50 financial terms, GPT-4 3 may 2023 Flashcards
Cost of Goods Sold (COGS)
The direct costs of producing or acquiring the goods or services that a company sells, including raw materials, labor, and manufacturing overhead.
Gross Profit
The difference between a company’s revenue and its cost of goods sold. Represents the profit a company makes after accounting for production costs.
Gross Profit Margin
Gross profit expressed as a percentage of revenue. Indicates the efficiency of a company’s production process.
Operating Expenses
Costs associated with running a company’s core business operations, such as salaries, rent, utilities, and marketing.
Examples:
Salaries and wages: Compensation paid to employees for their work.
Employee benefits: Costs related to health insurance, retirement plans, and other employee benefits.
Rent: Expenses associated with leasing office space or other facilities for business operations.
Utilities: Costs for electricity, water, gas, and other essential services.
Office supplies: Expenses for items such as paper, ink, and office equipment.
Marketing and advertising: Costs related to promoting the company’s products or services, including online ads, print materials, and public relations efforts.
Insurance: Premiums paid for various types of business insurance, such as property, liability, and workers’ compensation.
Depreciation and amortization: The systematic allocation of the cost of tangible and intangible assets over their useful lives, respectively.
Travel and entertainment: Costs associated with business travel, including transportation, lodging, meals, and other related expenses.
Professional fees: Expenses for services provided by external professionals, such as attorneys, accountants, and consultants.
Operating Income
A measure of a company’s profitability from its core business operations, calculated by subtracting total operating expenses from total revenue.
Operating Margin
Operating income expressed as a percentage of revenue. Indicates the efficiency of a company’s operations and pricing strategy.
EBITDA
A measure of a company’s operating performance that excludes financing decisions, tax policies, and the accounting treatment of tangible and intangible assets.
Net Income
The total profit or loss a company generates after accounting for all expenses, including operating expenses, interest, taxes, and one-time gains or losses.
Formula:
Net Income = Total Revenue - Total Expenses
Net Profit Margin
Net income expressed as a percentage of revenue. Indicates the overall profitability of a company.
Fixed Costs
Costs that do not change with the level of production or sales, such as rent or salaries.
Variable Costs
Costs that change with the level of production or sales, such as raw materials or commissions.
Break-Even Point
The level of sales at which a company’s total revenue equals its total costs, resulting in neither profit nor loss.
Cash Flow
The movement of money in and out of a business, representing the operating, investing, and financing activities of a company.
Cash flow refers to the movement of money into and out of a business over a specific period, reflecting the company’s ability to generate and manage cash. It encompasses all sources of incoming cash, such as sales revenue, investments, and loans, as well as all outgoing cash, including operating expenses, capital expenditures, and debt repayments. For example, a positive cash flow might result from strong sales, successful cost management, or new investment, while a negative cash flow could be due to high expenses, poor sales performance, or large capital investments.
Operating Cash Flow
The cash generated from a company’s core business operations, reflecting its ability to generate cash to fund operations, pay debts, and invest in growth.
Free Cash Flow
The cash available to a company after accounting for capital expenditures, such as investments in property, plant, and equipment.
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Free Cash Flow (FCF) is a financial metric that represents the cash a company generates from its operations after accounting for capital expenditures. It indicates how much cash is available for discretionary purposes, such as reinvesting in the business, paying down debt, or distributing dividends to shareholders. FCF is considered a crucial indicator of a company’s financial health and ability to generate value for investors.
The formula for Free Cash Flow is:
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Where:
Operating Cash Flow is the cash generated from a company’s core business operations, as reflected in its cash flow statement.
Capital Expenditures (CapEx) are funds spent by a company to acquire or upgrade physical assets, such as property, plant, and equipment.
Illustrative Example:
Let’s assume Company XYZ has an Operating Cash Flow of $500,000 and Capital Expenditures of $200,000 during a specific period.
Free Cash Flow = $500,000 (Operating Cash Flow) - $200,000 (Capital Expenditures)
Free Cash Flow = $300,000
In this example, Company XYZ generated $300,000 in Free Cash Flow during the period. This means that, after accounting for the necessary investments to maintain or expand its operations, the company has $300,000 available for other purposes, such as paying down debt, distributing dividends to shareholders, or reinvesting in growth opportunities. A positive Free Cash Flow is generally seen as a sign of a healthy, financially stable company
Working Capital
The difference between a company’s current assets and current liabilities, representing its ability to meet short-term obligations and fund operations.
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Working Capital is a financial metric that represents a company’s short-term liquidity and operational efficiency. It measures the difference between a company’s current assets and current liabilities, indicating the resources available to cover day-to-day operations, meet financial obligations, and invest in growth opportunities. A positive working capital suggests that a company has sufficient funds to meet its short-term liabilities, while a negative working capital may indicate potential liquidity issues.
The formula for Working Capital is:
Working Capital = Current Assets - Current Liabilities
Where:
Current Assets are the assets that a company expects to convert into cash or use up within one year, such as cash, accounts receivable, and inventory.
Current Liabilities are the obligations that a company must settle within one year, such as accounts payable, short-term debt, and accrued expenses.
