Knowledge Base

A

Accounts Payable (AP)

Definition: Money a company owes to its suppliers for goods or services received but not yet paid for.
Example: If a business buys office supplies on credit, the amount due to the supplier will be recorded as Accounts Payable.
Calculation: No specific calculation, but it appears as a liability on the balance sheet.

Accounts Receivable (AR)

Definition: Money owed to a company by its customers for goods or services delivered but not yet paid for.
Example: If a company sells products to a customer on credit, the amount the customer owes will be recorded as Accounts Receivable.
Calculation: No specific calculation, but it appears as an asset on the balance sheet.

Accrual Accounting

Definition: An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.
Example: If a company performs a service in December but doesn't get paid until January, the revenue is recorded in December under accrual accounting.
Calculation: Revenue and expenses are recorded as they are incurred, regardless of cash flow.

Amortization

Definition: The gradual repayment of a loan over a period of time, or the spreading of the cost of an intangible asset over its useful life.
Example: If a company buys a patent for $10,000 with a useful life of 10 years, it might amortize $1,000 each year.
Calculation: \[Amortization Expense=Cost of Intangible AssetUseful Life\text{Amortization Expense} = \frac{\text{Cost of Intangible Asset}}{\text{Useful Life}}Amortization Expense=Useful LifeCost of Intangible Asset​\]

Asset Turnover Ratio

Definition: A measure of a company's efficiency in using its assets to generate revenue.
Example: If a company has $1,000,000 in assets and generates $2,000,000 in sales, its asset turnover ratio is 2.
Calculation: \[Asset Turnover Ratio=Net SalesAverage Total Assets\text{Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Total Assets}}Asset Turnover Ratio=Average Total AssetsNet Sales​\]

B

Bad Debt

Definition: An amount owed to a company that is unlikely to be collected and is therefore written off as an expense.
Example: If a customer owes $1,000 but goes bankrupt and cannot pay, the company would record this as bad debt.
Calculation: No specific calculation, but it is recognized as an expense on the income statement.

Balance Sheet

Definition: A financial statement that shows a company’s assets, liabilities, and equity at a specific point in time.
Example: A company's balance sheet might show $100,000 in assets, $60,000 in liabilities, and $40,000 in equity as of December 31st.
Calculation: \[Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity\]

Bond

Definition: A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
Example: If you buy a $1,000 bond that pays 5% interest annually, you will receive $50 each year until the bond matures.
Calculation: No specific calculation, but bonds typically pay regular interest (coupon payments) until maturity.

Break-Even Point

Definition: The point at which total revenue equals total costs, resulting in neither profit nor loss.
Example: If a company needs to sell 100 units of a product at $10 each to cover $1,000 in fixed and variable costs, 100 units is the break-even point.
Calculation: \[Break-Even Point (units)=Fixed CostsSelling Price per Unit−Variable Cost per Unit\text{Break-Even Point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}}Break-Even Point (units)=Selling Price per Unit−Variable Cost per UnitFixed Costs​\]

C

Capital Expenditure (CapEx)

Definition: Funds used by a company to acquire, upgrade, or maintain physical assets such as property, buildings, or equipment.
Example: If a company spends $200,000 to purchase new machinery, this is a capital expenditure.
Calculation: No specific calculation, but it is recorded as an asset and depreciated over time.

Capital Gains

Definition: The profit made from selling an asset at a higher price than its purchase price.
Example: If you buy stock for $50 and sell it for $70, the capital gain is $20.
Calculation: \[Capital Gain=Selling Price−Purchase Price\text{Capital Gain} = \text{Selling Price} - \text{Purchase Price}Capital Gain=Selling Price−Purchase Price\]

Cash Flow

Definition: The total amount of money being transferred into and out of a business, especially affecting liquidity.
Example: If a company receives $5,000 from sales and pays $3,000 for expenses in a month, the net cash flow is $2,000.
Calculation: \[Net Cash Flow=Cash Inflows−Cash Outflows\text{Net Cash Flow} = \text{Cash Inflows} - \text{Cash Outflows}Net Cash Flow=Cash Inflows−Cash Outflows\]

Chart of Accounts (COA)

Definition: A list of all the accounts used by a business to record financial transactions, organized by category (assets, liabilities, equity, revenue, expenses).
Example: A company’s chart of accounts might include accounts like "Cash," "Accounts Payable," and "Sales Revenue."
Calculation: No specific calculation, but it’s a foundational organizational tool for bookkeeping and financial reporting.

Cost Accounting

Definition: A type of accounting focused on capturing a company's costs of production by assessing the input costs of each step of production.
Example: A manufacturing company uses cost accounting to determine the cost of producing a single unit of product.
Calculation: \[Cost per Unit=Total Production CostsNumber of Units Produced\text{Cost per Unit} = \frac{\text{Total Production Costs}}{\text{Number of Units Produced}}Cost per Unit=Number of Units ProducedTotal Production Costs​\]

Cost of Goods Sold (COGS)

Definition: The direct costs attributable to the production of goods sold by a company, including material and labor costs.
Example: If a company spends $500 on materials and $200 on labor to produce a product that sells for $1,000, the COGS is $700.
Calculation: \[COGS=Beginning Inventory+Purchases During the Period−Ending Inventory\text{COGS} = \text{Beginning Inventory} + \text{Purchases During the Period} - \text{Ending Inventory}COGS=Beginning Inventory+Purchases During the Period−Ending Inventory\]

