The Finance Dictionary

Day order

An order to buy or sell securities, valid only on the day for which the order is placed.

Day's sales outstanding

Also called average collection period, this ratio is calculated as

trade accounts receivable balance x 365
annual credit sales

The trade accounts receivable amount used in the ratio should be the amount before any deduction for uncollectible accounts.

The following is an example of the calculation:

For a firm with terms of net 30 days, days outstanding of 91.25 would indicate a severe problem in the collection of accounts receivable.

See also accounts receivable turnover and aged accounts receivable.

Debenture

A debenture is a type of debt issued by a corporation. It is not secured by any specific assets, as is a bond. A debenture is backed by assets of the corporation that have not been pledged as security for other debt.

Debt/Equity ratio (D/E)

This measure of financial strength is calculated as a company's total debt divided by its total shareholders' equity. The lower the number, the better.

Deemed disposition

A capital gain or loss normally only occurs when a property is actually sold. However, there are instances where a property may be deemed to be sold. That is, you must treat the situation as if you have actually sold the asset. Types of deemed dispositions:
1. Securities are transferred from a non-registered investment account into an RRSP. In this case, the deemed proceeds will be the market value of the securities at the time of transfer to the RRSP. Note that if a loss has occurred in the transfer to an RRSP, it will be considered a superficial loss, and will not be deductible for tax purposes.
2. Property is gifted to a third party. In this case, the property is deemed to have been sold at its fair market value at that time.
3. Use of property changes from personal use to business or investment use, or vice versa. Again, the property is deemed to have been sold at its fair market value. An example is a personal residence being converted to a rental property, or a rental property being converted to a personal residence.
4. A taxpayer ceases to be a resident of Canada for tax purposes. Certain properties are excluded, and in some cases where capital gains occur, a tax payment can be delayed until the property is sold.
5. When an individual dies, all of their capital property is deemed to have been sold immediately prior to death.

Deferred life annuity

Deficit

When referring to the government deficit, this is the excess of expenditures over revenues for a one year period. The National Debt is the total debt of the Federal government, and when there is a deficit the debt is increased.

When referring to the financial statements of a corporation, a deficit occurs when a corporation has accumulated more losses than profits over the years. This shows up as a negative amount of Retained Earnings on the balance sheet.

Defined Benefit Pension Plan (DBPP)

Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans. With a defined benefit plan, the employees know in advance what their pension will be when they retire. The company makes contributions to the plan based on actuarial calculations of what contributions are necessary to fund current and future pensions. The plan funds are invested, and the company must make higher contributions if the investments perform poorly.

With defined benefit pension plans there is some risk to the employee, because these plans are never funded enough that 100% of current and future pension obligations can be covered. If the company becomes insolvent, employees may not get their full pension.

If an employee leaves their job prior to retirement, a pension lump sum (commuted value) can be transferred to a locked-in RRSP, or in many cases can be taken as a deferred pension. If the lump sum goes to a locked-in RRSP, withdrawals cannot usually be made until the employee is within 10 years of retirement age. If the employee is already within 10 years of retirement, then the funds can probably be used to purchase a locked-in Registered Retirement Income Fund, also called a Life Income Fund (LIF), or Locked-in Retirement Income Fund (LRIF).The age at which the employee can access the locked-in RRSP is usually determined by referring to the original pension plan.

Defined Contribution Pension Plan (DCPP)

Registered pension plans (RPPs), which are regulated by either federal or provincial legislation, are either Defined Benefit Pension Plans or Defined Contribution Pension Plans. With a defined contribution plan, also known as a Money Purchase RPP, the employees do not know in advance what their pension will be when they retire, but they do have some control over how their are invested. The company makes contributions to the plan usually based on a percentage of the employee's wages. Often the employee can also contribute, which may result in a higher contribution by the employer. The plan funds are invested in individual accounts for each employee. The employee usually has a choice of types of securities in which to invest their funds.

With defined contribution pension plans the risk to the employee is that the investments may perform poorly. However, the upside is that if the investments perform well, all profit increases go to the employee. If the company becomes insolvent the employee will not lose any of the pension, because the funds are in the employee's name.

If an employee leaves their job prior to retirement, they will be able to transfer the assets in their pension plan to a locked-in RRSP, also known as a Locked-in Retirement Account (LIRA). This differs from a Group RRSP, where any assets transferred to an RRSP would not be locked in.

Depreciation

Depreciation is the expensing, over a period of years, of the cost of fixed assets (except land), usually based on the estimated useful life of the fixed asset. There are various methods of depreciation, with two of the most common being straight line and declining balance (usually double declining balance).

Straight line depreciation - the original cost of the asset is written off in equal amounts over the estimated useful life.
Example: machinery with an estimated useful life of 5 years, original cost $50,000.
Straight line depreciation amount = $50,000/5 (or $50,000 x 20%) = $10,000 each year

Declining balance depreciation - a fixed percentage is applied to the remaining book value (undepreciated balance) each year to determine the depreciation amount. With double declining balance, a percentage of twice the straight line rate is used.

When fixed assets are depreciated for tax purposes, the depreciation is called capital cost allowance (CCA), and the method of depreciation is usually declining balance, using a rate designated by the Income Tax Act and Regulations.

Derivative

A financial product whose value is derived from fluctuations in the value of an asset, such as options and futures. See also hedging and speculator.

Director

Directors are the people elected by shareholders to oversee the management of the company.

Discretionary account

A discretionary account is a brokerage account where the client has authorized the broker to buy and sell stocks without contacting the client.

Diversification

Diversification is a method of reducing risk by buying assets in different industries, different countries, and different types of securities such as bonds, stocks, etc. (Don't put all your eggs in one basket.)

Dividend

An amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders. Dividends on preferred shares will usually be for a fixed amount. Dividends on common shares may fluctuate depending on the profits of the company. Some companies pay dividends on common shares, and some do not. See also dividend tax credit, and dividend tax credit rates.

Dividend reinvestment plan (DRIP)

A DRIP is a dividend reinvestment plan, whereby when a dividend is issued to the shareholder, it is used to purchase further shares of the company instead of paying out a cash dividend. These purchases are usually done with no brokerage fees. Shareholders can only participate in a DRIP if they have shares registered in their own name, instead of in street name. The dividends that are reinvested in more shares are still considered taxable dividend income.

Dividend tax credit

Starting in 2006, an enhanced dividend tax credit is available for dividends received after 2005 from:

• public corporations resident in Canada
• other corporations resident in Canada that are not Canadian-controlled private corporations (CCPCs) and are subject to the general corporate tax rate
• CCPCs resident in Canada to the extent that their income (other than investment income, which is eligible for a special refundable tax) is subject to tax at the general corporate tax rate

With the enhanced dividend tax credit, 145% of the dividend received will be included in income. The additional 45% is referred to as the gross-up. The tax credit is calculated as 11/18ths of the gross-up. The result is a federal tax credit of

• 18.97% of the taxable (grossed-up) dividend, or
• 27.5% of the actual dividend

For an individual with no income other than taxable Canadian dividends which are eligible for the enhanced dividend tax credit, approximately $66,000 can be earned before any federal taxes are payable.

Dividend yield

This is the % obtained by dividing the dividend per share by the current market price per share, x 100.

Example: market value per share $37, annual dividend $1.85, yield = 1.85/37 x 100 = 5%

Dollar cost averaging

Instead of purchasing a large number of shares at one time, a smaller number of shares are purchased at regular intervals over a period of time. This reduces volatility, because stocks usually go up slowly, but can go down quickly.

Due diligence

Performing an investigation to verify information, often regarding a business which is being considered for purchase.