Definition of loss
loss
an expired cost that was unintentionally incurred; a cost
that does not relate to the generation of revenues
Loss
An excess of expenses over revenues, either for a single business transaction or in
reference to the sum of all transactions for an accounting period.
Related Terms:
The probability of not achieving a portfolio expected return.
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
losses that a firm can take advantage of to reduce taxes.
Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of
current market price to original cost.
Lost wealth of the shareholders due to divergent behavior of the managers.
An order to sell a stock when the price falls to a specified level.
A financial statement measuring the profit or loss of a business – income less expenses – for an accounting period.
No pun intended, but these types of gains
and losses are extraordinarily important to understand. These are nonrecurring,
onetime, unusual, nonoperating gains or losses that are
recorded by a business during the period. The amount of each of these
gains or losses, net of the income tax effect, is reported separately in the
income statement. Net income is reported before and after these gains
and losses. These gains and losses should not be recorded very often, but
in fact many businesses record them every other year or so, causing
much consternation to investors. In addition to evaluating the regular
stream of sales and expenses that produce operating profit, investors
also have to factor into their profit performance analysis the perturbations
of these irregular gains and losses reported by a business.
This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
statement.
any reduction in units that occurs uniformly
throughout a production process
a reduction in units that occurs at a specific
point in a production process
an expected decline in units during the production process
The offsetting of a current year loss against the reported taxable
income of previous years.
The offsetting of a current year loss against the reported taxable
income for future years.
Gains and losses that are judged to be both unusual and nonrecurring.
Impairment Loss
A special, nonrecurring charge taken to write down an asset with an overstated
book value. Generally an asset is considered to be value-impaired when its book value
exceeds the future net cash flows expected to be received from its use. An impairment write-down
reduces an overstated book value to fair value.
Realized Gains and Losses
Increases or decreases in the fair value of an asset or a liability that
are realized through sale or settlement.
Credit Loss
A loan receivable that has proven uncollectible and is written off.
capital loss
The negative difference between the adjusted cost base of an investment held as a capital property and the proceeds of disposition you receive when you sell it. When you sell such an investment for less than you paid, you incur a capital loss.
Job Loss Insurance (Credit Insurance)
Coverage that can pay down your debt should you become involuntarily unemployed. The payment is made to your creditors to reduce your debt owing.
Bane
In the words of Warren Buffet, Bill Bane Sr., is, "a great American and one of the last real traders
around. I like to call him 'Salvo.'" His wife, Carol, is a huge NASCAR fan, and in her own words "delights in
pulling the legs off central bankers." Cooper Bane, son number two, is a thriving artiste who specializes in
making art that is much better than the stuff most folks are doing. Jackson, son number three, is a world
renowned master chef and plans on opening a restaurant. Bill Bane Jr., son number one, plans on giving Mr.
Monroe Trout a run for his money. [Bill Bane, Jr. helped Professor Harvey put the hypertextual glossary
together while an MBA student at Duke University.]
Basis
Regarding a futures contract, the difference between the cash price and the futures price observed in the
market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to
determine capital gains or losses for tax purposes when the stock is sold.
Book profit
The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
Business failure
A business that has terminated with a loss to creditors.
Capital gain
When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.
Cumulative Translation Adjustment (CTA) account
An entry in a translated balance sheet in which gains
and/or losses from translation have been accumulated over a period of years. The CTA account is required
under the FASB No. 52 rule.
Deficit
An excess of liabilities over assets, of losses over profits, or of expenditure over income.
Exposure netting
Offsetting exposures in one currency with exposures in the same or another currency,
where exchange rates are expected to move in such a way that losses or gains on the first exposed position
should be offset by gains or losses on the second currency exposure.
FASB No. 8
U.S. accounting standard that requires U.S. firms to translate their foreign affiliates' accounts by
the temporal method. Gains and losses from currency fluctuations were reported in current income. It was in
effect between 1975 and 1981 and became the most controversial accounting standard in the U.S. It was
replaced by FASB No. 52 in 1981.
Foreign exchange risk
The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.