Current Ratio

Definition: A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.
Example: If a company has $200,000 in current assets and $100,000 in current liabilities, its current ratio is 2.
Calculation: \[Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​\]

D

Debt-to-Equity Ratio

Definition: A measure of a company's financial leverage, calculated by dividing its total liabilities by its shareholder equity.
Example: If a company has $500,000 in debt and $250,000 in equity, its debt-to-equity ratio is 2.
Calculation: \[Debt-to-Equity Ratio=Total LiabilitiesShareholder Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholder Equity}}Debt-to-Equity Ratio=Shareholder EquityTotal Liabilities​\]

Deferred Revenue

Definition: Payments received for goods or services not yet delivered; recognized as a liability until the service or product is delivered.
Example: A company receives $1,000 in advance for a one-year subscription and recognizes $83.33 as revenue each month.
Calculation: \[Deferred Revenue=Total Payment Received−Revenue Recognized to Date\text{Deferred Revenue} = \text{Total Payment Received} - \text{Revenue Recognized to Date}Deferred Revenue=Total Payment Received−Revenue Recognized to Date\]

Depreciation

Definition: The process of allocating the cost of a tangible asset over its useful life.
Example: If a company buys a machine for $10,000 and expects it to last 10 years, it might depreciate $1,000 per year.
Calculation: \[Straight-Line Depreciation=Cost of Asset−Salvage ValueUseful Life\text{Straight-Line Depreciation} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}}Straight-Line Depreciation=Useful LifeCost of Asset−Salvage Value​\]

Discount Rate

Definition: The interest rate used to discount future cash flows to their present value.
Example: If you expect to receive $1,000 in one year and the discount rate is 5%, the present value of that $1,000 is about $952.
Calculation: \[Present Value=Future Value(1+Discount Rate)n\text{Present Value} = \frac{\text{Future Value}}{(1 + \text{Discount Rate})^n}Present Value=(1+Discount Rate)nFuture Value​\] Where nnn is the number of periods.

Dividend

Definition: A portion of a company's earnings distributed to shareholders, typically in the form of cash or additional shares.
Example: If a company declares a $1 dividend per share and you own 100 shares, you would receive $100.
Calculation: \[Dividend per Share=Total Dividends PaidTotal Shares Outstanding\text{Dividend per Share} = \frac{\text{Total Dividends Paid}}{\text{Total Shares Outstanding}}Dividend per Share=Total Shares OutstandingTotal Dividends Paid​\]

E

Earnings Before Interest and Taxes (EBIT)

Definition: A measure of a company's profitability that includes all expenses except interest and income tax expenses.
Example: If a company has $200,000 in revenue, $100,000 in operating expenses, and $20,000 in depreciation, its EBIT is $80,000.
Calculation: \[EBIT=Revenue−Operating Expenses−Depreciation\text{EBIT} = \text{Revenue} - \text{Operating Expenses} - \text{Depreciation}EBIT=Revenue−Operating Expenses−Depreciation\]

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

Definition: A measure of a company's overall financial performance and is used as an alternative to net income in some circumstances.
Example: If a company has $200,000 in revenue, $50,000 in operating expenses, $20,000 in depreciation, and $10,000 in amortization, its EBITDA is $140,000.
Calculation: \[EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization\text{EBITDA} = \text{Net Income} + \text{Interest} + \text{Taxes} + \text{Depreciation} + \text{Amortization}EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization\]

Economic Value Added (EVA)

Definition: A measure of a company's financial performance based on residual wealth, calculated by deducting the cost of capital from its operating profit.
Example: If a company's operating profit is $500,000 and the cost of capital is $300,000, the EVA is $200,000.
Calculation: \[EVA=Net Operating Profit After Taxes (NOPAT)−(Capital Invested×WACC)\text{EVA} = \text{Net Operating Profit After Taxes (NOPAT)} - \text{(Capital Invested} \times \text{WACC)}EVA=Net Operating Profit After Taxes (NOPAT)−(Capital Invested×WACC)\]

Effective Interest Rate

Definition: The real return on an investment, taking into account the effect of compounding over time.
Example: If a savings account offers a 5% nominal interest rate compounded quarterly, the effective interest rate will be slightly higher.
Calculation: \[Effective Interest Rate=(1+Nominal Raten)n−1\text{Effective Interest Rate} = \left(1 + \frac{\text{Nominal Rate}}{n}\right)^n - 1Effective Interest Rate=(1+nNominal Rate​)n−1\] Where nnn is the number of compounding periods per year.

Equity

Definition: The value of an owner's interest in a company, calculated as assets minus liabilities.
Example: If a company has $500,000 in assets and $300,000 in liabilities, its equity is $200,000.
Calculation: \[Equity=Assets−Liabilities\text{Equity} = \text{Assets} - \text{Liabilities}Equity=Assets−Liabilities\]

Ex-Dividend Date

Definition: The date on which a stock starts trading without the value of its next dividend payment.
Example: If a stock’s ex-dividend date is April 1, and you purchase the stock on or after this date, you will not receive the next dividend payment.
Calculation: No specific calculation, but it determines who is eligible to receive the declared dividend.

