Glossary of Terms: Modules 3 & 8 1

Accounts Payable or Trade Credit (A/P): Obligation created when inventory or supplies are
purchased on credit from suppliers. A/P is found on the balance sheet as a current liability.
Accounts Payable Turnover: A short-term liquidity measure used to quantify the rate at which a
company pays off its suppliers. Formula: A/P Turnover = Cost of Goods Sold / Accounts Payable.
A higher number means the company is paying its suppliers faster.
Accounts Receivables (A/R): Money owed by customers for goods or services that have been
received but not yet paid for. Receivables are created when a company sells its products or
services on credit. Typically expected to be collected within twelve months, A/R is shown as a
current asset on the balance sheet.
Accounts Receivable (A/R) Days Sales Outstanding is calculated as 365 Days / A/R Turnover.
Also see Accounts Receivable (A/R) Turnover.
Accounts Receivable (A/R) Turnover: An accounting measure used to quantify a firm's
effectiveness in extending credit and collecting from its customers. The A/R turnover ratio is an
activity ratio, measuring how quickly its credit customers pay. Formula: A/R Turnover = Credit
Sales / Accounts Receivables. Note: frequently Total Sales is substituted for Credit Sales, which
may not be available.
Accrual Accounting: A system where revenue is recognized when earned (products are sold or
services have been performed) and expenses are recognized when incurred to generate revenues
(i.e., the matching concept), during a specific period of time regardless of when cash transactions
occur.
Accrued Expenses: Any expense incurred and shown on the income statement, but not paid for
with cash. Usually listed as a current liability
Accrued Liabilities: An expense incurred but not yet paid. Accrued liabilities can be recorded as
either short or long-term liabilities on a company's balance sheet. Similar to Accrued Expenses
and in fact the terms are often used interchangeably.
Accumulated Depreciation: The aggregate depreciation of an asset up to a single point in its life.
The depreciation expense of an asset during a period is added to the previous periods’ accumulated
depreciation to get the current accumulated depreciation. An asset’s carrying value (“net” or
“book” value) on the balance sheet is the difference between its purchase price and accumulated
depreciation.
Acid Test Ratio or Quick Ratio: An indicator of a firm’s ability to cover short term liabilities
with short-term assets without selling inventory. The acid-test ratio is a far more strenuous test of
liquidity than the other popular liquidity ratio, the Current Ratio. Formula: Acid Test Ratio =
(Current Assets-Inventory) / Current Liabilities.
Assets: Owned or controlled business resources that have future, quantifiable benefits. The
requirement to be reasonably quantifiable in monetary terms means a number of important assets
may not be included in a company balance sheet; e.g. its people, brand name or logo, etc.

1 - This glossary was prepared by Angela Wu of LAGCC, with assistance from Michael Fetters and Richard Bliss.
© 2011
Asset Turnover: The amount of sales generated for every dollar of assets. It is calculated by: Asset
Turnover = Sales / Total Assets. Also known as the "Asset Turnover Ratio". This ratio is one
measure of how effectively uses capacity.
Balance Sheet: A financial statement that summarizes a company's assets, liabilities and owners’
investment (owners’ equity or net worth) at a specific point in time. These three balance sheet
building blocks give investors an idea as to what the company owns and owes, as well as the
amount invested by the owners. The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity.
This is known as the Accounting or Balance Sheet Equation.
Balance Sheet Equation Format (BSE Format): Assets = Liabilities + Shareholder Equity is
used in the text to illustrate the recording of business transactions and the construction of financial
statements.
Cash Flow: The cash that moves in and out of a business. Cash inflows usually arise from one of
three activities – operating, investing or financing. Cash outflows result from expenses,
investments in assets, payments to creditors or owners.
Cash Flow from Financing Activities: A category in the cash flow statement that accounts for
funding: activities with the firm’s capital providers. Examples include issuing dividends,
borrowing or repaying loans, and the sale or repurchase of equity.
Cash Flow From Investing Activities: An item on the cash flow statement that reports the
aggregate change in a company's cash position resulting from investments or the sale of fixed
assets, other companies’ shares, or intangible assets.
Cash Flow From Operating Activities: An accounting item indicating the cash a company gets
from its ongoing, regular business activities. When entrepreneurs talk about “Happiness is a
positive cash flow”, they should be referring to operating cash flows.
Cash Flow Statement: A financial statement that summarizes information about the cash inflows
(receipts) and cash outflows (payments) for a specific period of time. Cash flows are usually
categorized as operating, investing, or financing.
Cash Operating Cycle (Cash Conversion Cycle) = Inventory Days on Hand + A/R Days
Outstanding - A/P Days. It is a measure of how many days a company is “out cash” from the time
it pays for its inventory until it collects cash from its customers. Some businesses (Amazon.com,
Dell, for example) have a negative cash operating cycle, which means they collect from their
customers before they pay their supplier for the product. This is rare.
Common Size Analysis: A financial statement that displays all items as percentages of a common
base figure. Common size statements allow for easy comparison between companies or across time
periods for a given company. For the income statement the base figure is Total Revenue; for the
balance sheet, Total Assets.
Common Size Balance Sheet: In the normal balance sheet, account values are expressed in dollar
terms. A common size balance sheet lists each line item as a percentage of total assets. This type
of financial statement allows for easy comparison between companies or across time periods for a
given company.

