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Profit plan: A company’s total budget used in achieving a desired profit goal. Sometimes the term refers only to the operating budget, and sometimes it is used synonymously with the term master budget. Prospectus: Part I of a Registration Statement filed by a company offering its securities to the
638 Glossary Profit plan: A company’s total budget used in achieving a desired profit goal. Some- times the term refers only to the operating budget, and sometimes it is used synony- mously with the term master budget. Prospectus: Part I of a Registration Statement filed by a company offering its secu- rities to the public, which Registration Statement is filed with and must be approved by the Securities and Exchange Commission. The Prospectus describes the registering company, its business and finances, and the risk factors the company faces. Proxy: The grant by a shareholder to another party of the right to vote the stock- holder’s shares of stock. Proxy contest: An attempt to gain control of a corporation by soliciting shareholder votes. Purchase method: After the acquisition, the target firm’s assets are put on the bid- der’s balance sheet at their fair market value. Put option: An asset that gives the owner the right but not the obligation to sell some other asset for a set price on or up to a specified date. RAM: Random access memory is the hardware which a computer uses for storing programs and data that the computer is currently using. In human terms, you can think of RAM as the memory storing part of your brain. When you are thinking about a problem, you are using your own RAM to work through various calculations and thoughts. Rate of return: An amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment. Red herring: A preliminary, nonfinal Prospectus distributed by underwriters for the purpose of generating interest in shares of stock to be offered to the public. Registration statement: A filing made with the SEC by a company issuing its secu- rities to the public, which describes the company and its financial condition. Part I consists of the Prospectus. Regulation FD: A Securities and Exchange Commission Regulation which among other matters requires a company which purposely or inadvertently releases previ- ously unknown material information to promptly further distribute that information to the public. Regulation S-K: A Regulation of the Securities and Exchange Commission that sets forth the standards for drafting the body of a Prospectus. Regulation S-X: A Regulation of the Securities and Exchange Commission that sets forth the standards for the preparation of financial statements to be included in doc- uments filed with the Securities and Exchange Commission. Remeasurement: See temporal translation procedure. Reporting currency: The currency in which a firm prepares its financial statements. Residual value: The prospective value as of the end of the discrete projection period in a discounted benefit streams model. Restructuring charges: Expenses typically recognized in conjunction with down- sizings, reengineerings, reorganizations, and comparable activities. The expenses are usually made up of cash costs, accruals of obligations for future expenditures, as well as the write-down of assets. Risk factors: That section of a Prospectus, or of a Form 10-K or other SEC filing, which lists the operational and financial risks faced by a company. Glossary 639 Risk-free rate: The rate of return available in the market on an investment free of default risk. Risk premium: A rate of return in addition to a risk-free rate to compensate the in- vestor for accepting risk. Road show: A trip, generally of two or more weeks’ duration, by underwriters and company management to meet with underwriters, brokers, and investors in different cities in order to explain a proposed public offering of securities. Roll over: To enter a new future or forward contract to replace a contract that is expiring. ROM: Read-only memory are forms of data storage which cannot be written to (or changed), but from which data can only be retrieved. A music CD (and, hence, CD ROM) is a device from which you can play back music, but you cannot record your own music to a CD ROM. (If you can record to a CD, the device is called a CD-R (for recordable), not a CD ROM.) Securities Act of 1933: The U.S. statute that permits the private placement or pri- vate sale of securities without registration provided full and fair disclosure is made and that requires the registration of public offerings of securities. Securities and Exchange Commission (SEC): An agency of the U.S. government which regulates the public issuance of securities under the Securities Act of 1933 and the conduct of trading markets and brokerage firms under the Securities Ex- change Act of 1934, so as to protect investors from fraud and misleading or inade- quate corporate and financial information. Securities Exchange Act of 1934: The U.S. statute which established the Securi- ties and Exchange Commission and regulates the operation of broker/dealers. Under this statute, companies with publicly held securities are required to make periodic reports to the public on various forms, most typically Forms 10-K, 10-Q, and 8-K. Of- ficers, directors, and significant shareholders of publicly held companies are required to report purchases and sales of securities and the formation of “groups” for the hold- ing, voting, purchase, or sale of publicly traded securities. Short: To enter a future or forward as the short party. Also known as “selling” the future or forward. Short party: The party in a forward or future contract that will deliver the under- lying