PGN bootcamp Financial Terms

Accounting

The systematic process of recording, organizing, and reporting financial transactions and business activity.

Assets

Economic resources and goods owned by an entity that provide future economic value, such as cash or inventory.

Liabilities

Debts and financial obligations owed to outside parties, such as bank loans, unpaid rent, or supplier debt.

Stockholders' Equity

The residual interest in a company's resources after subtracting all obligations; represents owner net worth.

The Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$$

Balance Sheet

A financial snapshot presenting an organization's resources, obligations, and shareholder ownership at a specific point in time.

Income Statement

A financial report displaying sales, expenses, and overall profitability over a designated accounting period.

Cash Flow Statement

A financial document tracking the actual movement of currency across operations, investments, and financing.

Accrual Accounting

The method where revenue is recognized when earned and expenses are recognized when incurred, regardless of cash timing.

Cost of Goods Sold (COGS)

Direct costs directly tied to producing goods or delivering services, including direct labor, direct materials, and allocated manufacturing overhead.

Gross Profit

The profit remaining after deducting direct production costs from total sales: $\text{Revenue} - \text{COGS}$

Operating Income (EBIT)

Profit generated strictly from primary business operations before financing costs and taxes: $\text{Gross Profit} - \text{Operating Expenses}$

EBITDA

A non-GAAP metric evaluating operational cash generation by adding non-cash expenses back into operational profit: $\text{EBIT} + \text{Depreciation} + \text{Amortization}$

Net Income

The bottom-line profit remaining after subtracting operating expenses, interest, and taxes from revenue: $\text{Operating Income} - \text{Interest Expense} - \text{Taxes}$

Gross Margin

A profitability ratio showing the percentage of sales remaining after direct production expenses: $\frac{\text{Gross Profit}}{\text{Revenue}}$

Operating Margin

A ratio measuring operational efficiency by assessing the percentage of sales remaining after operating costs: $\frac{\text{Operating Income}}{\text{Revenue}}$

Net Margin

A comprehensive profitability ratio indicating the proportion of each dollar of sales that converts into bottom-line profit: $\frac{\text{Net Income}}{\text{Revenue}}$

Current Assets

Short-term, liquid resources expected to be converted into cash or utilized within one operating cycle (e.g., cash, receivables, inventory).

Fixed Assets

Long-term, illiquid physical resources used over multiple years to generate income (e.g., property, plant, and equipment).

Current Ratio

A liquidity metric evaluating short-term obligation coverage: $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

Debt-to-Equity Ratio

A leverage metric comparing external borrowings against owner-funded capital: $\frac{\text{Total Liabilities}}{\text{Total Equity}}$

Retained Earnings

Cumulative profits reinvested back into the business rather than distributed to owners: $\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$

Operating Activities

Cash flows derived directly from core daily business operations, including customer receipts, employee wages, and supplier payments.

Investing Activities

Cash flows involving the purchase or sale of long-term equipment, physical facilities, or external securities.

Financing Activities

Cash flows related to raising and servicing capital, including taking bank loans, issuing bonds or equity, paying dividends, and buying back stock.

Difference Between Net Income and Cash Flow

Accounting profit records non-cash expenses and uncollected revenues, meaning a company can show accounting profitability while experiencing negative liquidity.

Deferred Revenue

Advance cash collected for goods or services not yet delivered, recorded on the balance sheet as an obligation until earned.

Fixed Costs vs. Variable Costs

Constant expenses unaffected by business volume versus dynamic expenses that fluctuate in direct proportion to production volume.

Interconnection of the Three Financial Statements

The bottom-line earnings from the income statement flow into retained earnings and initiate operational cash reconciliation, while the ending cash balance updates liquid assets on the balance sheet.