Glossary of Terms
|Insurance Terms Information Tech A – I J-S|
|Financial Professional Corner – Glossary of Terms|
A brief history of title to land
Accelerated Death benefit
A percentage of the policy?s face amount, discounted for interest, that can be paid to the insured prior to death, under specified circumstances. This is in lieu of a traditional policy that pays beneficiaries after the insured?s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries
Accident and Health Insurance
Coverage for acci-dental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses, and catastrophic care, with limits.
What Does Amortization Mean?
1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset’s life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.
While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.
Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel, or amortization charts and tables.
What is the difference between amortization and depreciation?
Because very few assets last forever, one of the main principles of accrual accounting requires that an asset’s cost be proportionally expensed based on the time period over which the asset was used. Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset to the asset’s life. It is important to mention that these methods are calculated by subtracting the asset’s salvage value from its original cost.
Amortization usually refers to spreading an intangible asset’s cost over that asset’s useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company’s income statement.
Depreciation, on the other hand, refers to prorating a tangible asset’s cost over that asset’s life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year.
Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well’s setup costs are spread out over the predicted life of the oil well.
It is important to note that in some places, such as Canada, the terms amortization and depreciation are often to used interchangeably to refer to both tangible and intangible assets.
The practice of comparing the performance of your organisation, department or function against the performance of 'the best' – whether they be other organisations, industry standards or internal departments. The aim is to look at how well you are doing compared to others in the same field or industry, and to learn from their best practices as a basis for improving your own.
A process or methodology that has been proven to work well and produce good results, and is therefore recommended as a model. Some people prefer to use the term good practice as in reality it is debateable whether there is a single best approach.
The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. Companies can create brand equity for their products by making them memorable, easily recognizable and superior in quality and reliability. Mass marketing campaigns can also help to create brand equity. If consumers are willing to pay more for a generic product than for a branded one, however, the brand is said to have negative brand equity. This might happen if a company had a major product recall or caused a widely publicized environmental disaster.
Measures implemented by a company to reduce its expenses and improve profitability. Cost cutting measures may include laying off employees, reducing employee pay, switching to a less expensive employee health insurance program, downsizing to a smaller office, lowering monthly bills, changing hours of service and restructuring debt.
What Does Depreciation Mean?
Equity contribution of owners. The basic approach of capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business. Capital is divided into different tiers according to the characteristics / qualities of each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I and Tier II.
Tier I Capital
A term used to refer to one of the components of regulatory capital. It consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest quality because they are fully available to cover losses Hence it is also termed as core capital.
Tier II Capital
Refers to one of the components of regulatory capital. Also known as supplementary capital, it consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from a bank’s activities. Tier II’s capital loss absorption capacity is lower than that of Tier I capital.
Economic Order Quantity – EOQ
An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:
EOQ = Square root of (2SD/PI)
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)The EOQ formula can be modified to determine production levels or order interval lengths, and is used by large corporations around the world, especially those with large supply chains and high variable costs per unit of production.Despite the equation’s relative simplicity by today’s standards, it is still a core algorithm in the software packages that are sold to the largest companies in the world.
The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.Calculated as:
(Net Income – Dividends on Preferred Stock)/ Average Outstanding Shares
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).An important aspect of EPS that’s often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) – that company would be more efficient at using its capital to generate income and, all other things being equal, would be a “better” company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
The party in a franchising agreement that is purchasing the right to use a business’s trademarks, associated brands and other proprietary knowledge in order to open a branch. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor.
One of the benefits of being a franchisee is that the franchisor provides all the information that is needed for running the business (such as, training and suppliers). Furthermore, a franchisee is also usually given an exclusive area, where no other franchises belong to the same underlying business can set up shop in order to prevent internal competition.