Give up
The loss in yield that occurs when a block of bonds is swapped for another block of lower-coupon
bonds. Can also be referred to as "after-tax give up" when the implications of the profit or loss on taxes are
considered.
Hedging
A strategy designed to reduce investment risk using call options, put options, short selling, or futures
contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.
Herstatt risk
The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.
Limited liability
Limitation of possible loss to what has already been invested.
Marked-to-market
An arrangement whereby the profits or losses on a futures contract are settled each day.
P&L (P and L)
Profit and loss statement for a trader.
Pay-up
The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.
Perfect hedge
A financial result in which the profit and loss from the underlying asset and the hedge position
are equal.
Rate risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
the cost of funding fixed-rate loans or other fixed-rate assets.
Regulatory accounting procedures
Accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.
Settlement price
A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.
Subject to opinion
An auditor's opinion reflecting acceptance of a company's financial statements subject to
pervasive uncertainty that cannot be adequately measured, such as information relating to the value of
inventories, reserves for losses, or other matters subject to judgment.
Tax-timing option
The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.
Total dollar return
The dollar return on a nondollar investment, which includes the sum of any
dividend/interest income, capital gains or losses, and currency gains or losses on the investment.
See also: total return.
Total return
In performance measurement, the actual rate of return realized over some evaluation period. In
fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest
on interest, and any capital gain/loss) over some i nvestment horizon.
Value-at-Risk model (VAR)
Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.
Wash
Gains equal losses.
INCOME STATEMENT
An accounting statement that summarizes information about a company in the following format:
Net Sales
– Cost of goods sold
--------------------
Gross profit
– Operating expenses
--------------------
Earnings before income tax
– Income tax
--------------------
= Net income or (Net loss)
Formally called a “consolidated earnings statement,” it covers a period of time such as a quarter or a year.
Breakeven point
The point at which total costs equal total revenue, i.e. where there is neither a profit nor a loss.
Capitalize
To make a payment that might otherwise be an expense (in the Profit and loss account) an asset
(in the Balance Sheet).
Financial reports or statements
The Profit and loss account, Balance Sheet and Cash Flow statement of a business.
basic earnings per share (EPS)
This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.
financial leverage
The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.
income statement
Financial statement that summarizes sales revenue
and expenses for a period and reports one or more profit lines for the
period. It’s one of the three primary financial statements of a business.
The bottom-line profit figure is labeled net income or net earnings by
most businesses. Externally reported income statements disclose less
information than do internal management profit reports—but both are
based on the same profit accounting principles and methods. Keep in
mind that profit is not known until accountants complete the recording
of sales revenue and expenses for the period (as well as determining any
extraordinary gains and losses that should be recorded in the period).
Profit measurement depends on the reliability of a business’s accounting
system and the choices of accounting methods by the business. Caution:
A business may engage in certain manipulations of its accounting methods,
and managers may intervene in the normal course of operations for
the purpose of improving the amount of profit recorded in the period,
which is called earnings management, income smoothing, cooking the
books, and other pejorative terms.
internal accounting controls
Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. Internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
and authority.
inventory shrinkage
A term describing the loss of products from inventory
due to shoplifting by customers, employee theft, damaged and
spoiled products that are thrown away, and errors in recording the purchase
and sale of products. A business should make a physical count and
inspection of its inventory to determine this loss.
mark to market
Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.
negative cash flow
The cash flow from the operating activities of a business
can be negative, which means that its cash balance decreased from
its sales and expense activities during the period. When a business is
operating at a loss instead of making a profit, its cash outflows for
expenses very likely may be more than its cash inflow from sales. Even
when a business makes a profit for the period, its cash inflow from sales
could be considerably less than the sales revenue recorded for the
period, thus causing a negative cash flow for the period. Caution: This
term also is used for certain types of investments in which the net cash
flow from all sources and uses is negative. For example, investors in
rental real estate properties often use the term to mean that the cash
inflow from rental income is less than all cash outflows during the
period, including payments on the mortgage loan on the property.
net income (also called the bottom line, earnings, net earnings, and net
operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.
profit
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
return on assets (ROA)
Although there is no single uniform practice for
calculating this ratio, generally it equals operating profit (before interest
and income tax) for a year divided by the total assets that are used to
generate the profit. ROA is the key ratio to test whether a business is
earning enough on its assets to cover its cost of capital. ROA is used for
determining financial leverage gain (or loss).
