ATD Level III
Fundamentals of Finance glossary
Every term this guide defines, A to Z, each with the chapter that teaches it. Open it when a word in a question is unfamiliar, and test yourself on it in the last week: cover the definition and say it in one sentence.
19 terms from the free first chapter
A
- Agent
The party appointed to act on the principal's behalf, management in the classic corporate example, who may not always act purely in the principal's interest.
C
- Cost accounting
Supplies the detailed cost data (per unit, per department) finance needs to evaluate a project's likely cash flows.
D
- Dividend decisions
Deciding how much of the profit earned to distribute to shareholders versus retain for reinvestment (see the chapter on the dividend decision).
F
- Financial
Maximising shareholder wealth is the primary financial objective assumed throughout this paper, typically proxied by maximising the market value of the firm's ordinary shares; profit maximisation is a related but weaker objective, since it ignores the timing, risk and financing of that profit.
- Financial accounting
Supplies the audited historical statements finance uses to assess an organisation's existing financial position before making a new decision.
- Financing decisions
Deciding the mix of debt and equity used to fund the organisation's investments (see the chapter on sources of business finance), which in turn determines its cost of capital (see the chapter on the cost of capital).
I
- Investment decisions
Deciding which assets and projects to commit the organisation's funds to, evaluated using the capital budgeting techniques in the chapter on project appraisal.
L
- Liquidity decisions
Deciding how to manage short-term assets and liabilities so the organisation can meet its obligations as they fall due (see the chapter on working capital management).
M
- Management accounting
Supplies forward-looking budgets and variance analysis finance draws on for planning and control alongside its own techniques.
N
- Non-financial goals
Employee welfare, customer satisfaction, environmental and social responsibility, and long-term survival, objectives a firm also pursues alongside its financial goal.
- Non-Routine (Managerial)
The higher-level decisions this paper is built around: investment appraisal, financing structure, dividend policy and working capital strategy, requiring judgement rather than routine processing.
O
- Ordinary shareholders and management
Shareholders want value maximised; management may instead pursue growth, job security, or perks that serve their own interests first.
- Overlaps and conflicts among the objectives
Financial and non-financial goals often reinforce each other (satisfied customers and employees support long-term financial performance), but can also conflict in the short term, spending on staff welfare or environmental measures can reduce reported profit even while supporting the firm's long-term value.
P
- Principal
The party who delegates authority and whose interests are meant to be served, shareholders in the classic corporate example.
R
- Routine
The day-to-day administrative finance activities: processing payments, managing cash receipts, record-keeping and routine reporting.
S
- Shareholders and debenture holders
Shareholders may favour riskier projects that benefit equity if they succeed, while lenders bear the downside without sharing the upside, a conflict debt covenants exist to manage.
- Shareholders and external auditors
Shareholders rely on the auditor for an independent check on management's own reporting, a relationship that only works if the auditor's independence from management is genuinely maintained.
- Shareholders and Government
Government (as tax authority and regulator) wants compliance and its due share of profit; shareholders want returns maximised, which can create an incentive toward aggressive tax or regulatory positions.
- Similarities and differences
Both draw on the same underlying transaction data, but accounting is chiefly concerned with recording and reporting what has already happened, while finance is chiefly concerned with using that data to decide what to do next; accounting looks backward to inform, finance looks forward to decide.
The full glossary adds every term from the other 11 chapters, A to Z, each with the chapter that teaches it.