F

Fixed Asset

Definition: Long-term tangible assets used in the operation of a business, such as machinery, buildings, and land.
Example: A company's office building is a fixed asset because it is used in operations and has a useful life of more than one year.
Calculation: No specific calculation, but fixed assets are recorded on the balance sheet at cost, minus accumulated depreciation.

Fixed Costs

Definition: Business expenses that remain constant regardless of the level of production or sales.
Example: A company's rent of $2,000 per month is a fixed cost, as it does not change with production levels.
Calculation: No specific calculation, but fixed costs are included in the break-even analysis.

Forecasting

Definition: The process of predicting future financial performance based on historical data, trends, and assumptions.
Example: A company predicts next year's sales will increase by 5% based on past growth rates.
Calculation: \[Forecast=Historical Data×(1+Growth Rate)\text{Forecast} = \text{Historical Data} \times (1 + \text{Growth Rate})Forecast=Historical Data×(1+Growth Rate)\]

Fractional CFO

Definition: A part-time or outsourced Chief Financial Officer who provides financial leadership and strategy without being a full-time employee.
Example: A growing business hires a fractional CFO to help with forecasting, budgeting, and strategic planning without the cost of a full-time CFO.
Calculation: No specific calculation, but it often involves analyzing financial metrics like ROI, cash flow, and profitability.

Fund Accounting

Definition: A system of accounting used primarily by nonprofits and government organizations, focusing on accountability rather than profitability.
Example: A nonprofit tracks donations in a separate fund to ensure they are used for their intended purpose.
Calculation: No specific calculation, but funds are segregated to match expenses with restricted resources.

Futures Contract

Definition: A legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
Example: A farmer might sell a futures contract to lock in a price for their crop months before it's harvested.
Calculation: No specific calculation, but the value of a futures contract fluctuates with the price of the underlying asset.

G

General Ledger

Definition: The main accounting record of a company, which uses double-entry bookkeeping to record all financial transactions.
Example: The general ledger contains all the accounts for the company's assets, liabilities, equity, revenue, and expenses.
Calculation: No specific calculation, but it involves recording debits and credits to the appropriate accounts.

Goodwill

Definition: An intangible asset that represents the excess of purchase price over the fair value of the net identifiable assets acquired in a business combination.
Example: If a company purchases another company for $1 million when the fair value of its net assets is $800,000, the $200,000 difference is recorded as goodwill.
Calculation: \[Goodwill=Purchase Price−Fair Value of Net Assets Acquired\text{Goodwill} = \text{Purchase Price} - \text{Fair Value of Net Assets Acquired}Goodwill=Purchase Price−Fair Value of Net Assets Acquired\]

Gross Margin

Definition: A financial metric that shows the percentage of revenue that exceeds the cost of goods sold (COGS).
Example: If a company has a gross profit of $4,000 on $10,000 in revenue, the gross margin is 40%.
Calculation: \[Gross Margin=Gross ProfitRevenue×100%\text{Gross Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times 100\%Gross Margin=RevenueGross Profit​×100%\]

Gross Profit

Definition: The difference between revenue and the cost of goods sold (COGS), representing the profit from core business activities before deducting operating expenses.
Example: If a company sells $10,000 worth of products and the COGS is $6,000, the gross profit is $4,000.
Calculation: \[Gross Profit=Revenue−COGS\text{Gross Profit} = \text{Revenue} - \text{COGS}Gross Profit=Revenue−COGS\]

H

Held-to-Maturity Securities

Definition: Debt securities that a company has the intent and ability to hold until they mature.
Example: If a company buys bonds and intends to hold them until they mature, they would be classified as held-to-maturity securities.
Calculation: No specific calculation, but these are reported on the balance sheet at amortized cost.

Horizontal Analysis

Definition: The comparison of historical financial information over a series of reporting periods to identify trends and growth patterns.
Example: If a company’s revenue increased from $100,000 in Year 1 to $120,000 in Year 2, the horizontal analysis would show a 20% increase.
Calculation: \[Horizontal Analysis Percentage=Current Year Amount−Base Year AmountBase Year Amount×100%\text{Horizontal Analysis Percentage} = \frac{\text{Current Year Amount} - \text{Base Year Amount}}{\text{Base Year Amount}} \times 100\%Horizontal Analysis Percentage=Base Year AmountCurrent Year Amount−Base Year Amount​×100%\]

Hurdle Rate

Definition: The minimum rate of return that a company expects to earn when investing in a project.
Example: If a company's hurdle rate is 10%, it would only invest in projects expected to yield a return of 10% or more.
Calculation: No specific calculation, but it's used as a benchmark for investment decisions.

