amortization
(noun)
The reduction of loan principle over a series of payments.
Examples of amortization in the following topics:
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Long-Term Loans
- Over this period, the principal component of the loan (the original loan) is slowly paid down through amortization.
- Term: Mortgage loans generally have a maximum term, or a number of years after which an amortizing loan will be repaid.
- Some mortgage loans may have no amortization or require full repayment of any remaining balance at a certain date; others may have negative amortization.
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Capital Expenditures
- The CAPEX costs are then amortized or depreciated over the life of the asset in question.
- Costs that are capitalized, however, are amortized or depreciated over multiple years.
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Net Income
- Net sales (revenue) – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)
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Direct and Indirect Measurement
- Operating items in the indirect method include depreciation and amortization, accounts receivable, inventory, and operating gains and losses.
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Debt Utilization Ratios
- EBIT is earnings before interest and taxes, and EBITDA is earnings before interest, taxes, depreciation, and amortization.
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Employee Retirement Income Security Act
- If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets.
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Short-Term Loans
- Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, as well as various fees and other "sweeteners" like equity participation by the lender.
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Sample Income Statement
- 'Revenue' is money received from the sales of products and services before expenses are deducted, also called the 'top line. ' The net income is the result after all revenues and expenses have been accounted for, also known as the 'net profit' or the 'bottom line. ' The income statement displays the revenues recognized for a specified period and the expenses charged against these revenues, including write-offs (depreciation and amortization of assets) and taxes.
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Profit and Value
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) equals sales revenue minus cost of goods sold and all expenses, except for interest, amortization, depreciation and taxes.