2
Common Size Income Statement: An income statement with each line item expressed as a
percentage of total revenue (sales). A common size income statement allows for easy comparison
between companies or across time periods for a given company.
Common Stock (Common Equity or Common Shares): A security that represents ownership in
a corporation. Holders of common stock exercise control by electing a board of directors and
voting on corporate policy. In the event of liquidation, common shareholders have residual rights
to a company's assets, i.e., they are paid only after bondholders, preferred shareholders and other
debtholders have been paid in full.
Comparables (Multiples or Relative) Analysis: A method which estimates value based on
metrics of similar businesses. Comparables analysis uses the assumption companies with similar
risks and business models will be valued comparably by investors. Common metrics for
comparison include Revenue, EBITDA, and Net Income. Also referred to as Comparable
Company Analysis (CCA).
Convertible Bond: A bond that can be converted into a specified number of common shares,
usually at the discretion of the bondholder.
Cost of Goods Sold (COGS) or Cost of Sales: The direct costs attributable to the production or
purchase of goods sold by a company (manufacturer or retailer). For a manufacturer, COGS
includes the cost of the raw materials used in creating the good along with the direct labor costs
and manufacturing overhead incurred in production. It excludes indirect expenses such as
distribution costs and sales force costs. For a retailer, COGS is the wholesale price of the goods
purchased for resale. A service company typically has no COGS, but instead uses “Cost of
Services Provided” which is primarily salaries.
Current Assets: Those assets that are reasonably expected to be converted into cash or used
within one year over the normal course of business. Current assets include cash, accounts
receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be
readily converted to cash.
Current Liabilities: A company's debts or obligations due or payable within one year. Current
liabilities appear on the balance sheet and may include short-term debt, accounts payable, accrued
liabilities, wages payable, taxes payable and other short-term debts.
Current Ratio (CR): A liquidity ratio that measures a company's ability to meet short-term
obligations. The formula is: Current Ratio = Current Assets / Current Liabilities. A higher current
ratio represents more liquidity.
Debt-to-Equity Ratio (D/E): A measure of a company's financial leverage, i.e. its use of debt to
finance the business. There are many definitions of this ratio. Two common ones are total
liabilities/stockholders' equity and total interest-bearing debt/stockholders’ equity. The D/E ratio
indicates what proportions of equity and debt are being used to finance the company’s assets. A
higher number means more leverage.
Debt Service Coverage (Times Burdened Covered): This ratio is a measure of a company’s
ability to cover the principle and interest payments required by its current debt. Debt service
coverage can be calculated a number of ways: EBIT/(interest + principal payments) or
EBITDA/(interest + principal payments).