I

Income Statement

Definition: A financial statement that shows a company's revenues, expenses, and profits or losses over a specific period.
Example: A company's income statement might show $500,000 in revenue, $400,000 in expenses, and $100,000 in net income for the year.
Calculation: \[Net Income=Revenue−Expenses\text{Net Income} = \text{Revenue} - \text{Expenses}Net Income=Revenue−Expenses\]

Interest Coverage Ratio

Definition: A ratio used to determine how easily a company can pay interest on its outstanding debt.
Example: If a company has $100,000 in EBIT and $20,000 in interest expenses, its interest coverage ratio is 5.
Calculation: \[Interest Coverage Ratio=EBITInterest Expense\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}Interest Coverage Ratio=Interest ExpenseEBIT​\]

Interest Expense

Definition: The cost incurred by an entity for borrowed funds.
Example: If a company takes out a $100,000 loan at a 5% interest rate, the annual interest expense is $5,000.
Calculation: \[Interest Expense=Loan Amount×Interest Rate\text{Interest Expense} = \text{Loan Amount} \times \text{Interest Rate}Interest Expense=Loan Amount×Interest Rate\]

Inventory Turnover

Definition: A ratio that shows how many times a company's inventory is sold and replaced over a period.
Example: If a company has $500,000 in sales and an average inventory of $100,000, its inventory turnover ratio is 5.
Calculation: \[Inventory Turnover Ratio=Cost of Goods Sold (COGS)Average Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}Inventory Turnover Ratio=Average InventoryCost of Goods Sold (COGS)​\]

J

Journal Entry

Definition: A record of a financial transaction in a company's accounting system, showing the accounts affected and the amounts debited and credited.
Example: If a company purchases office supplies for $500 on credit, the journal entry would debit Supplies Expense and credit Accounts Payable.
Calculation: No specific calculation, but each journal entry must balance with equal debits and credits.

Just-in-Time (JIT) Inventory

Definition: A strategy that companies use to increase efficiency by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
Example: A car manufacturer might use JIT inventory to receive parts just before they are needed on the assembly line.
Calculation: No specific calculation, but it impacts inventory turnover and inventory management metrics.

K

Key Performance Indicators (KPIs)

Definition: Quantifiable metrics that reflect how well an organization is achieving its key business objectives.
Example: A company might track KPIs like customer satisfaction, sales growth, or employee turnover to gauge performance.
Calculation: No specific calculation, as KPIs vary depending on the organization’s goals.

Kiting

Definition: The illegal act of writing a check for a greater amount than the balance in the account, using funds from another account to cover the shortfall before check clears
Calculation: No specific calculation, but kiting is considered fraud and is illegal.

L

Law of Diminishing Returns

Definition: A principle stating that as investment in a particular area increases, the rate of return on that investment will eventually decline.
Example: A company hires additional employees for a project, but after a certain point, the productivity gains from each new hire start to decrease.
Calculation: No specific calculation, but it’s often illustrated using a production function.

Leverage

Definition: The use of borrowed capital (debt) to increase the potential return of an investment.
Example: If a company uses $100,000 of its own money and borrows $200,000 to invest in a $300,000 project, the leverage ratio is 2:1.
Calculation: \[Leverage Ratio=Total DebtEquity\text{Leverage Ratio} = \frac{\text{Total Debt}}{\text{Equity}}Leverage Ratio=EquityTotal Debt​\]

Liabilities

Definition: Financial obligations or debts that a company owes to outside parties.
Example: If a company takes out a $50,000 loan, this amount will be recorded as a liability on the balance sheet.
Calculation: No specific calculation, but liabilities are part of the balance sheet equation: \[Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity\]

LIFO (Last-In, First-Out)

Definition: An inventory valuation method where the last items added to inventory are assumed to be the first ones used or sold.
Example: If a company has 100 units of inventory purchased at $10 each and then buys another 100 units at $12 each, under LIFO, the company would assume that the $12 units were sold first.
Calculation: No specific calculation, but it affects the cost of goods sold and ending inventory valuation.

Liquidity

Definition: The ease with which an asset can be converted into cash without affecting its market price.
Example: Cash is the most liquid asset, while real estate is less liquid because it takes longer to sell.
Calculation: No specific calculation, but liquidity is often assessed through ratios like the current ratio and quick ratio.

Liquidity Ratio

Definition: A financial metric used to determine a company's ability to pay off its short-term liabilities with its short-term assets.
Example: The current ratio is a type of liquidity ratio. If a company has $150,000 in current assets and $100,000 in current liabilities, its liquidity ratio is 1.5.
Calculation: \[Liquidity Ratio=Current AssetsCurrent Liabilities\text{Liquidity Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Liquidity Ratio=Current LiabilitiesCurrent Assets​\]

M

Margin

Definition: The difference between the selling price of a product and the cost of producing it, expressed as a percentage of the selling price.
Example: If a product sells for $100 and costs $60 to produce, the margin is 40%.
Calculation: \[Margin=Selling Price−Cost of Goods SoldSelling Price×100%\text{Margin} = \frac{\text{Selling Price} - \text{Cost of Goods Sold}}{\text{Selling Price}} \times 100\%Margin=Selling PriceSelling Price−Cost of Goods Sold​×100%\]

Market Capitalization (Market Cap)

Definition: The total market value of a company's outstanding shares of stock.
Example: If a company has 1 million shares outstanding and the current share price is $50, its market capitalization is $50 million.
Calculation: \[Market Cap=Share Price×Number of Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Number of Shares Outstanding}Market Cap=Share Price×Number of Shares Outstanding\]

Markup

Definition: The amount added to the cost of a product to determine its selling price.
Example: If a product costs $50 to produce and the company wants a 50% markup, the selling price would be $75.
Calculation: \[Markup=Cost of Product×(1+Markup Percentage)\text{Markup} = \text{Cost of Product} \times (1 + \text{Markup Percentage})Markup=Cost of Product×(1+Markup Percentage)\]

Monetary Unit Assumption

Definition: An accounting principle that assumes transactions and events can be expressed in monetary units (e.g., dollars).
Example: In financial statements, a company reports its financial transactions in a consistent currency (e.g., USD), disregarding inflation.
Calculation: No specific calculation, but it underlies the recording and reporting of all financial transactions.

