What is Activity-Based Budgeting? Activity-based budgeting (ABB) is a budgeting method where activities are thoroughly analyzed to predict costs. ABB does not take historical costs into account when creating a budget. Understanding Activity-Based Budgeting While a traditional budgeting method adjusts previous costs based on inflation or changes in business activity, activity-based budgeting is a much…
What is an Accrued Liability? An accrued liability represents an expense a business has incurred during a specific period but has yet to be billed for. Accrued liabilities are only reported under accrual accounting to represent the performance of a company regardless of their cash position. They appear on the balance sheet under current liabilities….
What is a Budget Deficit? A budget deficit occurs when government expenditures exceed revenues from taxes and other sources. Although the concept of a budget deficit applies to any organization with operating revenues and expenses, the term is most commonly applied to government budgets. Public savings are also referred to as budget surplus. When public…
What is a Bail-in Clause? A bail-In clause is used in times of bankruptcy or financial distress and forces the borrower’s creditors to write-off some of their debt in order to ease the financial burden on the borrowing institution. The ultimate goal of a bail-in clause is to keep the institution afloat and operating, even…
What is Baseline? Baseline is a reference point that is used to analyze the current performance of a project, company, or budget relative to historical records and measure progress over time. Baseline – Applications 1. Project management In project management, a baseline is used as a reference point for each new project…
What is Anti-Money Laundering? Anti-Money Laundering (AML) is a set of policies, procedures, and technologies that prevents money laundering. It is implemented within government systems and large financial institutions to monitor potentially fraudulent activity. What is Money Laundering? Money laundering refers to the process of taking illegally obtained money and making it appear to have…
What are Leverage Ratios? A leverage ratio is any kind of financial ratio that indicates the level of debt incurred by a business entity against several other accounts in its balance sheet, income statement, or cash flow statement. The leverage ratios provide an indication of how the company’s assets and business operations are financed (using…
What is the Cost of Debt? The cost of debt is the return that a company provides to its debtholders and creditors. These capital providers need to be compensated for any risk exposure that comes with lending to a company. Since observable interest rates play a big role in quantifying the cost of debt, it is…
What is the Effective Annual Rate? The Effective Annual Rate (EAR) is the rate of interest actually earned on an investment or paid on a loan as a result of compounding the interest over a given period of time. It is usually higher than the nominal rate and is used to compare different financial products…
What is Equity Multiplier? Equity multiplier is a leverage ratio that measures the portion of the company’s assets that are financed by equity. It is calculated by dividing the company’s total assets by the total shareholder equity. The equity multiplier is also used to indicate the level of debt financing that a firm has used…