asset and receive payment (i.e., the selling party). The party in a forward or fu- ture contract that benefits from a decline in the price of the underlying asset. Single-step income statement: An income statement format that simply deducts expenses and losses from revenues and gains in arriving at a single measure of income from continuing operations. Speculate: Attempt to profit by taking on a risk exposure. Spot market: The market in which transactions are executed for immediate deliv- ery of an asset. Spot price: The price to be paid for immediate delivery of an asset or commodity. Spot rate: Rate at which currencies are exchanged for immediate delivery. Standard and Poor’s 500: A stock portfolio consisting of 500 large corporations. The composition and value of the stock portfolio is tracked and reported by the Stan- dard and Poor’s publishing company. The S&P 500 value is widely used as a bench- mark index of overall stock market performance. 640 Glossary Standard of value: The identification of the type of value being utilized in a spe- cific engagement (e.g., fair market value, fair value, investment value). Standards: Predetermined, expected levels of efficiency or measures of desired performance (e.g., a budget amount, a standard cost, or a nonquantitative statement of desired performance). A standard cost is the predetermined cost of an input per unit of output. Standards may be unchanging (basic), perfect (ideal), or currently attainable. Statements of Financial Accounting Standards (SFAS): Pronouncements of the Financial Accounting Standards Board that are the central elements of generally accepted accounting principles. Stock acquisition: The purchase of a controlling interest in a firm by buying its outstanding equity. Strategic information system: An application used by senior management to cre- ate a company’s strategy. Streaming media: Typically, refers to Internet sites that send out a continuous flow of sound or video signal to user. An example might be www.radiotango.com, which plays tangos 24 hours per day. Strike price: The prespecified purchase or sale price for the underlying asset in an option contract. Sustainable earnings base: A revised historical earnings series from which the effects of all nonrecurring items have been removed (see core earnings). Sustainable earnings worksheet: A worksheet used to organize and summarize nonrecurring items so that their effects can be removed from as-reported net income in order to arrive at a sustainable earnings base. Swap: An agreement between two parties to exchange cash flows over a period of time. Cash flows are determined by an agreed upon formula specified in the swap agreement—a formula that is contingent on the performance of other underlying instruments. Symmetric risk: An exposure that results in profits when an underlying price or economic variable moves in one direction, and proportional losses if the variable moves in the opposite direction. Synergy: The incremental value generated by the combination of two or more firms. Synthetic stock portfolio: A portfolio that consists of Treasury bills and a long position in equity futures contracts. A properly constructed synthetic stock portfolio behaves the same as a portfolio consisting of actual stocks. Systematic risk: The risk that is common to all risky securities and cannot be elim- inated through diversification. When using the capital asset pricing model, system- atic risk is measured by beta. Takeover: The transfer of corporate control from one group of shareholders to another. Target: A firm that is the subject of takeover or acquisition activities. Tau: The amount of time remaining prior to an option’s expiration. Taxable transaction: An acquisition in which the target firm shareholders are im- mediately subject to capital gains on their sale of shares. Glossary 641 Tax-adjusted nonrecurring items: Pretax nonrecurring items of revenue, gain, expense, and loss that are multiplied by one minus a representative income tax rate. The result is the after-tax effect of each of these items on net income. Tax-free transaction: An acquisition in which the primary consideration paid to the target’s shareholders is the acquirer’s common stock, thereby deferring capital gains taxes until the new shares are sold. TCP/IP: The communications standard that is used by the Internet. A protocol is the understanding that computers have for how information will be delivered over the communications network, which enables computers with different operating sys- tems to communicate with each other and to eliminate errors in data. Temporal (remeasurement) translation procedure: A method for translating foreign currency financial statements in which monetary assets (including assets valued at market) and liabilities are translated at current exchange rates. Nonmone- tary assets, liabilities, and paid-in capital accounts are translated at historical ex- change rates; cost of sales and depreciation expense are translated at the rates in existence when the related inventory or fixed assets were acquired; and revenues and other expenses are translated at the average exchange rate in existence during the reporting period. Translation gains and losses are reported as a component of net income. Transaction exposure: The potential for gains and losses as foreign-denominated assets and liabilities (e.g., accounts receivable, accounts payable, notes payable), in- crease or decrease in value with changes in exchange rates. Transfer prices: Prices charged when goods or services are transferred either within firms (e.g., from one division of a firm to another) or between related firms (e.g., between a parent and its