N

Net Income

Definition: The total profit of a company after all expenses, including taxes and interest, have been deducted from revenue.
Example: If a company has $1,000,000 in revenue and $800,000 in total expenses, its net income is $200,000.
Calculation: \[Net Income=Revenue−Total Expenses\text{Net Income} = \text{Revenue} - \text{Total Expenses}Net Income=Revenue−Total Expenses\]

Net Present Value (NPV)

Definition: The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Example: If a project costs $100,000 now and is expected to generate $120,000 in the future, the NPV can be calculated to determine if the project is worthwhile.
Calculation: \[NPV=∑Cash Inflowt(1+r)t−Initial Investment\text{NPV} = \sum \frac{\text{Cash Inflow}_t}{(1 + r)^t} - \text{Initial Investment}NPV=∑(1+r)tCash Inflowt​​−Initial Investment\] Where rrr is the discount rate and ttt is the time period.

Net Working Capital

Definition: A measure of a company’s short-term financial health, calculated as current assets minus current liabilities.
Example: If a company has $200,000 in current assets and $150,000 in current liabilities, its net working capital is $50,000.
Calculation: \[Net Working Capital=Current Assets−Current Liabilities\text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities}Net Working Capital=Current Assets−Current Liabilities\]

Non-Operating Income

Definition: Income derived from activities not related to the core operations of a business, such as dividends, interest, or rental income.
Example: If a company earns $5,000 in interest from its investments, this would be considered non-operating income.
Calculation: No specific calculation, but it is reported separately from operating income on the income statement.

O

Operating Expenses (OPEX)

Definition: The ongoing costs for running a business, such as rent, utilities, and salaries, that are not directly tied to the production of goods or services.
Example: If a company spends $50,000 on rent and $30,000 on salaries, these are considered operating expenses.
Calculation: No specific calculation, but it is subtracted from gross profit to calculate operating income.

Operating Income

Definition: The profit a company makes from its normal business operations, excluding income from investments and before taxes and interest.
Example: If a company has a gross profit of $500,000 and operating expenses of $300,000, its operating income is $200,000.
Calculation: \[Operating Income=Gross Profit−Operating Expenses\text{Operating Income} = \text{Gross Profit} - \text{Operating Expenses}Operating Income=Gross Profit−Operating Expenses\]

Overhead

Definition: The ongoing business expenses not directly attributed to creating a product or service, such as rent, utilities, and administrative costs.
Example: If a company pays $5,000 in rent and $2,000 for utilities each month, these are considered overhead costs.
Calculation: No specific calculation, but overhead is typically allocated to products or services to determine total costs.

Owner’s Equity

Definition: The residual interest in the assets of the entity after deducting liabilities, also known as net assets or shareholder equity.
Example: If a company has $500,000 in assets and $300,000 in liabilities, the owner’s equity is $200,000.
Calculation: \[Owner’s Equity=Total Assets−Total Liabilities\text{Owner’s Equity} = \text{Total Assets} - \text{Total Liabilities}Owner’s Equity=Total Assets−Total Liabilities\]

P

Par Value

Definition: The nominal or face value of a bond or stock as stated by the issuing company.
Example: If a company issues a bond with a par value of $1,000, this is the amount the bondholder will receive at maturity.
Calculation: No specific calculation, but par value is often used to determine the minimum price for which a security can be issued.

Price-to-Earnings Ratio (P/E Ratio)

Definition: A valuation ratio of a company's current share price compared to its per-share earnings.
Example: If a company’s stock price is $50 and its earnings per share (EPS) is $5, the P/E ratio is 10.
Calculation: \[P/E Ratio=Market Price per ShareEarnings per Share (EPS)\text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}}P/E Ratio=Earnings per Share (EPS)Market Price per Share​\]

Profit and Loss Statement (P&L)

Definition: Another term for the income statement, showing a company's revenues, costs, and expenses during a specific period.
Example: A company’s P&L might show it made $100,000 in revenue but had $70,000 in expenses, resulting in a $30,000 profit.
Calculation: \[Net Profit=Revenue−Expenses\text{Net Profit} = \text{Revenue} - \text{Expenses}Net Profit=Revenue−Expenses\]

Profit Margin

Definition: A profitability ratio calculated as net income divided by revenue, expressed as a percentage.
Example: If a company has a net income of $20,000 on $100,000 in revenue, its profit margin is 20%.
Calculation: \[Profit Margin=Net IncomeRevenue×100%\text{Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}} \times 100\%Profit Margin=RevenueNet Income​×100%\]

Project Accounting

Definition: A specialized form of accounting that tracks costs, revenue, and profitability associated with a specific project.
Example: A construction company uses project accounting to manage the financials of building a new bridge.
Calculation: \[Project Profitability=Revenue from Project−Costs Associated with Project\text{Project Profitability} = \text{Revenue from Project} - \text{Costs Associated with Project}Project Profitability=Revenue from Project−Costs Associated with Project\]

Q

Qualified Opinion

Definition: A statement issued by an auditor indicating that while the financial statements are generally accurate, there are specific exceptions that need to be noted.
Example: If an auditor finds that a company’s inventory valuation is questionable but the rest of the financial statements are accurate, they might issue a qualified opinion.
Calculation: No specific calculation, but it affects how financial statements are interpreted by investors and regulators.