ABM
see activity-based management
abnormal loss a decline in units in excess of normal expectations
during a production process
break-even chart
a graph that depicts the relationships among revenues, variable costs, fixed costs, and profits (or losses)
expired cost
an expense or a loss
profit-volume graph
a visual representation of the amount
of profit or loss associated with each level of sales
Capital
The investment by a company’s owners in a business, plus the impact of any
accumulated gains or losses.
Cost of capital
The blended cost of a company’s currently outstanding debt instruments
and equity, weighted by the comparative proportions of each one. During a capital
budgeting review, the expected return from a capital purchase must exceed this cost
of capital, or else a company will experience a net loss on the transaction.
Deficit
Anegative balance in the retained earnings account that is caused by cumulative
losses that exceed the amount of equity.
Factoring
The sale of accounts receivable to a third party, with the third party bearing
the risk of loss if the accounts receivable cannot be collected.
Profit center
An entity within a corporation against which both revenues and costs are
recorded. This results in a separate financial statement for each such entity, which
reveals a net profit or loss, as well as a return on any assets used by the entity.
in the red
Making a loss.
Inflation Tax
The loss in purchasing power due to inflation eroding the real value of financial assets such as cash.
Accumulated Other Comprehensive Income
Cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
pension plans.
Adjusted Earnings
Net income adjusted to exclude selected nonrecurring and noncash items of reserve, gain, expense, and loss.
Adjusted EBITDA
Conventional earnings before interest, taxes, depreciation, and amortization (EBITDA) revised to exclude the effects of mainly nonrecurring items of revenue or gain and expense or loss.
Cherry Picking
Selecting specific assets for sale so as to record desired gains or losses.
Deferred Tax Asset
Future tax benefit that results from (1) the origination of a temporary difference
that causes pretax book income to be less than taxable income or (2) a loss, credit, or other
carryforward. Future tax benefits are realized on the reversal of deductible temporary differences
or the offsetting of a loss carryforward against taxable income or a tax-credit carryforward against
the current tax provision.
Discontinued Operations
Net income and the gain or loss on disposal of a business segment whose assets and operations are clearly distinguishable from the other assets and operations of an entity.
Factoring
The discounting, or sale at a discount, of receivables on a nonrecourse, notification
basis. The purchaser of the accounts receivable, the factor, assumes full risk of collection and
credit losses, without recourse to the firms discounting the receivables. Customers are notified to
remit directly to the factor.
Inventory Shrinkage
A shortfall between inventory based on actual physical counts and inventory
based on book records. This shortfall may be due to such factors as theft, breakage, loss, or
poor recordkeeping.
Nonrecurring Items
Revenues or gains and expenses or losses that are not expected to recur
on a regular basis. This term is often used interchangeably with special items.
Other-than-Temporary Decline in Market Value
The standard used to describe a decline in market value that is not expected to recover. The use of the other-than-temporary description as
opposed to describing a loss as permanent stresses the fact that the burden of proof is on the
investor who believes a decline is only temporary. That investor must have the intent and financial
ability to hold the investment until its market value recovers. In the absence of an ability to
demonstrate that a decline is temporary, the conclusion must be that a decline in value is other
than temporary, in which case the decline in value must be recognized in income.
Pro-Forma Earnings
Reported net income with selected nonrecurring items of revenue or gain
and expense or loss deducted from or added back, respectively, to reported net income. Occasionally
selected nonoperating or noncash items are also treated as adjustment items.
Restructuring Charge
A special, nonrecurring charge taken in conjunction with a consolidation
or relocation of operations, or the disposition or abandonment of operations or productive
assets. Such charges may include impairment losses as well as other expenses, such as writedowns
of other assets including accounts receivable and inventory, and accruals of liabilities for
so-called exit costs, including such expenses as lease terminations, closure costs, severance pay,
benefits, and retraining.
