Financial Terms
sole proprietor

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Definition of sole proprietor

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sole proprietor

sole owner of a business which has no partners and no shareholders. The proprietor is personally liable for all the firm’s obligations.

Related Terms:

Sole proprietorship

A business owned by a single individual. The sole proprietorship pays no corporate
income tax but has unlimited liability for business debts and obligations.

Sole Proprietorship

An unincorporated business owned by one person which may or may not have employees.

organizational form

an entity’s legal nature (for example,
sole proprietorship, partnership, corporation)


The reduction in utility of an inventory item or fixed asset. If it is an
inventory item, then a reserve is created to reduce the value of the inventory by the
estimated amount of obsolescence. If it is a fixed asset, the depreciation method and
timing will be set to approximate the rate and amount of obsolescence.

Obsolete inventory

Parts not used in any current end product.


A single person who is the owner of an unincorporated business.

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.

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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.

acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.

Adjusted Income from Continuing

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

Affirmative covenant

A bond covenant that specifies certain actions the firm must take.

After-tax profit margin

The ratio of net income to net sales.

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

All-in cost

Total costs, explicit and implicit.

All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.

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All-or-none underwriting

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


assign based on the use of a cost driver, a cost predictor,
or an arbitrary method


the systematic assignment of an amount to a recipient
set of categories annuity a series of equal cash flows (either positive or negative) per period


The process of storing costs in one account and shifting them to other
accounts, based on some relevant measure of activity.

Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and

Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.

Allowance for doubtful accounts

A contra account related to accounts receivable that represents the amounts that the company expects will not be collected.

Allowance for Doubtful Accounts

An estimate of the uncollectible portion of accounts receivable
that is subtracted from the gross amount of accounts receivable to arrive at the estimated collectible

Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.

approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

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Asset/liability management

Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution:
1) to earn an adequate return on funds invested, and
2) to maintain a comfortable surplus of assets beyond liabilities.

Asymmetric taxes

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


An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

Average tax rate

taxes as a fraction of income; total taxes divided by total taxable income.

average tax rate

Total taxes owed divided by total income.

Bad debts

The amount of accounts receivable that is not expected to be collected.

bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.

Balloon maturity

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

Bargain-purchase-price option

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

Basic business strategies

Key strategies a firm intends to pursue in carrying out its business plan.

Before-tax profit margin

The ratio of net income before taxes to net sales.

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 Income

Pretax income reported on the income statement.

Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.

Business cycle

Repetitive cycles of economic expansion and recession.

Business Cycle

Fluctuations of GDP around its long-run trend, consisting of recession, trough, expansion, and peak.

Business Expansion Investment

The use of capital to create more money through the addition of fixed assets or through income producing vehicles.

Business failure

A business that has terminated with a loss to creditors.

business intelligence (BI) system

a formal process for gathering and analyzing information and producing intelligence to meet decision making needs; requires information about
internal processes as well as knowledge, technologies, and competitors

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.

business-value-added activity

an activity that is necessary for the operation of the business but for which a customer would not want to pay


An option that gives the right to buy the underlying futures contract.


a. An option to buy a certain quantity of a stock or commodity for a
specified price within a specified time. See Put.
b. A demand to submit bonds to the issuer for redemption before the maturity date.
c. A demand for payment of a debt.
d. A demand for payment due on stock bought on margin.

Call an option

To exercise a call option.

Call date

A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond
for a specified call price.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date

call option

Right to buy an asset at a specified exercise price on or before the exercise date.

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 protection

A feature of some callable bonds that establishes an initial period when the bonds may not be

Call provision

An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.

Call risk

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

Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.


A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to
call the security.

Callable bond

A bond that allows the issuer to buy back the bond at a
predetermined price at specified future dates. The bond contains an embedded
call option; i.e., the holder has sold a call option to the issuer. See Puttable

callable bond

Bond that may be repurchased by the issuer before maturity at specified call price.

Capital allocation

decision allocation of invested funds between risk-free assets versus the risky portfolio.

Capital Consumption Allowance

See depreciation.

Capital Cost Allowance (CCA)

The annual depreciation expense allowed by the Canadian income tax Act.

Cash flow after interest and taxes

Net income plus depreciation.

Cash Flow–to–Income Ratio (CFI)

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

Chinese wall

Communication barrier between financiers (investment bankers) and traders. This barrier is
erected to prevent the sharing of inside information that bankers are likely to have.

Closing purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in
a stock, or in a given series of options.

Commercial Business Loan (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes.

common-size income statement

income statement that presents items as a percentage of revenues.


Raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.


he written statement that follows any "trade" in the securities markets. Confirmation is issued
immediately after a trade is executed. It spells out settlement date, terms, commission, etc.

Contingent Liability

An obligation that is dependent on the occurrence or nonoccurrence of
one or more future events to confirm the existence of an obligation, the amount owed, the payee,
or the date payable.

Contingent Owner

This is the person designated to become the new owner of a life insurance policy if the original owner dies before the life insured.

Contingent pension liability

Under ERISA, the firm is liable to the plan participants for up to 39% of the net
worth of the firm.

Corporate acquisition

The acquisition of one firm by anther firm.

Corporate bonds

Debt obligations issued by corporations.

Corporate charter

A legal document creating a corporation.

Corporate finance

one of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.

Corporate financial management

The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.

Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer

Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.

Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.

cost allocation

the assignment, using some reasonable basis,
of any indirect cost to one or more cost objects

Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

Current Income Tax Expense

That portion of the total income tax provision that is based on
taxable income.

Current liability

This is typically the accounts payable, short-term notes payable, and
accrued expense accounts on the balance sheet, or any other liabilities that are
expected to be liquidated within a short time interval.

Current Tax Payment Act of 1943

A federal Act requiring employers to withhold income taxes from employee pay.

Deferred call

A provision that prohibits the company from calling the bond before a certain date. During this
period the bond is said to be call protected.

Deferred Income Tax Expense

That portion of the total income tax provision that is the result
of current-period originations and reversals of temporary differences.

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.

Deferred Tax Liability

Future tax obligation that results from the origination of a temporary
difference that causes pretax book income to exceed taxable income.

Deferred taxes

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.

Depreciation Allowances

tax deductions that businesses can claim when they spend money on investment goods.

Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

depreciation tax shield

Reduction in taxes attributable to the depreciation allowance.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Disposable Income

income less income tax.







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