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Finance & Accounting Vocabulary Guide

category: Finance & Accounting
tags: finance, accounting, financial-analysis, budgeting, investment

Financial Statements & Reporting

Core documents and concepts for understanding company financial health.

Primary Financial Statements

Income Statement (P&L) - Shows revenues, expenses, and profit over period
Balance Sheet - Shows assets, liabilities, and equity at specific point in time
Cash Flow Statement - Shows cash inflows and outflows over period
Statement of Stockholders' Equity - Shows changes in ownership equity over period
Notes to Financial Statements - Additional details and explanations
Management Discussion & Analysis (MD&A) - Management's perspective on results
Consolidated Financial Statements - Combined statements for parent and subsidiaries
Pro Forma Statements - Hypothetical financial statements showing potential scenarios
Interim Financial Statements - Quarterly or monthly financial reports
Annual Report - Comprehensive yearly report to shareholders

Income Statement Components

Revenue (Top Line) - Total income from sales of goods/services
Gross Revenue - Total revenue before any deductions
Net Revenue - Revenue after returns, allowances, and discounts
Cost of Goods Sold (COGS) - Direct costs of producing goods/services
Gross Profit - Revenue minus cost of goods sold
Operating Expenses - Costs of running day-to-day operations
Selling, General & Administrative (SG&A) - Overhead expenses
Research & Development (R&D) - Investment in innovation and development
Depreciation - Allocation of asset costs over time
Amortization - Allocation of intangible asset costs over time
Operating Income (EBIT) - Earnings before interest and taxes
Interest Income - Money earned from investments
Interest Expense - Cost of borrowing money
Pre-tax Income - Income before income taxes
Income Tax Expense - Taxes owed on income
Net Income (Bottom Line) - Final profit after all expenses
Earnings Per Share (EPS) - Net income divided by shares outstanding
Diluted EPS - EPS accounting for potential share dilution

Balance Sheet Components

Assets - Resources owned by company
Current Assets - Assets convertible to cash within one year
Cash and Cash Equivalents - Liquid assets readily available
Accounts Receivable - Money owed by customers
Inventory - Goods held for sale
Prepaid Expenses - Payments made in advance
Fixed Assets (Property, Plant & Equipment) - Long-term physical assets
Intangible Assets - Non-physical assets like patents, trademarks
Goodwill - Premium paid for acquisitions above book value
Liabilities - Debts and obligations owed by company
Current Liabilities - Debts due within one year
Accounts Payable - Money owed to suppliers
Accrued Expenses - Expenses incurred but not yet paid
Short-term Debt - Loans due within one year
Long-term Debt - Loans due after one year
Stockholders' Equity - Ownership stake in company
Retained Earnings - Accumulated profits not distributed as dividends
Common Stock - Basic ownership shares in company
Preferred Stock - Shares with priority over common stock for dividends
Treasury Stock - Company's own shares that have been repurchased

Cash Flow Statement Components

Operating Cash Flow - Cash from core business operations
Investing Cash Flow - Cash from buying/selling assets and investments
Financing Cash Flow - Cash from debt, equity, and dividend transactions
Free Cash Flow - Operating cash flow minus capital expenditures
Net Cash Flow - Total change in cash position
Cash Flow from Operations - Cash generated from business activities
Capital Expenditures (CapEx) - Investment in fixed assets
Working Capital Changes - Changes in current assets and liabilities
Depreciation Add-back - Non-cash expense added back to cash flow
Stock-based Compensation - Non-cash compensation expense

Financial Analysis & Ratios

Tools and metrics for evaluating company performance and financial health.