Illustrative Example:
Let’s assume Company ABC has $400,000 in Current Assets and $300,000 in Current Liabilities.
Working Capital = $400,000 (Current Assets) - $300,000 (Current Liabilities)
Working Capital = $100,000
In this example, Company ABC has a Working Capital of $100,000. This means that, after considering its short-term financial obligations, the company has $100,000 available to cover day-to-day operations and invest in growth opportunities. A positive Working Capital is generally seen as an indicator of a healthy, financially stable company with adequate liquidity.
Current Ratio
A liquidity ratio that measures a company’s ability to pay short-term liabilities with short-term assets.
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Current Ratio is a financial metric that measures a company’s liquidity and ability to meet its short-term financial obligations. It compares a company’s current assets to its current liabilities, providing insights into whether the company has sufficient resources to pay off its short-term debts. A higher current ratio indicates better short-term financial stability, while a lower ratio may signal potential liquidity issues.
The formula for Current Ratio is:
Current Ratio = Current Assets / Current Liabilities
Where:
Current Assets are the assets that a company expects to convert into cash or use up within one year, such as cash, accounts receivable, and inventory.
Current Liabilities are the obligations that a company must settle within one year, such as accounts payable, short-term debt, and accrued expenses.
Illustrative Example:
Let’s assume Company XYZ has $600,000 in Current Assets and $300,000 in Current Liabilities.
Current Ratio = $600,000 (Current Assets) / $300,000 (Current Liabilities)
Current Ratio = 2.0
In this example, Company XYZ has a Current Ratio of 2.0. This means that it has $2 in current assets for every $1 in current liabilities, indicating that the company is in a strong position to meet its short-term financial obligations. Generally, a Current Ratio of 1.0 or higher is considered satisfactory, as it suggests that the company has enough assets to cover its liabilities. However, an excessively high Current Ratio may indicate that the company is not using its assets efficiently to generate revenue and growth.
Quick Ratio
A liquidity ratio that measures a company’s ability to pay short-term liabilities using its most liquid assets, excluding inventory.
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Quick Ratio, also known as the Acid-Test Ratio, is a financial metric that measures a company’s short-term liquidity and ability to meet its financial obligations without relying on inventory. It is a more conservative measure than the Current Ratio, as it excludes inventory from current assets, focusing on the most liquid assets that can be easily converted to cash. The Quick Ratio provides insights into whether the company can pay off its short-term debts using only its cash, cash equivalents, and accounts receivable.
The formula for Quick Ratio is:
Quick Ratio = (Cash + Cash Equivalents + Accounts Receivable) / Current Liabilities
Where:
Cash and Cash Equivalents are the most liquid assets, such as physical currency, bank deposits, and short-term investments that can be quickly converted into cash.
Accounts Receivable are amounts owed to the company by customers for goods or services provided on credit.
Current Liabilities are the obligations that a company must settle within one year, such as accounts payable, short-term debt, and accrued expenses.
Illustrative Example:
Let’s assume Company ABC has $100,000 in Cash, $50,000 in Cash Equivalents, $150,000 in Accounts Receivable, and $300,000 in Current Liabilities.
Quick Ratio = ($100,000 + $50,000 + $150,000) / $300,000
Quick Ratio = $300,000 / $300,000
Quick Ratio = 1.0
In this example, Company ABC has a Quick Ratio of 1.0. This means that it has $1 in cash, cash equivalents, and accounts receivable for every $1 in current liabilities, indicating that the company is in a position to meet its short-term financial obligations without relying on its inventory. Generally, a Quick Ratio of 1.0 or higher is considered satisfactory, as it suggests that the company has enough liquid assets to cover its liabilities. However, an ideal Quick Ratio may vary depending on the industry and the company’s specific circumstances.
Debt-to-Equity Ratio
A financial leverage ratio that compares a company’s total debt to its total equity, indicating the proportion of debt and equity used to finance its assets.
Skuldsättningsgrad
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Debt-to-Equity Ratio is a financial metric that measures a company’s financial leverage by comparing its total debt to its total equity. This ratio indicates the proportion of debt used to finance the company’s assets relative to the amount of equity contributed by shareholders. A higher Debt-to-Equity Ratio suggests that the company relies more on borrowed money to finance its operations, which can be riskier, while a lower ratio implies that the company has a more conservative capital structure with less debt.
The formula for Debt-to-Equity Ratio is:
Debt-to-Equity Ratio = Total Debt / Total Equity
Where:
Total Debt represents the sum of a company’s short-term and long-term borrowings.
Total Equity represents the shareholders’ ownership interest in the company, calculated as the difference between total assets and total liabilities.
Illustrative Example:
Let’s assume Company ABC has $500,000 in Total Debt and $1,000,000 in Total Equity.
Debt-to-Equity Ratio = $500,000 (Total Debt) / $1,000,000 (Total Equity)
Debt-to-Equity Ratio = 0.5
In this example, Company ABC has a Debt-to-Equity Ratio of 0.5. This means that the company has $0.5 in debt for every $1 in equity, indicating a moderate level of financial leverage. An appropriate Debt-to-Equity Ratio may vary depending on the industry and the company’s specific circumstances, but a lower ratio is generally considered less risky.
