Financial Terms
Residual income (RI)

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Definition of Residual income (RI)

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Residual income (RI)

The profit remaining after deducting from profit a notional cost of capital on the investment in a business or division of a business.

Related Terms:

Absolute priority

Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full
before junior creditors receive any payment.

Absolute Right of Return

Goods may be returned to the seller by the purchaser without restrictions.

Accounting Irregularities

Intentional misstatements or omissions of amounts or disclosures in
financial statements done to deceive financial statement users. The term is used interchangeably with fraudulent financial reporting.

Accounting period

The period of time for which financial statements are produced – see also financial year.

Accrued Income

income that has been earned but not yet received. For instance, if you have a non-registered Guaranteed Investment Certificate (GIC), Mutual Fund or Segregated Equity Fund, growth accrues annually or semi-annually and is taxable annually even though the gain is only paid at maturity of your investment.

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.

Act of state doctrine

This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.

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activity driver

a measure of the demands on activities and,
thus, the resources consumed by products and services;
often indicates an activity’s output

Adjusted Income from Continuing

Operations Reported income from continuing operations
adjusted to remove nonrecurring items.

Adjusting entries

The entries needed at the end of an accounting period to properly state certain account balances.

Administrative pricing rules

IRS rules used to allocate income on export sales to a foreign sales corporation.

Advance material request

Very early orders for materials before the completion
of a product design, given the long lead times required to supply some items.


a logical step-by-step problem-solving technique
(generally requiring the use of a computer) that continuously
searches for an improved solution from the one previously
computed until the best answer is determined

All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

American Depositary Receipts (ADRs)

Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's
are "sponsored," the corporation provides financial information and other assistance to the bank and may
subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are
a similar form of certification.

American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option

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American option

An option that can be exercised any time until its
expiration date. Contrast with European option.

American shares

Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

Annuity Period

The time between each payment under an annuity.

Appraisal rights

A right of shareholders in a merger to demand the payment of a fair price for their shares, as
determined independently.


a budgeted maximum allowable expenditure

Appropriation request

Formal request for funds for capital investment project.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.

Arithmetic average (mean) rate of return

Arithmetic mean return.

Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.

Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to

Ask price

A dealer's price to sell a security; also called the offer price.

Asset-Backed Securities

Bond or note secured by assets of company.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset pricing model

A model, such as the Capital Asset Pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Asset-specific Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as company-specific risk or
unsystematic risk.


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

Asymmetric information

Information that is known to some people but not to other people.

Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.

attribute-based costing (ABC II)

an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product

Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity
attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a
particular industry sector.

Attribution Rules

Legislation under which interest, dividends, or capital gains earned on assets you transfer to your spouse will be treated as your own for tax purposes. Interest or dividends relating to property transferred to children under 18 also will be attributed back to you. The exception to this rule is that capital gains relating to property transferred to children under 18 will not be attributed back to you.


the right (usually by virtue of position or rank) to use resources to accomplish a task or achieve an objective

authorized share capital

Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.

Authorized shares

Number of shares authorized for issuance by a firm's corporate charter.

Authorized shares

The number of shares of stock that the company is legally authorized to sell.

Automated Clearing House (ACH)

A collection of 32 regional electronic interbank networks used to
process transactions electronically with a guaranteed one-day bank collection float.

Automated Clearing House (ACH)

A banking clearinghouse that processes direct
deposit transfers.

Automated storage/retrieval system

A racking system using automated systems
to load and unload the racks.

Available-for-Sale Security

A debt or equity security not classified as a held-to-maturity security or a trading security. Can be classified as a current or noncurrent investment depending on the intended holding period.

Average Amortization Period

The average useful life of a company's collective amortizable asset base.

Average Collection Period

Average number of days necessary to receive cash for the sale of
a company's products. It is calculated by dividing the value of the
accounts receivable by the average daily sales for the period.

Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average maturity

The average time to maturity of securities held by a mutual fund. Changes in interest rates
have greater impact on funds with longer average life.

Balloon maturity

Any large principal payment due at maturity for a bond or loan with or without a a sinking
fund requirement.

Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.

Basis price

Price expressed in terms of yield to maturity or annual rate of return.

Basis risk

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
price risk.

Beta risk

risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.

Biased expectations theories

Related: pure expectations theory.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Bill of materials

A listing of all the materials and quantities that go to make up a completed product.

bill of materials

a document that contains information about
the product materials components and their specifications
(including quality and quantities needed)

Bill of materials

An itemization of the parts and subassemblies required to create a
product, frequently including assumed scrap rates that will arise as part of the production

Bill of materials (BOM)

A listing of all parts and subassemblies required to produce one
unit of a finished product, including the required number of units of each part
and subassembly.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.

Book-entry securities

The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the
Fed in the names of member banks, which in turn keep records of the securities they own as well as those they
are holding for customers. In the case of other securities where a book-entry has developed, engraved
securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.

Book Income

Pretax income reported on the income statement.

Breeder bill of materials

A bill of material that accounts for the generation and
cost implications of byproducts as a result of manufacturing the parent item.

Bridge financing

Interim financing of one sort or another used to solidify a position until more permanent
financing is arranged.

Bridge Loan

A short term loan to cover the immediate cash requirements until permanent financing is received.

British clearers

The large clearing banks that dominate deposit taking and short-term lending in the domestic
sterling market.

budget variance

the difference between total actual overhead
and budgeted overhead based on standard hours allowed
for the production achieved during the period; computed
as part of two-variance overhead analysis; also
referred to as the controllable variance

Bullish, bearish

Words used to describe investor attitudes. Bullish refers to an optimistic outlook while
bearish means a pessimistic outlook.

business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market

Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.

Cafeteria Plan

A flexible benefits plan authorized under the Internal Revenue
Code allowing employees to pay for a selection of benefits with pay deductions,
some of which may be pretax.

cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits

Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

Call price

The price for which a bond can be repaid before maturity under a call provision.

Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

Carring costs

Costs that increase with increases in the level of investment in current assets.

Cash Flow–to–Income Ratio (CFI)

Adjusted cash flow provided by continuing operations
divided by adjusted income from continuing operations.

Ceteris Paribus

Holding other things constant.

Change in Accounting Principle

A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
to expensing them. A change in accounting principle is accounted for in most instances
as a cumulative-effect–type adjustment.

Characteristic line

The market model applied to a single security. The slope of the line is a security's beta.

Child Insurance Rider (CIR)

Insurance or insurability provided on current or future children of insured.

Clean price

Bond price excluding accrued interest.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for Payment Clearing Services (APACS).

Clearing house / Clearinghouse

An adjunct to a futures exchange through which transactions executed its floor are settled by a
process of matching purchases and sales. A clearing organization is also charged with the proper conduct of
delivery procedures and the adequate financing of the entire operation.

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

Clearing member

A member firm of a clearing house. Each clearing member must also be a member of the
exchange. Not all members of the exchange, however, are members of the clearing organization. All trades of
a non-clearing member must be registered with, and eventually settled through, a clearing member.







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