Profitability Ratios

Gross Profit Margin - Gross profit divided by revenue
Operating Profit Margin - Operating income divided by revenue
Net Profit Margin - Net income divided by revenue
EBITDA Margin - EBITDA divided by revenue
Return on Assets (ROA) - Net income divided by total assets
Return on Equity (ROE) - Net income divided by shareholders' equity
Return on Investment (ROI) - Gain from investment divided by cost
Return on Capital Employed (ROCE) - Operating profit divided by capital employed
Gross Margin - Percentage of revenue remaining after COGS
Operating Margin - Percentage of revenue remaining after operating expenses
EBIT Margin - EBIT as percentage of revenue
Tax Rate - Income tax expense divided by pre-tax income
Effective Tax Rate - Total tax expense divided by pre-tax income
Asset Turnover - Revenue divided by average total assets
Equity Multiplier - Total assets divided by shareholders' equity

Liquidity Ratios

Current Ratio - Current assets divided by current liabilities
Quick Ratio (Acid Test) - Liquid assets divided by current liabilities
Cash Ratio - Cash and equivalents divided by current liabilities
Working Capital - Current assets minus current liabilities
Operating Cash Flow Ratio - Operating cash flow divided by current liabilities
Cash Conversion Cycle - Days to convert investments into cash
Days Sales Outstanding (DSO) - Average days to collect receivables
Days Inventory Outstanding (DIO) - Average days inventory is held
Days Payable Outstanding (DPO) - Average days to pay suppliers
Net Working Capital - Current assets minus current liabilities
Working Capital Ratio - Current assets divided by current liabilities
Defensive Interval - Liquid assets divided by daily operating expenses
Cash Coverage Ratio - Cash available relative to debt obligations
Liquidity Index - Measure of how quickly assets can be converted to cash

Leverage/Debt Ratios

Debt-to-Equity Ratio - Total debt divided by shareholders' equity
Debt-to-Assets Ratio - Total debt divided by total assets
Equity Ratio - Shareholders' equity divided by total assets
Debt Ratio - Total debt divided by total assets
Long-term Debt to Equity - Long-term debt divided by equity
Interest Coverage Ratio - EBIT divided by interest expense
Times Interest Earned - Earnings available to pay interest
Debt Service Coverage - Cash flow available to service debt
Capital Structure Ratio - Debt and equity proportions
Financial Leverage - Use of debt to acquire assets
Degree of Financial Leverage - Sensitivity of earnings to financing costs
Capitalization Ratio - Long-term debt divided by total capitalization
Cash Coverage - Cash flow available to cover debt payments
Fixed Charge Coverage - Earnings available to cover fixed charges

Efficiency/Activity Ratios

Asset Turnover - Revenue divided by average total assets
Inventory Turnover - COGS divided by average inventory
Receivables Turnover - Revenue divided by average receivables
Payables Turnover - COGS divided by average payables
Fixed Asset Turnover - Revenue divided by average fixed assets
Total Asset Turnover - Revenue divided by average total assets
Working Capital Turnover - Revenue divided by average working capital
Capital Turnover - Revenue divided by average capital employed
Equity Turnover - Revenue divided by average shareholders' equity
Cash Turnover - Revenue divided by average cash balance

Budgeting & Financial Planning

Processes and concepts for planning and controlling financial resources.

Budget Types & Planning

Operating Budget - Plan for day-to-day business operations
Capital Budget - Plan for major asset purchases and investments
Cash Budget - Forecast of cash inflows and outflows
Master Budget - Comprehensive financial plan for organization
Flexible Budget - Budget that adjusts for different activity levels
Static Budget - Fixed budget for specific activity level
Rolling Budget - Continuously updated budget extending into future
Zero-based Budget - Building budget from zero each period
Activity-based Budget - Budget based on activities and their costs
Performance Budget - Budget focused on results and outcomes
Program Budget - Budget organized by programs or projects
Line-item Budget - Budget detailed by expense categories
Top-down Budget - Budget set by senior management
Bottom-up Budget - Budget built from departmental inputs
Participative Budget - Budget involving multiple organizational levels

Budget Process & Controls

Budget Variance - Difference between budgeted and actual amounts
Favorable Variance - Actual results better than budget
Unfavorable Variance - Actual results worse than budget
Budget vs. Actual Analysis - Comparing planned to actual performance
Variance Analysis - Investigating reasons for budget differences
Budget Revision - Updating budget based on changed circumstances
Budget Approval - Formal authorization of budget
Budget Monitoring - Ongoing tracking of budget performance
Budget Reporting - Regular communication of budget status
Contingency Budget - Plans for unexpected events
Supplemental Budget - Additional budget for unforeseen needs
Budget Cycle - Regular process of preparing and managing budgets
Planning Horizon - Time period covered by budget
Budget Calendar - Schedule for budget preparation activities
Budget Committee - Group responsible for budget oversight

