Definition of Gain
Gain
The profit earned on the sale of an asset, computed by subtracting its book value
from the revenue received from its sale.
Related Terms:
If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve
month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.
Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.
When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
The price change portion of a stock's return.
Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of
current market price to original cost.
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.
The gain recognized on the sale of a capital item (fixed asset), calculated
by subtracting its sale price from its original purchase price (less the impact of any
associated depreciation).
An increase in the value of an asset.
future-period revenue.
gains and losses that are judged to be both unusual and nonrecurring.
Up-front gain recognized from the securitization and sale of a pool
of loans. Profit is recorded for the excess of the sales price and the present value of the estimated
interest income that is expected to be received on the loans above the amounts funded on the loans
and the present value of the interest agreed to be paid to the buyers of the loan-backed securities.
Increases or decreases in the fair value of an asset or a liability that
are realized through sale or settlement.
The positive 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 more than you paid, you realize a capital gain.
In portfolio accounting, a straight-line accumulation of capital gains on discount
bond in anticipation of receipt of par at maturity.
A protection against borrower fallout risk in the mortgage pipeline.
Basis
Regarding a futures contract, the difference between the cash price and the futures price observed in the
market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to
determine capital gains or losses for tax purposes when the stock is sold.
Basket options
Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.
Beggar-thy-neighbor
An international trade policy of competitive devaluations and increased protective
barriers where one country seeks to gain at the expense of its trading partners.
Best-interests-of-creditors test
The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.
Blanket inventory lien
A secured loan that gives the lender a lien against all the borrower's inventories.
Book profit
The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
Cash dividend
A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in
addition to the dividend.
Circus swap
A fixed rate currency swap against floating U.S. dollar LIBOR payments.
Closed-end mortgage
Mortgage against which no additional debt may be issued.
Conversion factors
Rules set by the Chicago Board of Trade for determining the invoice price of each
acceptable deliverable Treasury issue against the Treasury Bond futures contract.
Cumulative Translation Adjustment (CTA) account
An entry in a translated balance sheet in which gains
and/or losses from translation have been accumulated over a period of years. The CTA account is required
under the FASB No. 52 rule.
Delivery notice
The written notice given by the seller of his intention to make delivery against an open, short
futures position on a particular date. Related: notice day
Difference from S&P
A mutual fund's return minus the change in the Standard & Poors 500 Index for the
same time period. A notation of -5.00 means the fund return was 5 percentage points less than the gain in the
S&P, while 0.00 means that the fund and the S&P had the same return.
Discount window
Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.
Distributions
Payments from fund or corporate cash flow. May include dividends from earnings, capital
gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by
investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least
once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).
Double-tax agreement
Agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.
Embedded option
An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.
Exposure netting
Offsetting exposures in one currency with exposures in the same or another currency,
where exchange rates are expected to move in such a way that losses or gains on the first exposed position
should be offset by gains or losses on the second currency exposure.
FASB No. 8
U.S. accounting standard that requires U.S. firms to translate their foreign affiliates' accounts by
the temporal method. gains and losses from currency fluctuations were reported in current income. It was in
effect between 1975 and 1981 and became the most controversial accounting standard in the U.S. It was
replaced by FASB No. 52 in 1981.
Financial planning
The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.
First notice day
The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.
Floating lien
General lien against a company's assets or against a particular class of assets.
Foreign tax credit
Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.
Head & shoulders
In technical analysis, a chart formation in which a stock price reaches a peak and declines,
rises above its former peak and again declines and rises again but not to the second peak and then again
declines. The first and third peaks are shoulders, while the second peak is the formation's head. Technical
analysts generally consider a head and shoulders formation to be a very bearish indication.
Immunization strategy
A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
general change in the rate of interest through the use of duration.
Initial public offering (IPO)
A company's first sale of stock to the public. Securities offered in an IPO are
often, but not always, those of young, small companies seeking outside equity capital and a public market for
their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the
possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting
fees which represent a load to buyers.
IRA/Keogh accounts
Special accounts where you can save and invest, and the taxes are deferred until money
is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of
contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from
such accounts.
Loan value
The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.
Long hedge
The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: Hedge, short hedge
Market model
This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.
Mortgage bond
A bond in which the issuer has granted the bondholders a lien against the pledged assets.
Collateral trust bonds
Open-end mortgage
Mortgage against which additional debts may be issued. Related: closed-end mortgage.
Optimal contract
The contract that balances the three types of agency costs (contracting, monitoring, and
misbehavior) against one another to minimize the total cost.
Pac-Man
strategy Takeover defense strategy in which the prospective acquiree retaliates against the
acquirer's tender offer by launching its own tender offer for the other firm.
Pickup
The gain in yield that occurs when a block of bonds is swapped for another block of higher-coupon bonds.
Recourse
Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the
parent company if the collateral is insufficient to repay the debt.
Regular way settlement
In the money and bond markets, the regular basis on which some security trades are
settled is that the delivery of the securities purchased is made against payment in Fed funds on the day
following the transaction.
Regulation D
Fed regulation currently that required member banks to hold reserves against their net
borrowings from foreign offices of other banks over a 28-day averaging period. Regulation D has been
merged with Regulation M.
Regulation M
Fed regulation currently requiring member banks to hold reserves against their net borrowings
from their foreign branches over a 28-day averaging period. Reg M has also required member banks to hold
reserves against Eurodollars lent by their foreign branches to domestic corporations for domestic purposes.
Regulatory accounting procedures
Accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.
Riding the yield curve
Buying long-term bonds in anticipation of capital gains as yields fall with the
declining maturity of the bonds.
Scalp
To trade for small gains. It normally involves establishing and liquidating a position quickly, usually
within the same day.
Settlement price
A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.
