Accounting and the Three Financial Statements Flashcards

General review of accounting principles, vocabulary terms, and financial ratios based on the Module 4 lecture notes.

Income Statement

A financial statement that shows a company’s revenue, expenses, and taxes over a period of time, starting with Revenue and ending with Net Income.

Balance Sheet

A statement showing a company's resources (Assets) and how it paid for those resources (Liabilities and Equity) on a specific date.

Cash Flow Statement

A financial statement that shows changes in cash over a period by starting with Net Income, adjusting for non-cash items, and factoring in changes from operating assets, liabilities, investing, and financing activities.

Revenue

The total value of products or services that a company delivers to its customers during a specific period regardless of whether cash has been collected.

Cost of Goods Sold (COGS)

Expenses directly linked to the delivery of products or services, such as shipping, materials, or direct labor for services.

Gross Margin (what it means and formula)

A metric that indicates the profit a company earns from each additional sale before fixed expenses like rent and employee salaries are considered.

Gross Profit/Revenue where Gross Profit = Revenue - COGS

Operating Expenses

Costs not directly linked to individual products sold, such as marketing, rent, employee salaries, and research and development.

Operating Income

Also known as EBIT, this tells you how much a business earns from its core operations before 'side activities,' interest, and taxes.

Net Income

The 'bottom line' representing how much a company earned in after-tax profits after all expenses, interest, and taxes.

Asset

A resource that will result in a future benefit for the company, such as future cash flow, growth, or tax savings.

Liability

A future obligation for the company, such as a cash payment, delivery of a service, or interest payments to external parties.

Equity

A funding source for assets that does not result in direct, predictable cash outflows like debt; it includes money contributed by owners and cumulative after-tax profits.

Accounts Receivable (AR)

An Asset line item created when a company delivers a product or service to a customer but has not yet received cash payment.

Accounts Payable (AP)

A Liability line item created when a company receives a product or service from a vendor but has not yet paid for it in cash.

Accrued Expenses

Recurring expenses that lack specific invoices, such as utilities, rent, and employee wages, which have been incurred but not yet paid in cash.

Prepaid Expenses

An Asset representing cash paid upfront for services or products that the company has not yet received or consumed.

Deferred Revenue

A Liability representing cash collected upfront from customers for products or services that have not yet been delivered.

Inventory

An Asset representing the supplies and raw materials purchased for products before they are sold and delivered to customers.

Capital Expenditures (CapEx)

Cash spending on assets that will be useful for more than one year, such as property, plants, and equipment (PP&E).

Depreciation

A non-cash expense on the Income Statement used to allocate the initial cost of a capital asset over its useful life.

Stock-Based Compensation (SBC)

A non-cash expense representing the cost of paying employees with stock or options instead of cash salaries.

Goodwill

An intangible asset created in an acquisition to 'plug the gap' between the purchase price paid and the target’s identifiable assets.

Other Intangible Assets

Identifiable non-physical assets acquired in a deal, such as patents, trademarks, and customer relationships, which typically amortize over time.

Deferred Tax Liability (DTL)

Tracking line item for timing differences when Book Taxes listed on the Income Statement exceed the actual Cash Taxes paid to the government.

Deferred Tax Asset (DTA)

An asset representing potential future tax savings, often created when a company records an expense for book purposes that is not yet deductible for tax purposes.

Net Operating Loss (NOL)

A balance created when a company has negative Pre-Tax Income, which can be applied toward reducing taxable income in future years when the company is profitable.

Operating Lease (U.S. GAAP)

A lease where a company records a simple Rental Expense on the Income Statement, and both a 'Right-of-Use Asset' and Liability on the Balance Sheet.

Finance Lease

A lease giving a company the risks and benefits of ownership, where the expense is split into Interest and Depreciation elements on the Income Statement.

Free Cash Flow (FCF)

A common discretionary cash flow metric defined as: $FCF = CFO - CapEx$

EBITDA

A proxy for recurring business cash flow calculated as: $EBIT + Depreciation + Amortization$

Leverage Ratio

A credit metric that indicates a company's risk level relative to its debt, calculated as: $\frac{\text{Total Debt}}{\text{EBITDA}}$

Interest Coverage Ratio

A metric measuring how easily a company can pay its interest expenses, calculated as: $\frac{\text{EBITDA}}{\text{Interest Expense}}$

Return on Invested Capital (ROIC)

A measure of capital efficiency defined as: $\frac{\text{NOPAT}}{\text{Average Invested Capital}}$

Return on Equity (ROE)

A returns-based metric calculated as: $\frac{\text{Net Income (to Common)}}{\text{Average (Common) Shareholders' Equity}}$

Days Sales Outstanding (DSO)

A cash conversion metric defined as: $\frac{\text{Accounts Receivable}}{\text{Revenue}} \times \text{Days in Year}$

Cash Conversion Cycle (CCC)

The time it takes a company to convert short-term operational assets into cash, calculated as: $DIO + DSO - DPO$