3
Depreciation: A method of allocating (expensing) the cost of a tangible fixed asset over its useful
life.
Discounted Cash Flow Analysis (DCF): A valuation method based on forecasted cash flows and
their risk. DCF analysis discounts estimated future cash flows using a discount rate that reflects
both the riskiness of the cash flows and the choice of debt and equity (most often the weighted
average cost of capital). The result is an estimate of the present value of the company or project
which generates the cash flows.
DuPont Formula: A performance measurement which breaks ROE into three components: 1)
Profitability, (net profit margin); 2) Asset utilization (total asset turnover), and 3) Financial
leverage, (assets/equity).
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Financial Leverage
(Assets/Equity)
The DuPont formula tells us much more about performance than just looking at ROE in isolation.
Earnings Before Tax (EBT) or Pre-tax Income: An indicator of a company's operating
performance calculated as: EBT = Revenue - Expenses (excluding tax).
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA): An indicator of a
company's operating performance. EBITDA is frequently used as an approximation of operating
cash flows and is popular as a comparables valuation metric.
EBITDA Margin: A measurement of a company's operating profitability.
EBITDA Margin = EBITDA/Revenues).
Because EBITDA excludes depreciation and amortization, the EBITDA margin can provide an
investor with a cleaner view of a company's core profitability.
Enterprise Value (EV): A measure of a company's total market value, including debt and equity.
Enterprise value is calculated as market capitalization (total stock market value) plus debt,
minority interest and preferred shares, minus “excess” cash.
Financial Leverage: 1. The use of various financial instruments, e.g., liabilities, to increase the
potential return of an investment to the owners. 2. The amount of debt used to finance a firm's
assets. A firm with significantly more debt than equity is considered to be highly leveraged.
Financial Statements: Records that outline the financial activities of a business, an individual or
any other entity. Financial statements for businesses usually include: income statements, balance
sheet, statements of cash flows, as well as footnotes explaining the details of these statements.
Fixed Assets (also Property, Plant & Equipment [PP&E]): A long-term tangible asset used in
the generation of revenue. Examples include factories, vehicles, machinery, etc.
Fixed Asset Turnover: The ratio of sales to fixed assets. The fixed-asset turnover ratio measures a
company's ability to generate sales from its fixed-assets. A higher fixed-asset turnover ratio shows
that the company has been more effective in using the investment in fixed assets to generate
revenues. The fixed-asset turnover ratio is calculated as: Fixed Assets Turnover = Net Sales / Net
Property, Plant & Equipment.

4
Fixed Cost: Costs that remain constant regardless of changes in the business’ activity level. That
is, as sales increase, the expense stays the same; e.g. fixed rent for office space.
Forecasting: A planning tool that helps management in its attempts to cope with the uncertainty of
the future, relying mainly on data from the past and analysis of future trends. Forecasting starts
with certain assumptions based on management's experience, knowledge, and judgment.
General & Administrative Expenses (G&A): Expenditures related to the day-to-day operations
of a business. G&A expenses pertain to operating expenses rather than expenses that can be
directly related to the production of any goods or services. General and administrative expenses
include rent, utilities, insurance and managerial salaries.
Gross Margin: The gross margin represents the percent of total sales revenue that the company
retains after incurring the direct costs associated with producing the goods and services sold by a
company. The higher the percentage, the more the company retains on each dollar of sales to
service its operating costs and other obligations (interest and taxes, e.g.).
Gross Margin (%) = (Revenue - Cost of Goods Sold) / Revenue.
Gross Profit: A company's revenue minus its cost of goods sold. Gross profit is the dollar-based
numerator of the Gross Margin calculation.
Income Statement (Profit and Loss Statement (P&L) or Statement of Operations): A financial
statement that measures a company's operating performance, as measured by profitability, over a
specific accounting period (usually quarterly or annually). The income statement starts with
revenue and then subtracts all expenses from both operating and non-operating activities. What is
left, is net income, or “the bottom line”.
Interest Expense: The cost associated with borrowing money. Interest expense is shown on the
income statement below operating profit, but before taxes. Calculated by multiplying the interest
rate for a given period times the loan balance outstanding over the period.
Interest Rate: The percentage cost associated with borrowing money. Higher interest rates mean
the lender feels there is more risk to the loan.
Inventory: The raw materials, work-in-process, and finished goods that are ready or will be ready
for sale. Inventory represents one of the most important assets that most businesses possess,
because the turnover of inventory represents one of the primary sources of revenue generation and
subsequent earnings for the company's shareholders/owners. Most inventory is classified as a
current asset on the balance sheet.
Inventory Days on Hand: Calculated as = 365 Days / Inventory Turnover. This number is an
important indicator of management’s control of inventory and indicates how long an item typically
stays on the shelf before it is sold.
Inventory Turnover: How many times a company's inventory is sold and replaced over a given
period. It is calculated as: Inventory Turnover = Cost of Goods Sold / Inventory. This ratio is used
to evaluate current asset or working capital management.
Liability: A debt or obligation that arise during the normal course of business operations.
Liabilities are settled over time through the transfer of economic benefits including money, goods
or services.