subsidiaries). Translation exposure: Typically, the excess of foreign-currency assets over foreign currency liabilities of foreign subsidiaries. Translation gains result from increases in the value of the foreign currency and losses in the event of decreases. Translation of foreign currency financial statements: The restatement of the financial statements of a foreign entity from its local currency to the reporting cur- rency of its parent. UNIX: An open operating system running on many manufacturers’ computers. The first successful nonproprietary operating system. It was developed by Bell Labs in the 1970s. Unsystematic risk: The portion of total risk specific to an individual security that can be avoided through diversification. Unwind: To close out a future or forward position. URL: Universal Resource Locator is the Internet address for a given Web site. The URL for the president of the United States is www.whitehouse.gov. Valuation date: The specific point in time at which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”). Variances: Measures of the difference between actual costs and standard costs. They are favorable if costs are less than expected and unfavorable otherwise. Vari- ances may be analyzed by the effect of changing prices (price variances) or changing usage (quantity or usage variances). 642 Glossary Vertical merger: A merger in which the two firms are from different stages of the same industry or production process (e.g., an automobile manufacturer purchases a steelmaker). WA N : A wide area network is a connection of two or more computers which are geo- graphically distant from each other. The typical purpose of a WAN is to send data or communicate with distant facilities. Thus, an airline might have a WAN connecting all of its airports world wide to allow for the quick communications of scheduling changes between its various facilities. Weighted average cost of capital (WACC): The cost of capital (discount rate) de- termined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure. Windows NT or 2000: Quickly becoming the network operating system standard of the industry. Developed by Microsoft. Write an option: Sell an option. The writer is paid the option premium up front. The writer of a call must later sell the underlying asset if the call option owner exercises. The writer of a put must later buy the underlying asset if the put option owner exercises. The writer of the option is essentially liable for any future payoffs received by the option owner. Also known as shorting the option. 643 About the Authors Charles A. Anderson’s career includes academic and business experience. He has been a faculty member of both the Harvard Business School and the Stan- ford Business School. He was the president, chief executive officer, and a director of Walker Manufacturing Co., J.I. Case, and the Stanford Research Institute. He has served on a number of corporate boards of directors, includ- ing NCR Corp., Owens-Corning Fiberglas Corp., Boise-Cascade Corp., and the Eaton Company. Robert N. Anthony is Ross Graham Walker Professor of Management Con- trol, Emeritus, at Harvard Business School. He has been a director and chair- man of the audit committee of Carborundum Company and Warnaco, Inc. He has been a director of several smaller organizations and a trustee (including chairman of the board) of Colby College, and of Dartmouth-Hitchcock Med- ical Center. He is the author or coauthor of some 20 books and 100 articles on management subjects, especially management control; his books and articles have been translated into 12 languages. He is a past president of the American Accounting Association. Richard T. Bliss has been involved in corporate financial analysis since 1987 and is currently on the finance faculty at Babson College. He teaches at the un- dergraduate, MBA, and executive levels, specializing in the areas of Corporate Financial Strategy and Entrepreneurial Finance. Prior to coming to Babson, Dr. Bliss was on the faculty at Indiana University and he has also taught exten- sively in Central and Eastern Europe, including at the Warsaw School of Eco- nomics, Warsaw University, and the University of Ljubljana in Slovenia. With publications in the areas of corporate finance, entrepreneurship, and banking, Dr. Bliss has an active research agenda. His recent work on the impact of bank mergers on CEO compensation has been cited in For tune mag- azine and numerous other business publications and will be published in the Journal of Financial Economics. 644 About the Authors Dr. Bliss holds a PhD in Finance from Indiana University. He also re- ceived his MBA in Finance/Real Estate from Indiana University and graduated with honors from Rutgers University, earning a BS degree in Engineering and a BA degree in Economics Edward G. Cale Jr. is a professor of information systems at Babson College in Wellesley, Massachusetts. Dr. Cale holds a BS in electrical engineering from Stanford University and an MBA and a DBA from the Harvard Business School. After working for five years in the aerospace and integrated circuits in- dustries, Dr. Cale has spent the past 20 years in academia, teaching, conducted research, and consulting in the management of information technology. Eugene E. Comiskey received his PhD from Michigan State University and his professional qualifications include both Certified Public Accountant (CPA) and Certified Management Accountant (CMA). Professor Comiskey taught from 1965 to 1980 at the Krannert Graduate School of Management at Purdue University and also as a visiting faculty member during 1972 and 1973 at the University of California, Berkeley. While at Purdue, he twice received the Salgo Noren Foundation