Unit 2 Flashcards
Income statement
One of the three major financial statements that reports a company’s financial performance over a specific accounting period
Net income
Measure of profitability over a period of time
Revenue
The amount of money a business takes in during a reporting period.
The real dollar amount a company keeps from its sales.
Expenses
The amount of money a business spends during a reporting period.
Cost of goods sold (COGS)
The cost of producing or purchasing the goods that are delivered to customers. It’s considered an expense.
Margin
A measure of how much money a company is making on its products or services after subtracting all of the direct and indirect costs involved, and expressed as a percentage.
Gross profit
The profit a company makes after deducting the costs associated with producing and selling its products or the cost associated with its services
EBITDA
Earnings before interests, taxes, depreciation and amortisation.
Represents the cash profit generated by the company’s operations
Operating income
Measures the amount of profit realised from a business’ operations after deducting operating expenses such as wages, depreciation and COGS
Depreciation
The reduction of value/wear out of a tangible asset over a period of time and accounting for that in a way that reflects the true cost of using them
Amortisation
The reduction of value/wear out of intangible assets over its useful life and accounting for that in a way that reflects the true cost of using them
Impairment
A permanent reduction in the value of a company’s assets. It may be a fixed asset or an intangible asset. Permanent decrease in value.
Fair value
An alternative approach to measurement that seeks to capture changes in asset and liability values over time
Earnings per share (EPS)
Diving the total money the company made among each share
Gross margin
The ability of a company to sell products for more than the sum of the direct costs of making it (if it’s good at making profit)
Operating margin
How much a company earns from each dollar of sales
Net profit margin
The fraction of each dollar in revenues that is available to equity holders after the firm pays its expenses, interest and taxes
Return on Equity (ROE)
Measures a corporation’s profitability by revealing how much profit a company generated with the money shareholders have invested
Return on Assets (ROA)
The profitability of the company relative to the total amount of assets the owners have invested in the business
Accounts receivable days
How many days the firm takes to collect payments from their customers
Inventory turnover
How efficiently companies turn their inventory into sales
Asset turnover ratio
Measures the value of a company’s sales or revenues relative to the value of its assets
Interest coverage ratio
How easily a company can pay interest on its outstanding debt. It’s a leverage ratio (to what extent a company uses liabilities as a source of financing)
Price to earnings ratio (P/E)
The ratio of the value of equity (market value) to the firm’s earnings, either total basis or per share basis
The business or economic entity assumption
Requires companies to keep all of their business transactions separate from personal transactions
Monetary assumption
Requires businesses to record and present all transactions in monetary units
Time period assumption
Assumes all transactions can be separated in time periods such as months, quarters and years
Going concern assumption
Assumes that businesses will continue operating and not be closed in a foreseeable future
The historical cost principle
States that businesses are required to record most of their assets at their original cost with no adjustments for increases in market value
The revenue recognition principle
The basis of accrual accounting. It requires businesses to record revenue when the goods have been sold or the service has been provided
The matching principle
Requires businesses to match expenses with revenues, which is double entry bookkeeping. It uses accrual basis accounting.
The disclosure principle
To disclose all pertinent information about the business in an understandable form
Historical cost
A measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company
Revenue recognition principle
Requires that revenues are recognised when realised and earned, not when cash is received