Quick Assets

Definition: Assets that can be quickly converted into cash, typically including cash, marketable securities, and receivables.
Example: If a company has $50,000 in cash, $30,000 in receivables, and $20,000 in marketable securities, its quick assets total $100,000.
Calculation: No specific calculation, but quick assets are used to calculate the quick ratio.

Quick Ratio

Definition: A liquidity ratio that measures a company's ability to pay off its current liabilities without relying on the sale of inventory.
Example: If a company has $50,000 in quick assets (cash, marketable securities, receivables) and $25,000 in current liabilities, its quick ratio is 2.
Calculation: \[Quick Ratio=Quick AssetsCurrent Liabilities\text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesQuick Assets​\]

R

Receivables Turnover Ratio

Definition: A financial ratio that measures how efficiently a company collects its receivables or the credit it extends to customers.
Example: If a company has $500,000 in credit sales and $50,000 in average accounts receivable, its receivables turnover ratio is 10.
Calculation: \[Receivables Turnover Ratio=Net Credit SalesAverage Accounts Receivable\text{Receivables Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}Receivables Turnover Ratio=Average Accounts ReceivableNet Credit Sales​\]

Retained Earnings

Definition: The cumulative amount of net income that a company retains, rather than distributing it as dividends to shareholders.
Example: If a company earns $100,000 in net income and pays $30,000 in dividends, $70,000 is added to retained earnings.
Calculation: \[Retained Earnings=Beginning Retained Earnings+Net Income−Dividends Paid\text{Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends Paid}Retained Earnings=Beginning Retained Earnings+Net Income−Dividends Paid\]

Return on Assets (ROA)

Definition: A profitability ratio that measures how effectively a company uses its assets to generate profit.
Example: If a company has a net income of $100,000 and total assets of $1,000,000, its ROA is 10%.
Calculation: \[ROA=Net IncomeTotal Assets×100%\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100\%ROA=Total AssetsNet Income​×100%\]

Return on Investment (ROI)

Definition: A measure of the profitability of an investment, calculated as net profit divided by the initial cost of the investment.
Example: If a company invests $10,000 in a project and earns $15,000 from it, the ROI is 50%.
Calculation: \[ROI=Net ProfitInvestment Cost×100%\text{ROI} = \frac{\text{Net Profit}}{\text{Investment Cost}} \times 100\%ROI=Investment CostNet Profit​×100%\]

S

Sales Revenue

Definition: The income from sales of goods and services, before any costs or expenses are deducted.
Example: If a company sells 1,000 units of a product at $50 each, the sales revenue is $50,000.
Calculation: \[Sales Revenue=Number of Units Sold×Price per Unit\text{Sales Revenue} = \text{Number of Units Sold} \times \text{Price per Unit}Sales Revenue=Number of Units Sold×Price per Unit\]

Segment Reporting

Definition: The reporting of financial information for different business segments or divisions within a company.
Example: A company divides its financial statements into segments for North America, Europe, and Asia to analyze regional performance.
Calculation: No specific calculation, but revenue, costs, and profit are broken down by segment.

Shareholder Equity

Definition: The owners' claim after subtracting total liabilities from total assets. Also known as "net assets" or "net worth."
Example: If a company has $1,000,000 in assets and $600,000 in liabilities, shareholder equity is $400,000.
Calculation: \[Shareholder Equity=Total Assets−Total Liabilities\text{Shareholder Equity} = \text{Total Assets} - \text{Total Liabilities}Shareholder Equity=Total Assets−Total Liabilities\]

Shareholders' Equity

Definition: The owners' claim after subtracting total liabilities from total assets; also known as net assets or net worth.
Example: If a company has $1,000,000 in assets and $600,000 in liabilities, shareholders' equity is $400,000.
Calculation: \[Shareholders’ Equity=Total Assets−Total Liabilities\text{Shareholders' Equity} = \text{Total Assets} - \text{Total Liabilities}Shareholders’ Equity=Total Assets−Total Liabilities\]

Sunk Cost

Definition: A cost that has already been incurred and cannot be recovered.
Example: If a company spends $100,000 on research and development and the project is canceled, the $100,000 is a sunk cost.
Calculation: No specific calculation, but sunk costs should not be considered when making future investment decisions.

