Accounting Terms

GAAP (Generally Accepted Accounting Principles)

The common set of standards and procedures by which audited financial statements are prepared

Matching Principle

The accounting requirement to recognize expenses in the same period as the revenues they helped to generate

Accrual Accounting

A method where revenue and expenses are recorded when they occur

Historical Cost

The principle that assets are recorded on the balance sheet at their original purchase price rather than current market value

Current Assets

Assets expected to be converted to cash within 12 months

Fixed Assets

Long-term tangible assets (like PPE) or intangible assets (like patents) used in operations for more than one year

Accounts Receivable

Amounts owed to the firm by customers who purchased goods or services on credit

Inventory

The raw materials

Current Liabilities

Debts or obligations due to be paid within one year

Accounts Payable

Money the firm owes to its suppliers for goods or services purchased on credit

Net Working Capital (NWC)

Current assets minus current liabilities; it represents the firm's short-term liquidity

Owners' Equity (Book Value)

The residual value of the firm after liabilities are subtracted from assets

Net Book Value

The value of an asset

Revenue (Top Line)

The total amount of money brought in by the firm’s primary business activities before any expenses are deducted

Cost of Goods Sold (COGS)

The direct costs attributable to the production of the goods sold by a company

EBIT (Operating Income)

Earnings Before Interest and Taxes; it measures the profit generated by operations regardless of capital structure

EBITDA

EBIT plus Depreciation and Amortization; used as a proxy for operating cash flow before tax effects

Net Income (Bottom Line)

The total profit of the firm after all expenses

Depreciation

A non-cash expense that allocates the cost of a tangible asset over its useful life for tax and accounting purposes

Straight Line Depreciation

(Initial Cost - Salvage Value) / Useful lifespan of the equipment

MACRS (Modified Accelerated Cost Recovery System)

The required tax depreciation system in the United States for most tangible depreciable property placed into service after 1986

Salvage Value

The estimated resale or scrap value of an asset at the end of its useful life

After Tax Salvage Value

Salvage value - (Salvage value - Book Value) × Tax Rate

Accumulated Depreciation

The total cumulative amount of depreciation expense allocated to a fixed asset

Amortization

Similar to depreciation

Operating Cash Flow (OCF)

Cash generated from a firm's daily business activities

Net Income

The total profit of a firm after all cost of sales; it represents the actual amount of profit that remains for the business to either reinvest or distribute to its owners

it represents the actual amount of profit that remains for the business to either reinvest or distribute to its owners

Current Ratio

A liquidity ratio calculated as current assets divided by current liabilities

Debt-Equity Ratio

A leverage ratio that compares a firm's total debt to its total equity

Inventory Turnover

The number of times a firm sells and replaces its inventory during a specific period

Profit Margin

A measure of efficiency calculated as net income divided by sales

Return on Equity (ROE)

Net income divided by total equity