Abandonment option

The option of terminating an investment earlier than originally planned.

Ability to pay

Refers to the borrower’s ability to make interest and principal payments on debts. See: Fixed charge coverage ratio. In context of municipal bonds, refers to the issuer’s present and future ability to create sufficient tax revenue to fulfill its contractual obligations, accounting for municipal income and property values.

In context of taxation, notion that tax rates should be determined according to income or wealth.

Abnormal returns

The component of the return that is not due to systematic influences (market-wide influences). In other words, abnormal returns are above those predicted by the market movement alone. Related: excess returns.

Absolute priority

Rule in bankruptcy proceedings requiring senior creditors to be paid in full before junior creditors receive any payment.


Absorb is to assimilate, transfer or incorporate amounts in an account or a group of accounts in a manner in which the first entity loses its identity and is “absorbed” within the second entity. For example, see Absorption Costing.

Absorbed Costs

Absorbed Costs incorporates both variable and fixed costs.

Absorption Costing

Absorption Costing is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, e.g. selling and administrative expenses, being treated as period costs.

Absorption Variance

Absorption Variance is the variance from budgeted absorption costing of manufactured product. See also Absorption Costing.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the early years of a asset’s life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Acceleration clause

A contract stating that the unpaid balance becomes due and payable if specific actions transpire, such as failure to make interests payments on time.


Contractual agreement instigated when the drawee of a time draft “accepts” the draft by writing the word “accepted” thereon. The drawee assumes responsibility as the acceptor and for payment at maturity. See: Letter of credit and banker’s acceptance.


The overall process of identifying, measuring, recording, interpreting, and communicating the results of economic activity; tracking business income and expenses and using these numbers to answer specific questions about the financial and tax status of the business.

Accounting Rate of Return

The ratio of profit before interest and taxation to the percentage of capital employed at the end of a period. Variations include using profit after interest and taxation, equity capital employed, and average capital for the period.

Accounting Standard

A principle that governs current accounting practice and that is used as a reference to determine the appropriate treatment of complex transactions, preparation and publication of accounting statements.

Acid test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.


A combination of tasks that together complete an activity within a process, e.g. creating a first pass of a budget.

Activity Based Costing

Activity-based costing (ABC) is a method of allocating costs to products based on the resources they consume. The costs of all activities are traced to the product for which they are performed. Overhead costs are also traced to a particular product rather than spread arbitrarily across all product lines. The true cost of a product can then be determined.


Alliance is a form of cooperation between two or more independent companies in which they share risks and revenues with the aim of jointly improving their Competitive advantage. Alliances may include licensing, clusters, co-marketing arrangements, shared R&D, joint ventures, franchising agreements, outsourcing partnerships, and investments.

Ambush marketing

A tactic whereby a company attempts to ambush or undermine the sponsorship activities of a rival that owns the legal rights to sponsor an event; often involves creating the sense that they, and not the actual sponsor, are associated with the owners of the event or activity.

Analysis paralysis

is a colloquial expression that implies that one’s decision-making ability is severely impaired by exposure to overwhelming volumes of Information; it is a symptom of Information fatigue syndrome.


Measures that describe the business environment that is assumed throughout the life of the plan that directly affect strategic goals.

Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.