Shark repellant
Amendment to company charter intended to protect it against takeover.
Static theory of capital structure
Theory that the firm's capital structure is determined by a trade-off of the
value of tax shields against the costs of bankruptcy.
Stockholder's equity
The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.
Tax differential view ( of dividend policy)
The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.
Tax free acquisition
A merger or consolidation in which 1) the acquirer's tax basis in each asset whose
ownership is transferred in the transaction is generally the same as the acquiree's, and 2) each seller who
receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.
Tax deferral option
The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is
payable only when the gain is realized by selling the asset.
Tax-timing option
The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.
Tender
To offer for delivery against futures.
Total dollar return
The dollar return on a nondollar investment, which includes the sum of any
dividend/interest income, capital gains or losses, and currency gains or losses on the investment.
See also: total return.
Total return
In performance measurement, the actual rate of return realized over some evaluation period. In
fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest
on interest, and any capital gain/loss) over some i nvestment horizon.
Traditional view (of dividend policy)
An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.
Wash
gains equal losses.
Whole life insurance
A contract with both insurance and investment components: (1) It pays off a stated
amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or
borrow against.
Zero-sum game
A type of game wherein one player can gain only at the expense of another player.
Variance analysis
A method of budgetary control that compares actual performance against plan, investigates the causes of the variance and takes corrective action to ensure that targets are achieved.
basic earnings per share (EPS)
This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.
capital recovery
Refers to recouping, or regaining, invested capital over
the life of an investment. The pattern of period-by-period capital recovery
is very important. In brief, capital recovery is the return of capital—
not the return on capital, which refers to the rate of earnings on the
amount of capital invested during the period. The returns from an
investment have to be sufficient to provide for both recovery of capital
and an adequate rate of earnings on unrecovered capital period by
period. Sorting out how much capital is recovered each period is relatively
easy if you use a spreadsheet model for capital investment analysis.
In contrast, using a mathematical method of analysis does not
provide this period-by-period capital recovery information, which is a
major disadvantage.
cost of capital
Refers to the interest cost of debt capital used by a business
plus the amount of profit that the business should earn for its equity
sources of capital to justify the use of the equity capital during the
period. Interest is a contractual and definite amount for a period,
whereas the profit that a business should earn on the equity capital
employed during the period is not. A business should set a definite goal
of earning at least a certain minimum return on equity (ROE) and compare
its actual performance for the period against this goal. The costs of
debt and equity capital are combined into either a before-tax rate or an
after-tax rate for capital investment analysis.
financial leverage
The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.
income statement
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.
inventory write-down
Refers to making an entry, usually at the close of a
period, to decrease the cost value of the inventories asset account in
order to recognize the lost value of products that cannot be sold at their
normal markups or will be sold below cost. A business compares the
recorded cost of products held in inventory against the sales value of the
products. Based on the lower-of-cost-or-market rule, an entry is made to
record the inventory write-down as an expense.
net income (also called the bottom line, earnings, net earnings, and net
operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.
profit
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
return on assets (ROA)
Although there is no single uniform practice for
calculating this ratio, generally it equals operating profit (before interest
and income tax) for a year divided by the total assets that are used to
generate the profit. ROA is the key ratio to test whether a business is
earning enough on its assets to cover its cost of capital. ROA is used for
determining financial leverage gain (or loss).
return on investment (ROI)
A very general concept that refers to some
measure of income, earnings, profit, or gain over a period of time
divided by the amount of capital invested during the period. It is almost
always expressed as a percent. For a business, an important ROI measure
is its return on equity (ROE), which is computed by dividing its net
income for the period by its owners’ equity during the period.
hurdle rate
a preestablished rate of return against which
other rates of return are measured; it is usually the cost of
capital rate when used in evaluating capital projects
management control system (MCS)
an information system that helps managers gather information about actual organizational occurrences, make comparisons against plans,
effect changes when they are necessary, and communicate
among appropriate parties; it should serve to guide organizations
in designing and implementing strategies so that
organizational goals and objectives are achieved
standard
a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes
Collar
Interest-rate option that guarantees that the rate on a floating-rate
loan will not exceed a certain upper level nor fall below a lower level. It is
designed to protect an investor against wide fluctuations in interest rates.
Monte-Carlo simulation
A mathematical modeling process. For a model that
has several parameters with statistical properties, pick a set of random values
for the parameters and run a simulation. Then pick another set of values, and
run it again. Run it many times (often 10,000 times) and build up a statistical
distribution of outcomes of the simulation. This distribution of outcomes is
then used to answer whatever question you are asking.
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.
By-product
A product that is an ancillary part of the primary production process, having
a minor resale value in comparison to the value of the primary product being
manufactured. Any proceeds from the sale of a by-product are typically offset
against the cost of the primary product, or recorded as miscellaneous revenue.
Capital
The investment by a company’s owners in a business, plus the impact of any
accumulated gains or losses.
Loss carryback
The offsetting of a current year loss against the reported taxable
income of previous years.
Loss carryforward
The offsetting of a current year loss against the reported taxable
income for future years.
Net realizeable value
The expected revenue to be gained from the sale of an item or
service, less the costs of the sale transaction.
Pooling of interests
An method for accounting for a business combination. When used, the expenses of the combination are charged against income at once, and the net
income of the acquired company is added to the full-year reported results of the acquiring company.
Profit center
An entity within a corporation against which both revenues and costs are
recorded. This results in a separate financial statement for each such entity, which
reveals a net profit or loss, as well as a return on any assets used by the entity.
trade-off theory
Debt levels are chosen to balance interest tax shields against the costs of financial distress.
Make-Work Project
A project, such as digging holes and filling them up again, that has no useful purpose other than to make work.
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.
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