The Art of Finance (And Why It Matters) Flashcards
What is finance?
Finance is the art of using limited data to accurately describe how a company is performing
What three things are in an Income Statement?
An Income Statement has Revenue, Operating Costs, and Profit
How is Profit calculated in an Income Statement?
Revenue minus Operating Costs equal Profit
What is Revenue?
Revenue or sales is the value of goods and services sold in a given time period
What are the two types of costs?
Operating Costs and Capital Expenditures
What are Operating Costs?
Operating Costs are the cost of running a business day to day
What are Capital Expenditures?
Capital Expenditures are business purchases considered to be long-term investments, usually over a certain dollar amount
How do Capital Expenditures show up in an Income Statement?
Capital Expenditures show up as depreciation spread out over time in an Income Statement
True or false? In finance and accounting, numbers don’t lie
False
In what two ways does bias enter financial numbers?
Assumptions and Estimates
What is Valuation?
Valuation is the process of figuring out how much a company is worth
What are Accruals?
Accruals are revenues or expenses that accrue in a given time span
What are Allocations?
Allocations are assignments of cost to various departments in a company
What is Depreciation?
Depreciation is a method in accounting where the cost of an item is spread over its useful lifetime on the Income Statement
What four key questions do you ask to spot biases in financial numbers?
- What were the assumptions in this number?
- Are there any estimates in the number?
- What is the bias those assumptions and estimates lead to?
- What are the implications?