T

Taxable Income

Definition: The amount of income that is subject to income tax after deductions and exemptions.
Example: If a company has $1,000,000 in revenue and $800,000 in deductions, its taxable income is $200,000.
Calculation: \[Taxable Income=Gross Income−Deductions−Exemptions\text{Taxable Income} = \text{Gross Income} - \text{Deductions} - \text{Exemptions}Taxable Income=Gross Income−Deductions−Exemptions\]

Times Interest Earned (TIE) Ratio

Definition: A measure of a company’s ability to meet its debt obligations based on its earnings before interest and taxes.
Example: If a company has an EBIT of $100,000 and interest expenses of $20,000, its TIE ratio is 5.
Calculation: \[TIE Ratio=EBITInterest Expense\text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}TIE Ratio=Interest ExpenseEBIT​\]

Total Assets

Definition: The sum of all assets owned by a company, including both current and non-current assets.
Example: If a company has $200,000 in cash, $300,000 in inventory, and $500,000 in property, its total assets are $1,000,000.
Calculation: \[Total Assets=Current Assets+Non-Current Assets\text{Total Assets} = \text{Current Assets} + \text{Non-Current Assets}Total Assets=Current Assets+Non-Current Assets\]

Trial Balance

Definition: A report that lists the balances of all general ledger accounts to ensure that debits equal credits.
Example: Before preparing financial statements, a company might prepare a trial balance to confirm that the books are balanced.
Calculation: No specific calculation, but the sum of debits should equal the sum of credits.

U

Unearned Revenue

Definition: Money received by a company for goods or services not yet delivered or performed; a liability until the service is provided.
Example: If a customer pays $1,000 in advance for services to be delivered next month, this amount is recorded as unearned revenue.
Calculation: No specific calculation, but it appears as a liability on the balance sheet.

Units of Production Depreciation

Definition: A depreciation method that allocates cost based on the asset's usage, output, or production rather than time.
Example: If a machine costs $10,000 and is expected to produce 100,000 units, and it produces 10,000 units in the first year, the depreciation for that year is $1,000.
Calculation: \[Depreciation Expense=Cost of Asset−Salvage ValueTotal Estimated Production×Units Produced\text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Total Estimated Production}} \times \text{Units Produced}Depreciation Expense=Total Estimated ProductionCost of Asset−Salvage Value​×Units Produced\]

Unrealized Gains/Losses

Definition: The increase or decrease in the value of an investment that has not yet been sold.
Example: If a stock you own has increased in value from $100 to $150, but you haven’t sold it yet, you have an unrealized gain of $50.
Calculation: \[Unrealized Gain/Loss=Current Market Value−Purchase Price\text{Unrealized Gain/Loss} = \text{Current Market Value} - \text{Purchase Price}Unrealized Gain/Loss=Current Market Value−Purchase Price\]

Unsecured Debt

Definition: Debt that is not backed by any specific assets of the borrower; repayment is based solely on the borrower’s creditworthiness.
Example: Credit card debt is typically unsecured, meaning there is no collateral that the lender can claim if the borrower defaults.
Calculation: No specific calculation, but it is riskier for lenders than secured debt.

V

Variable Costs

Definition: Costs that change in proportion to the level of production or sales.
Example: If a company spends $5 per unit to produce a product, and it produces 1,000 units, the total variable cost is $5,000.
Calculation: \[Total Variable Costs=Variable Cost per Unit×Number of Units Produced\text{Total Variable Costs} = \text{Variable Cost per Unit} \times \text{Number of Units Produced}Total Variable Costs=Variable Cost per Unit×Number of Units Produced\]

Variable Interest Rate

Definition: An interest rate that fluctuates over time based on an underlying benchmark or index.
Example: If you have a loan with a variable interest rate tied to the prime rate, your interest payments will increase or decrease as the prime rate changes.
Calculation: No specific calculation, but it changes according to the benchmark rate.

Variance Analysis

Definition: The process of analyzing the difference between actual and budgeted figures to understand the reasons for the variance.
Example: If a company budgets $50,000 for marketing but spends $60,000, the variance is $10,000 unfavorable.
Calculation: \[Variance=Actual Figure−Budgeted Figure\text{Variance} = \text{Actual Figure} - \text{Budgeted Figure}Variance=Actual Figure−Budgeted Figure\]

Volume Variance

Definition: The difference between the budgeted quantity of sales or production and the actual quantity, multiplied by the budgeted cost or selling price.
Example: If a company budgeted to sell 1,000 units at $10 each but only sold 800 units, the volume variance is a $2,000 unfavorable variance.
Calculation: \[Volume Variance=(Actual Quantity−Budgeted Quantity)×Budgeted Price/Cost\text{Volume Variance} = (\text{Actual Quantity} - \text{Budgeted Quantity}) \times \text{Budgeted Price/Cost}Volume Variance=(Actual Quantity−Budgeted Quantity)×Budgeted Price/Cost\]

W

Weighted Average Cost Method

Definition: An inventory valuation method that assigns a cost to inventory based on the average cost of goods available for sale during the period.
Example: If a company has 100 units at $10 each and another 100 units at $15 each, the weighted average cost per unit is $12.50.
Calculation: \[Weighted Average Cost per Unit=Total Cost of Goods Available for SaleTotal Units Available for Sale\text{Weighted Average Cost per Unit} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Total Units Available for Sale}}Weighted Average Cost per Unit=Total Units Available for SaleTotal Cost of Goods Available for Sale​\]

Weighted Average Cost of Capital (WACC)