Special Charges
Nonrecurring losses or expenses resulting from transactions or events which,
in the view of management, are not representative of normal business activities of the period and
which affect comparability of earnings.
Sustainable Earnings
Reported earnings that have had the after-tax effects of all material
items of nonrecurring revenue or gain and expense or loss removed.
Temporary Difference
A difference between pretax book income and taxable income that
results from the recognition of revenues or gains and expenses or losses in different periods in the
determination of pretax book and taxable income. Temporary differences give rise to either
deferred tax assets or liabilities.
Write-Down
A reduction in the balance-sheet valuation of an asset with an accompanying
expense or loss recorded in earnings.
Scrap factor
An anticipated loss percentage included in the bill of material and
used to order extra materials for a production run, in anticipation of scrap losses.
Shrinkage
Any uncontrolled loss of inventory, such as through evaporation or theft.
Shrinkage factor
The expected loss of some proportion of an item during the
production process, expressed as a percentage.
Assuris
Assuris is a not for profit organization that protects Canadian policyholders in the event that their life insurance company should become insolvent. Their role is to protect policyholders by minimizing loss of benefits and ensuring a quick transfer of their policies to a solvent company where their benefits will continue to be honoured. Assuris is funded by the life insurance industry and endorsed by government. If you are a Canadian citizen or resident, and you purchased a product from a member life insurance company in Canada, you are protected by Assuris.
All life insurance companies authorized to sell in Canada are required, by the federal, provincial and territorial regulators, to become members of Assuris. Members cannot terminate their membership as long as they are licensed to write business in Canada or have any in force business in Canada.
If your life insurance company fails, your policies will be transferred to a solvent company. Assuris guarantees that you will retain at least 85% of the insurance benefits you were promised. Insurance benefits include Death, Health Expense, Monthly Income and Cash Value. Your deposit type products will also be transferred to a solvent company. For these products, Assuris guarantees that you will retain 100% of your Accumulated Value up to $100,000. Deposit type products include accumulation annuities, universal life overflow accounts, premium deposit accounts and dividend deposit accounts. The key to Assuris protection is that it is applied to all benefits of a similar type. If you have more than one policy with the failed company, you will need to add together all similar benefits before applying the Assuris protection. The Assuris website can be found at www.assuris.ca.
Errors and Omissions Insurance
Insurance coverage purchased by the agent/broker which provides protection against loss incurred by a client because of some negligent act, error, oversight, or omission by the agent/broker.
Fiat Money
Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.
Insurable Interest
In England in the 1700's it was popular to bet on the date of death of certain prominent public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not, however, issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary.
Replacement
This subject of replacement of existing policies is covered because sometimes existing life insurance policies are unnecessarily replaced with new coverage resulting in a loss of valuable benefits. If someone suggests replacing your existing coverage, insist on having a comparison disclosure statement completed.
The most important policies to examine in detail are those which were issued in Canada prior to December 2, 1982. If you have a policy of this vintage with a significant cash surrender value, you may want to consider keeping it. It has special tax advantages over policies issued after December 2, 1982.
Basically, the difference is this. The cash surrender value of a pre December, 1982 policy can be converted to an annuity in accordance with the settlement options in the policy and as a result, the tax on any policy gain can be spread over the duration of the annuity. Since only the interest element of the annuity payment will be taxed, there will be less of a tax impact on the annuitant. Policies issued after December 2, 1982 which have their cash surrender value annuitized trigger a disposition and the annuitant must pay tax on the total policy gain immediately. If you still decide to replace existing coverage, don't cancel what you have until the new coverage has been issued.
Segregated Fund
Sometimes called seg funds, segregated funds are the life insurance industry equivalent to a mutual fund with some differences.The term "Mutual Fund" is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds, mortgages, etc.
Since Segregated Funds are actually deferred annuity contracts issued by life insurance companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual Funds don't have this protection.
Unlike mutual funds, segregated funds offer guarantees at maturity (usually 10 years from date of issue) or death on the limit of potential losses - at times up to 100% of original deposits are guaranteed which makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular mutual funds, it is possible to have little or nothing left at death or plan maturity.
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