Definition of normal loss
an expected decline in units during the production process
see activity-based management
abnormal loss a decline in units in excess of normal expectations
during a production process
a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.
Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
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.
Sum of the differences between the expected return on a stock and the
actual return that comes from the release of news to the market.
A distribution where the logarithm of the variable follows a normal distribution.
Lognormal distributions are used to describe returns calculated over periods of a year or more.
losses that a firm can take advantage of to reduce taxes.
The manner in which retirement benefits are paid out.
Holds that the futures price will be bid down to a level below the expected
Related: standardized value
A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.
A customized benchmark that includes all the securities from which a manager normally
chooses, weighted as the manager would weight them in a portfolio.
A random variable that has a normal probability distribution.
The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.
Paper gain (loss)
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.
Standardized normal distribution
A normal distribution with a mean of 0 and a standard deviation of 1.
An order to sell a stock when the price falls to a specified level.
Profit and Loss account
A financial statement measuring the profit or loss of a business – income less expenses – for an accounting period.
extraordinary gains and losses
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.
profit and loss statement (P&L statement)
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
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 expired cost that was unintentionally incurred; a cost
that does not relate to the generation of revenues
net cost of normal spoilage
the cost of spoiled work less the estimated disposal value of that work
the long-run (5–10 years) average production
or service volume of a firm; it takes into consideration
cyclical and seasonal fluctuations
normal cost system
a valuation method that uses actual
costs of direct material and direct labor in conjunction with
a predetermined overhead rate or rates in determining the
cost of Work in Process Inventory
spoilage that has been planned or foreseen; is a product cost
Normal (bell-shaped) distribution
In statistics, a theoretical frequency
distribution for a set of variable data, usually represented by a bell-shaped
curve symmetrical about the mean.
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.
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.
Spoilage arising from the production process that exceeds the normal
or expected rate of spoilage. Since it is not a recurring or expected cost of ongoing
production, it is expensed to the current period.
The amount of spoilage that naturally arises as part of a production
process, no matter how efficient that process may be.
Extraordinary Gain or Loss
Gains and losses that are judged to be both unusual and nonrecurring.
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.
A loan receivable that has proven uncollectible and is written off.
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.
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.
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.
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