios include accounts receivable turnover, inventory turnover, asset/total‑assets turnover, and return on equity (ROE). What…

Activity Cost Driver Definition An activity cost driver is a measurable event or factor that causes a change in the variable cost of a business activity. Cost drivers explain why costs increase or decrease and are used to allocate overhead and understand product or service costs more accurately. Key takeaways Cost drivers trigger higher or…

Activity-Based Management (ABM) What is ABM? Activity-Based Management (ABM) is a management approach that analyzes the profitability and cost of every part of a business so strengths can be enhanced and weaknesses can be improved or eliminated. First developed in the 1980s, ABM allocates costs associated with employees, equipment, facilities, distribution, overhead, and other resources…

Activity-Based Costing (ABC) What is ABC? Activity-Based Costing (ABC) assigns overhead and indirect costs to products and services by tracing those costs to the specific activities that consume resources. Unlike traditional volume-based allocation (e.g., machine hours or direct labor), ABC uses multiple activity-based cost pools and cost drivers to produce more accurate product and service…

Activity-Based Budgeting (ABB) What is ABB? Activity-Based Budgeting (ABB) is a budgeting approach that identifies and analyzes the activities that drive costs in an organization. Instead of adjusting prior-period budgets for inflation or growth, ABB builds budgets from the ground up by estimating the resources required for each activity and the expected activity levels. The…

Activist Investors: Definition, Tactics, and Impact Key takeaways * Activist investors buy significant minority stakes in public companies to influence strategy, governance, operations, or capital allocation. * Common tactics include public campaigns, private engagement, proxy contests, board-seat demands, and threats of litigation or divestiture. * Regulatory rules (notably Schedule 13D/G disclosures) shape how and when…

Active Management Key takeaways * Active management involves regular buy, hold, and sell decisions by a manager or team aiming to outperform a benchmark and meet other investor goals (risk control, income, ESG, tax management). * Passive management (indexing) seeks to replicate a benchmark’s returns; active management seeks to exceed them. * Active strategies can…

Acquisition Premium: Difference Between Real Value and Price Paid An acquisition premium is the amount a buyer pays over a target company’s estimated fair value when completing a merger or acquisition. It represents the extra cost paid to persuade shareholders to sell, outbid rivals, or capture expected benefits from combining the businesses. Why acquirers pay…

Acquisition Cost An acquisition cost (or cost of acquisition) is the total amount a company recognizes for obtaining an asset, business, or customer. For physical assets, it includes the purchase price plus any additional expenditures necessary to prepare the asset for use (for example, shipping, installation, legal fees), net of discounts or incentives. For business…

Acquisition Accounting: Definition, How It Works, and Key Requirements What is acquisition accounting? Acquisition accounting (also called business combination accounting) is the set of accounting rules that govern how a purchaser reports the assets, liabilities, non-controlling interest (NCI) and goodwill of an acquired company on its consolidated statement of financial position. The acquirer must allocate…

Acquisition: Meaning, Types, and Examples Key takeaways An acquisition occurs when one company buys most or all of another company’s shares to gain control—typically more than 50%. Acquisitions can be friendly (mutual agreement) or hostile (resisted by the target). Common motives include entering new markets, acquiring technology, increasing market share, achieving economies of scale, and…

Acid-Test Ratio (Quick Ratio) What it is The acid-test ratio, also known as the quick ratio, measures a company’s ability to meet short-term obligations using its most liquid assets. A ratio of 1.0 or higher generally indicates the company can cover current liabilities with liquid assets; a ratio below 1.0 suggests potential difficulty. Key takeaways…

Accumulation/Distribution Indicator (A/D) What it is The Accumulation/Distribution (A/D) indicator is a cumulative technical indicator that combines price and volume to assess whether an asset is being accumulated (bought) or distributed (sold). It gauges the flow of money into or out of a security by looking at where the price closed within the period’s range…

Accumulation Phase The accumulation phase is the period in which a person builds savings and investments to fund retirement or future income needs. It commonly refers to the working years when contributions and investment growth increase a portfolio’s value. In the context of annuities, it also denotes the stage when the contract’s cash value grows…

Accumulated Other Comprehensive Income Accumulated other comprehensive income (OCI) is a component of shareholders’ equity that aggregates certain unrealized gains and losses. These items are excluded from net income because they haven’t been realized through a sale or settlement; instead they are reported directly in equity (typically below retained earnings) to signal potential future impacts…