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Glossary of Terms for Corporate Valuation Accounting consistency Balance sheets balance, and income statements are consistent with retained earnings on the balance sheet. Accruals Amounts owed for salary, taxes, and other items, but not yet paid. Accrual basis accounting An accounting convention in which revenue and most costs are recognized when the sale of the good or service occurs, rather than when the cash is received or when expenses are paid. Accrual basis accounting relies on the matching and recognition principles. Additional funds needed (AFN) The extra amount of financing that is required in a given year. Usually is positive if the firm is growing. Articulate Retained earnings on the balance sheet are equal to the previous year’s retained earnings plus the current year’s net income, less any dividends paid. Asset turnover Assets/Sales. Sometimes based on average assets: [(Assett + assett-1)/2 /Salest. This ratio is often used as an indicator of efficiency of asset utilization. Basis point 1/100 of a percent. For example, a 10 basis point increase from an interest rate of 4 percent gives an interest rate of 4.10 percent. Beta A measure of risk. Beta measures a stock’s market risk, which is the risk relevant to an investor. Market risk is the amount of risk that a stock contributes to a well-diversified portfolio. Bond rating A measure of the creditworthiness of a bond. For example, Moody’s bond ratings range from AAA down to C and D. AAA means very creditworthy and unlikely to default. Bonds rated BB or below are defined as non-investment grade bonds, commonly called junk bonds. Bond spread The difference in yield between a corporate bond of a certain credit rating and a comparable maturity Treasury security. Book value The value of an asset, a liability, or a company that is based solely upon the values reported in the company’s financial statements. Capital asset pricing model (CAPM) A model of investor required returns. The required return