Award as the outstanding professor in the Graduate Management Program. Since arriving at Georgia Tech he has six times been recognized as Professor of the Year by the Graduate Students in Management organization. In 1999, Professor Comisky was the recipient of the Educator of the Year award from the Georgia Society of CPAs. Professor Comiskey has published over 60 papers in a wide range of profes- sional and scholarly journals and edited books. A book, with Charles W. Mulford, Financial Warnings (478 pages), was published in 1996 by John Wiley & Sons and is now in its fifth printing. Another book, Guide to Financial Re- porting and Analysis (624 pages), also with Charles W. Mulford, was published by John Wiley & Sons in 2000. A third book, The Financial Numbers Game, is under contract with John Wiley and should be published in late 2001 or early 2002. Current research interests center on financial analysis and financial re- porting practices, financial early warnings, international financial reporting practices, and the role of financial data in credit decisions. For over 25 years, Professor Comiskey has worked with commercial banks, both in the United States and in Europe and Asia, in the design and delivery of educational pro- grams to improve the financially oriented credit analysis skills of lenders. Since 1988, he has been a partner in Financial Training Associates, a financial training and consulting firm that he founded with his colleague Charles W. Mulford. Professor Comiskey served from 1978 to 1980 as Director of Research for the American Accounting Association. He also served (1995–1996) as pres- ident of the Financial Accounting and Reporting Section of the American Accounting Association. The Section has a membership of over 1,500 and is made up of scholars and practitioners who have a primary interest in matters related to the measurement and disclosure of financial information. Professor About the Authors 645 Comiskey served two terms on the editorial review board of the Accounting Review—the second term was as an editorial consultant, or under current nomenclature, an associate editor. He has also served a term on the editorial review board of Issues in Accounting Education and is now serving a three- year term on the editorial board of Accounting Horizons. Michael A. Crain, CPA /ABV, ASA, CFE, MBA, is a business appraiser and lit- igation consultant practitioner in Ft. Lauderdale, Florida. He is an Accredited Senior Appraiser in business valuation awarded by the American Society of Appraisers and he is Accredited in Business Valuation from the American Insti- tute of Certified Public Accountants (AICPA). He has served on the examina- tion committee for the AICPA’s business valuation accreditation and on other AICPA national committees. He has been retained as an expert witness and testified on numerous occasions. His articles have appeared in the Journal of Accountancy, CPA-Expert, and other professional publications, and he has spo- ken on numerous occasions to national audiences. Steven P. Feinstein, PhD, CFA, is an associate professor of finance at Babson College and a consultant with the Michel/Shaked Group in Boston. He holds a PhD in economics from Yale University. Prior to entering academia, Dr. Fein- stein served as an economist at the Federal Reserve Bank of Atlanta. Dr. Fein- stein’s primary areas of research are financial valuation and the use and pricing of derivatives. He has presented his research at numerous academic confer- ences including the annual meetings of the American Finance Association and the Financial Management Association. His articles have appeared in Deriva- tives Quarterly, the Journal of Risk, Risk Management, the Atlanta Federal Re- serve Bank Economic Review, the American Bankruptcy Institute Journal, and the Journal of Financial Planning. Dr. Feinstein conducts professional semi- nars for executives and has consulted for a wide variety of institutions. Clients have included Bankers Trust, Cho Hung Bank of Korea, Chrysler, Honeywell, ITT, Lehman Brothers, Nippon Life Insurance, Travelers Insurance, and nu- merous law firms. Theodore Grossman is a member of the faculty of Babson College, where he teaches information technology and accounting. He lectures on various infor- mation technology topics such as Web technologies, e-commerce, strategic in- formation systems, managing information technology, and systems analysis and design. He also performs extensive consulting for food and nonfood retailers, suppliers of technology products to the retail industry. He is called upon fre- quently to act as an expert witness in complex litigation in matters relating to technology and cyber law. Prior to joining Babson College, he was the founder and CEO of a computer software company for the retail industry. He holds a BS degree in engineering from the University of New Hampshire and an MS in management from Northeastern University. 