Forecasting & Projections

Financial Forecast - Prediction of future financial performance
Revenue Forecast - Projection of future sales
Expense Forecast - Projection of future costs
Cash Flow Forecast - Prediction of future cash flows
Sales Forecast - Prediction of future sales volume and revenue
Demand Forecast - Prediction of customer demand
Trend Analysis - Using historical data to predict future trends
Seasonal Adjustment - Accounting for seasonal variations
Regression Analysis - Statistical method for forecasting
Scenario Planning - Preparing for multiple possible futures
Sensitivity Analysis - Testing how changes affect outcomes
Monte Carlo Simulation - Using probability to model outcomes
Best Case Scenario - Most optimistic forecast
Worst Case Scenario - Most pessimistic forecast
Base Case Scenario - Most likely forecast

Investment & Valuation

Concepts for evaluating investment opportunities and company value.

Valuation Methods

Discounted Cash Flow (DCF) - Valuing based on future cash flows
Net Present Value (NPV) - Present value of future cash flows minus investment
Internal Rate of Return (IRR) - Rate that makes NPV equal to zero
Payback Period - Time to recover initial investment
Return on Investment (ROI) - Gain relative to investment cost
Price-to-Earnings Ratio (P/E) - Stock price divided by earnings per share
Price-to-Book Ratio (P/B) - Stock price divided by book value per share
Enterprise Value - Market value of company including debt
Market Capitalization - Total value of company's shares
Book Value - Accounting value of shareholders' equity
Intrinsic Value - Fundamental value based on analysis
Fair Value - Price that would be received in orderly transaction
Liquidation Value - Value if company's assets were sold
Replacement Value - Cost to replace company's assets
Going Concern Value - Value assuming company continues operating

Investment Analysis

Capital Budgeting - Process of evaluating long-term investments
Cost of Capital - Required return on investment
Weighted Average Cost of Capital (WACC) - Blended cost of debt and equity
Cost of Equity - Required return for equity investors
Cost of Debt - Interest rate on borrowing
Risk-free Rate - Return on risk-free investment
Risk Premium - Additional return required for taking risk
Beta - Measure of stock's volatility relative to market
Alpha - Excess return relative to market performance
Sharpe Ratio - Risk-adjusted return measure
Capital Asset Pricing Model (CAPM) - Model for determining required return
Hurdle Rate - Minimum acceptable return on investment
Terminal Value - Value at end of projection period
Growth Rate - Rate at which value is expected to increase
Discount Rate - Rate used to discount future cash flows

Financial Markets & Instruments

Stock Market - Market for trading company shares
Bond Market - Market for trading debt securities
Money Market - Market for short-term debt instruments
Capital Markets - Markets for long-term financing
Primary Market - Market for new securities issuance
Secondary Market - Market for trading existing securities
Initial Public Offering (IPO) - First public sale of company stock
Secondary Offering - Additional stock sale after IPO
Private Placement - Sale of securities to limited number of investors
Venture Capital - Investment in early-stage companies
Private Equity - Investment in established private companies
Hedge Funds - Alternative investment funds using diverse strategies
Mutual Funds - Investment funds pooling money from many investors
Exchange-Traded Funds (ETFs) - Funds that trade like stocks
Derivatives - Financial instruments derived from underlying assets

Cost Accounting & Management

Understanding and controlling business costs.

