Finance and Banking Fundamentals

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Glossary
S. No. Term Definition
Period for which a firm prepares its
internal or external accounts. It is
the period covered by the financial
1 Accounting Period statements. For internal accounts, it
may be a month or a quarter; for
external accounts it is normally a
period of 12 months.
Resources with defined financial
2 Asset
value owned by the business.
The year over year growth rate of
3 CAGR an investment over a specified
period of time.
The cash flow arrived at by
financing activities such as
4 Cash Flow from Financing
borrowing money, getting capital
from owners, or repaying both.
The cash flow arrived at by
investment activities such as
5 Cash Flow from Investing
purchasing or selling stocks and
bonds or machinery.
The cash flow arrived at by
operating activities: sales and
expenses. This cash flow is of prime
6 Cash Flow from Operations
importance for a lender as it
ensures ongoing repayment
capacity
Compound interest is the interest
earned on the principal sum plus
7 Compound Interest
prior interest. It is the interest
earned on interest.
Interest on the amount is
8 Continuous Compounding
compounded every moment
Credit Risk is the risk of default by a
9 Credit Risk borrower to pay the principal
amount or interest or both.

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It includes those which can turn into

cash quickly within the accounting
10 Current Assets period (the period for which the
financial statements are being
prepared).
The rate of interest used to find the
11 Discount Rate Present Value (PV), is also called the
discount rate.
Diversification refers to spreading
12 Diversification risk by investing in multiple
products/markets.
Costs incurred directly or indirectly
13 Expense to earn income (not necessarily a
cash outflow).
It is a large, unusual sums which
occur rarely. For example, if land or
14 Extra Ordinary Income and Expense machinery or a part of the business
is sold off, it would result in
extraordinary income.
Future value defines the value a
15 Future Value sum of money today, would have at
a point of time in the future.
Hedging refers to protecting oneself
16 Hedging against risk, using specific financial
instruments.
Revenues/ financial benefits
17 Income received by the business (not
necessarily a cash inflow).
Inflation is a rise in the general level
of prices of goods and services in an
18 Inflation
economy over a period of time. It is
a decline in the real value of money.
Yield or IRR is that discount rate at
which NPV of an investment = 0. It
19 IRR/Internal Rate of Return
is the rate of return on that
investment.
Financial obligation to pay cash or
20 Liability
provide goods and services.
The risk of not having cash when it
21 Liquidity Risk is required is known as Liquidity
Risk

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Market Risk is the risk that the

22 Market Risk value of investment will decrease
due to moves in market forces.
Net Present Value is the net of PVs
23 Net Present Value of all cash flows occurring at
different points of time in the future.
Nominal rate of interest refers to
24 Nominal Rate the stated interest rate in the
economy.
It refers to the day to day expenses
of the business. Some of them are
25 Operating expenses Stationery items, electricity,
salaries, telephone bills, travel,
promotional activities, etc.
It is a non operating income. For
example if you have a bank deposit,
26 Other Income or have rented out some of your
property, then the interest or rental
income is other income.
Net worth (Funds belonging to the
27 Owners Equity owner/s, currently held by the
business)
A partnership is a type of business
entity in which partners (owners)
28 Partnership share with each other the profits or
losses of the business. It is an
extension of a proprietorship.
Present Value defines the value that
a sum of money in the future, would
29 Present Value have today. In other words, the
amount you need to invest today, to
get that defined future sum.
30 Proprietorship A business with a single owner.
Real rate of interest refers to the
inflation adjusted rate of interest.
31 Real Rate That is, it is the rate you actually
get after deducting the effect of
inflation.
Standard deviation is a measure of
32 Standard Deviation
the variability.

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Simple interest is the sum earned

33 Simple Interest on the principal invested, for a
period of time.
Suspense accounts are temporary
accounts. They are created to hold
34 Suspense Accounts
amounts which are doubtful in
nature.
This statement is a record of how
much the business owns, and how
much it owes to others, as on a
35 Balance Sheet particular date. Unlike the cash flow
and Profit and Loss, it is not for a
period. That date is typically the last
date of the period.
This statement just tracks the flow
of cash for the period. How much
36 Cash Flow Statement
came in, how much went out, how
much is left.
This is for a particular period: a
month, or a quarter, or a year. It
37 Profit and Loss Account tells you how much the business has
earned and how much it has spent,
in that period.

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