Definition: The average rate of return a company is expected to pay its investors, weighted according to the proportion of equity and debt in the company's capital structure.
Example: If a company has 60% equity with a cost of 8% and 40% debt with a cost of 5%, the WACC is calculated as follows.
Calculation: \[WACC=(EV×Re)+(DV×Rd×(1−Tc))\text{WACC} = \left( \frac{\text{E}}{\text{V}} \times \text{Re} \right) + \left( \frac{\text{D}}{\text{V}} \times \text{Rd} \times (1 - \text{Tc}) \right)WACC=(VE​×Re)+(VD​×Rd×(1−Tc))\]
Where:
• EEE = Market value of equity
• DDD = Market value of debt
• VVV = E+DE + DE+D (total market value of the firm’s financing)
• ReReRe = Cost of equity
• RdRdRd = Cost of debt
• TcTcTc = Corporate tax rate

Working Capital

Definition: The difference between a company's current assets and current liabilities, indicating the short-term financial health of a company.
Example: If a company has $200,000 in current assets and $150,000 in current liabilities, its working capital is $50,000.
Calculation: \[Working Capital=Current Assets−Current Liabilities\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}Working Capital=Current Assets−Current Liabilities\]

Write-Off

Definition: The reduction of the value of an asset or earnings by the amount of an expense or loss.
Example: If a company determines that an account receivable of $5,000 is uncollectible, it will write off the $5,000 as a bad debt expense.
Calculation: No specific calculation, but it typically involves debiting an expense account and crediting an asset account.

X

X-Efficiency

Definition: The degree of efficiency maintained by firms under conditions of imperfect competition.
Example: A company operating in a monopolistic market might not be as cost-efficient as one in a highly competitive market, leading to X-inefficiency.
Calculation: No specific calculation, but it relates to the company’s ability to minimize costs in an imperfect market.

Y

Year-End Closing

Definition: The process of finalizing a company's books at the end of a fiscal year, including recording all revenue and expenses and preparing financial statements.
Example: At the end of the fiscal year, a company will close out all temporary accounts and prepare its income statement, balance sheet, and cash flow statement.
Calculation: No specific calculation, but it involves ensuring that all accounts are accurately reflected for the year.

Yield

Definition: The income return on an investment, typically expressed as a percentage of the investment's cost or current market value.
Example: If a bond pays $50 in interest annually and costs $1,000 to purchase, the yield is 5%.
Calculation: \[Yield=Annual Income from InvestmentCost or Current Market Value of Investment×100%\text{Yield} = \frac{\text{Annual Income from Investment}}{\text{Cost or Current Market Value of Investment}} \times 100\%Yield=Cost or Current Market Value of InvestmentAnnual Income from Investment​×100%\]

Yield Curve

Definition: A graph that shows the relationship between interest rates and bonds of equal credit quality but differing maturity dates.
Example: A normal yield curve slopes upward, indicating that longer-term bonds have higher yields than short-term bonds.
Calculation: No specific calculation, but it is plotted with interest rates on the vertical axis and time to maturity on the horizontal axis.

Yield to Maturity (YTM)

Definition: The total return anticipated on a bond if the bond is held until it matures, expressed as an annual rate.
Example: If you purchase a bond for $950 that will pay $1,000 at maturity in 5 years, plus annual interest payments, the YTM would be calculated to reflect the total return over those 5 years.
Calculation: YTM is calculated using a complex formula that involves solving for the discount rate in the following equation:
\[Current Price=∑Coupon Payment(1+YTM)t+Face Value(1+YTM)n\text{Current Price} = \sum \frac{\text{Coupon Payment}}{(1 + \text{YTM})^t} + \frac{\text{Face Value}}{(1 + \text{YTM})^n}Current Price=∑(1+YTM)tCoupon Payment​+(1+YTM)nFace Value​\]
Where:
• ttt = Time period
• nnn = Number of periods until maturity

Z

Z-Score

Definition: A statistical measure that indicates how many standard deviations an element is from the mean; in finance, it is used to predict the probability of a company going bankrupt.
Example: If a company's Z-Score is below 1.8, it is considered to be in the "distress" zone and at risk of bankruptcy.
Calculation: The Altman Z-Score formula is:
\[Z=1.2×Working CapitalTotal Assets+1.4×Retained EarningsTotal Assets+3.3×EBITTotal Assets+0.6×Market Value of EquitytextTotalLiabilities+1.0×SalesTotal Assets\text{Z} = 1.2 \times \frac{\text{Working Capital}}{\text{Total Assets}} + 1.4 \times \frac{\text{Retained Earnings}}{\text{Total Assets}} + 3.3 \times \frac{\text{EBIT}}{\text{Total Assets}} + 0.6 \times \frac{\text{Market Value of Equity}}{\\text{Total Liabilities}} + 1.0 \times \frac{\text{Sales}}{\text{Total Assets}}Z=1.2×Total AssetsWorking Capital​+1.4×Total AssetsRetained Earnings​+3.3×Total AssetsEBIT​+0.6×textTotalLiabilitiesMarket Value of Equity​+1.0×Total AssetsSales​\]

Zero-Based Budgeting (ZBB)

Definition: A budgeting method where all expenses must be justified for each new period, starting from a "zero base," without reference to previous budgets.
Example: If a department spent $100,000 last year, it must justify every dollar for the new budget year, even if it wants to keep the same $100,000.
Calculation: No specific calculation, but the budget starts at zero and builds up based on necessary expenses.