Cost Classification

Direct Costs - Costs directly attributable to specific product/service
Indirect Costs - Costs not directly traceable to specific product/service
Fixed Costs - Costs that don't change with production volume
Variable Costs - Costs that change proportionally with production volume
Semi-variable Costs - Costs with both fixed and variable components
Opportunity Cost - Cost of best alternative foregone
Sunk Cost - Past costs that cannot be recovered
Relevant Cost - Future cost that differs between alternatives
Marginal Cost - Cost of producing one additional unit
Average Cost - Total cost divided by number of units
Standard Cost - Predetermined cost used for planning and control
Actual Cost - Real cost incurred
Budgeted Cost - Planned cost for budget period
Controllable Cost - Cost that can be influenced by manager
Uncontrollable Cost - Cost beyond manager's influence

Cost Management Systems

Activity-Based Costing (ABC) - Assigning costs based on activities
Traditional Costing - Allocating overhead using simple measures
Job Order Costing - Costing system for custom products
Process Costing - Costing system for mass production
Standard Costing - Using predetermined costs for control
Target Costing - Setting cost targets based on market price
Life Cycle Costing - Considering costs over product's entire life
Total Cost of Ownership - All costs associated with asset over its life
Cost-Volume-Profit Analysis - Analyzing relationship between costs, volume, and profit
Break-even Analysis - Finding point where revenue equals costs
Contribution Margin - Revenue minus variable costs
Gross Margin - Revenue minus cost of goods sold
Cost Center - Department responsible for controlling costs
Profit Center - Department responsible for revenues and costs
Investment Center - Department responsible for investments and returns

Key Concepts Summary

Financial Health - Overall condition of company's finances
Profitability - Company's ability to generate profit
Liquidity - Company's ability to meet short-term obligations
Solvency - Company's ability to meet long-term obligations
Efficiency - How well company uses its resources
Growth - Rate at which company is expanding
Risk - Uncertainty about future financial outcomes
Return - Gain or loss from investment
Cash Management - Managing cash flows and cash position
Working Capital Management - Managing short-term assets and liabilities
Capital Structure - Mix of debt and equity financing
Financial Leverage - Use of debt to increase potential returns
Time Value of Money - Money's changing value over time
Risk-Return Tradeoff - Higher returns require taking more risk
Diversification - Spreading risk across multiple investments

Best Practices / Tips

Understand the big picture - Know how individual metrics relate to overall performance
Focus on trends - Single period numbers can be misleading
Compare to benchmarks - Industry averages and competitor performance
Consider context - Economic conditions and industry factors
Look at multiple metrics - No single ratio tells the complete story
Verify data quality - Ensure numbers are accurate and consistent
Understand accounting policies - Different methods can affect comparability
Plan for the future - Use historical data to inform forward-looking decisions
Monitor key drivers - Identify factors that most impact financial performance
Communicate clearly - Present financial information in understandable terms

Common Issues / Troubleshooting

Cash Flow Problems

Symptom: Running out of cash despite being profitable
Cause: Poor cash flow management or timing differences
Solution: Improve cash flow forecasting, accelerate collections, delay payments

Poor Profitability

Symptom: Low or negative profit margins
Cause: High costs, low prices, or operational inefficiencies
Solution: Analyze cost structure, review pricing strategy, improve operations

Liquidity Issues

Symptom: Difficulty meeting short-term obligations
Cause: Poor working capital management or excessive debt
Solution: Improve cash conversion cycle, negotiate better terms, reduce debt

Budget Variances

Symptom: Significant differences between budget and actual results
Cause: Poor forecasting, changed conditions, or lack of control
Solution: Improve forecasting methods, update budgets regularly, enhance controls

High Cost of Capital

Symptom: Expensive financing limiting growth opportunities
Cause: Poor credit rating, high leverage, or market conditions
Solution: Improve financial performance, reduce debt, diversify funding sources

References / Further Reading

Financial Accounting Standards Board (FASB) - Accounting standards
Securities and Exchange Commission (SEC) - Public company reporting requirements
International Financial Reporting Standards (IFRS) - Global accounting standards
CFA Institute - Investment analysis and portfolio management
American Institute of CPAs (AICPA) - Accounting profession standards
"Financial Statement Analysis" by Martin Fridson
"Valuation: Measuring and Managing the Value of Companies" by McKinsey & Company
"Corporate Finance" by Ross, Westerfield, and Jaffe
Wall Street Journal - Financial news and analysis
Bloomberg Terminal - Financial data and analytics platform

Last updated: 2025-08-26 20:00 UTC