646 About the Authors Robert Halsey has an MBA in finance and a PhD in accounting from the Uni- versity of Wisconsin—Madison. During his business career, he managed the commercial lending division of a large Midwestern bank, and served as the Chief Financial Officer of a privately held retailing and manufacturing com- pany. Prior to joining the faculty of Babson College, Dr. Halsey taught at the University of Wisconsin—Madison where he received the Douglas Clarke Memorial Teaching Award. His research interests are in the area of financial reporting and include firm valuation, financial statement analysis, and disclo- sure issues. He has published in Advances in Quantitative Analysis of Finance and Accounting, the Journal of the American Taxation Association, and Issues in Accounting Education. Stephen M. Honig is senior partner with the Boston office of the national law firm of Schnader, Harrison, Segal & Lewis, LLP. A holder of a BA from Co- lumbia College and an LLB from Harvard University, Mr. Honig has worked in the private and public finance of emerging technology companies since 1966. He was assisted in the preparation of his chapter by his partner Albert Dan- dridge, formerly on the staff of the Securities and Exchange Commission, and associate Craig Circosta, both of Schnader’s Philadelphia office. William C. Lawler is an Associate Professor of Accounting at Babson College, Wellesley, Massachusetts, and Director of the Consortium for Executive De- velopment at Babson College’s School of Executive Education. Dr. Lawler did his undergraduate work at the University of Connecticut and his graduate studies at the University of Massachusetts. His teaching and research focus on two areas: financial footprints of business unit strategy and the impact of new technologies on cost systems design. Professor Lawler has authored several papers and given numerous profes- sional presentations. His primary focus is on aiding operational managers in un- derstanding the financial consequences of their decisions. He has run seminars on this topic for such diverse groups as telecom managers in China, production managers in the Czech Republic, and R&D managers in the United States. Dr. Lawler consults with a number of companies, ranging from small biotechs to Fortune 100 computer companies, concerning the design and use of cost infor- mation systems for management decision support rather than external financial reporting. His most recent publications in this area are chapters on Activity Based Accounting and Profit Planning for the third edition of The Portable MBA in Finance and Accounting. John Leslie Livingstone earned MBA and PhD degrees from Stanford Uni- versity. He is a CPA, licensed in New York and Texas, and a CVA (certified in business valuation). Les directs a nationwide business consulting practice, headquartered in West Palm Beach, Florida. He has been a partner in Coop- ers & Lybrand (now PricewaterhouseCoopers), an international accounting firm, and in The MAC Group, an international management consulting firm About the Authors 647 specializing in business strategy with offices in Boston, Chicago, Los Angeles, New York, San Francisco, Washington, D.C., London, Paris, Munich, Rome, Madrid, and Tokyo (since acquired by Cap Gemini/Ernst & Young). He has consulted to major corporations and other organizations such as the U.S. Postal Service and the SEC. He was the Arthur Young Distinguished Professor of Accounting at Ohio State University, Fuller E. Callaway Professor of Accounting at Georgia Institute of Technology, and Chairman of the Depart- ment of Accounting and Law at Babson College. He has authored or coau- thored 10 books, several chapters in authoritative accounting handbooks, and many articles in professional journals. Richard P. Mandel is an associate professor of law at Babson College, where he teaches a variety of courses in business law and taxation on the undergradu- ate and graduate school levels and has served as chairman of the Finance Divi- sion. He is also a partner in the law firm of Bowditch and Dewey, of Worcester and Framingham, Massachusetts, where he specializes in the representation of growing businesses and their executives. Mr. Mandel has written a number of articles regarding the legal issues encountered by small businesses. He holds an AB in Government and Meteorology from Cornell University and a JD from Harvard Law School. Charles W. Mulford is Invesco Chair and professor of accounting in the DuPree College of Management at Georgia Tech. Since joining the faculty in 1983, he has been recognized nine times as the Core Professor of the Year and once as the Professor of the Year by the Graduate Students in Management. In 1999 the Graduate Students in Management voted to rename the Core Profes- sor of the Year Award the “Charles W. Mulford Core Professor of the Year Award.” An additional teaching award received in 2000 was the university- wide W. Roane Beard Class of 1940 Outstanding Teacher Award. Dr. Mulford’s scholarly pursuits include the publication of numerous pa- pers in scholarly as well as professional accounting and finance journals. His research interests center on the effects of accounting standards on investment and credit decision making, earnings forecasts, the relationship between accounting-based and market-based measures of risk and international ac- counting and reporting practices. More recently, his research interests have turned to the use of published financial reports in the prediction of financial distress. He has coauthored a book on the subject, Financial Warnings, pub- lished in 1996. A second book on financial analysis, Guide to Financial Re- porting and Analysis, was published in July 2000. A third book on how accounting is used to mislead investors, The Financial Numbers Game: Identi- fying Creative Accounting Practices, is scheduled for publication in 2001. All three books were or will be published by John Wiley & Sons, New York. In addition to his work at Georgia Tech, Professor Mulford regularly con- sults with major domestic and international commercial banks on issues related to credit decision making. . To enter a future or forward as the short party. Also known as “selling” the future or forward. Short party: The party in a forward or future contract that. deliver the under- lying asset and receive payment (i.e., the selling party). The party in a forward or fu- ture contract that benefits from a decline in