5
Line of Credit (LOC): A short-term loan provided to a company by a financial institution, usually
a bank. A LOC has a maximum loan balance and often must be paid down to zero sometime
during the year. The borrower can draw on the line of credit at any time, as long as it does not
exceed the maximum. This arrangement is usually listed as a current liability and may be called or
required to be paid in full by the bank at any time. LOCs are usually meant to fund cyclical cash
needs, e.g., working capital.
Long-Term Debt: Loans, bonds, and other financial obligations payable in more than one year.
Net Income (NI) or Net Profit or the “Bottom Line”: Net income is calculated by taking
revenues and subtracting all expenses. It is found on a company's income statement and is an
important measure of how profitable the company is over a period of time. Net income represents
the owner’s return after all other expenses. At the end of each period, the net income (or loss) is
added to Retained Earnings in the Owner’s Equity section of the balance sheet.
Net Margin (Net Profit Margin): The ratio of net profits to revenues for a company or business
segment - typically expressed as a percentage that shows how much of each dollar earned by the is
left over after all expenses. Net margins are calculated as: Net Profit / Revenue.
Operating Expenses: Expenses other than COGS incurred in the normal course of business
operations.
Operating Income or Operating Profit: The profit realized after subtracting COGS and total
operating expenses from Revenue. Calculated as Operating Income = Revenue – COGS –
Operating Expenses.
Operating Margin: A ratio used to assess a company's operating efficiency. Calculated as:
Operating Margin = Operating Income / Sales.
Other Current Assets: A balance sheet item that includes the value of non-cash assets (other than
inventory or A/R) due within one year.
Other Current Liabilities: A balance sheet item used by companies to group together current
liabilities not assigned to common liabilities such as debt obligations or accounts payable.
Owner's Equity (Shareholder's Equity or Stockholder’s Equity or Net Worth): A firm's total
assets minus its total liabilities. It represents the amount the owners have invested in the business
either through direct investment or through the accumulation of net profits (less any dividends
taken).
Payables Period (A/P Days): Measures the average time a company takes to pay its suppliers.
Calculated as Payables Period = 365 Days / Accounts Payables Turnover.
Prepaid Expenses: An asset (usually current) that arises when a business make payments for
goods and services to be received in the near future. While prepaid expenses are initially recorded
as assets, their value is expensed over time as the benefit is received onto the income statement.
An example of a prepaid expense would be paying for a full year of insurance in January.
Profit Margin: A percentage-based profitability measure calculated from the income statement. It
can be computed at the gross level (Gross Profit/Revenue), the operating level (Operating
Profit/Revenue) or the net level (Net Profit/Revenue).
Property, Plant and Equipment (PP&E): see “Fixed Assets”

6
Research & Development (R&D) Expenses: Any expenses associated with the development of
new or improved goods or services. This type of expense is incurred in the process of finding and
creating new products or services.
Retained Earnings: Part of owner’s equity on the balance sheet, the retained earnings account
represents the accumulated profit (loss) of the business since its inceptions, minus any dividends
paid out.
Return on Assets (ROA): A percentage-based indicator of how profitable a company is relative
to its total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. The formula for Return on Assets is: ROA = Net Income / Total Assets. ROA
can also be calculate by multiplying the profit margin times asset turnover and is the product of
the first two components of the DuPont formula.
Return on Equity (ROE): A percentage-based return metric of shareholder return. ROE
measures a corporation's profitability by revealing how much profit a company generates with the
money the owners have invested. ROE is calculated as: ROE = Net Income / Owner's Equity.
Revenue (Sales): The first line of the income statement and the result of customers purchasing the
business’ goods and/or services. Revenues result from selling merchandise, performing services,
renting property, and lending money.
Run Rate (Burn Rate): Measures the monthly cash expenditures required to sustain ongoing
operations. By taking the sum of cash and marketable securities divided by the burn rate, we can
calculate the “Cash out period” or “Burn out period”, i.e., how many months the company can
continue operating before running out of funds.
Scenario Analysis: A process of analyzing possible future events by considering alternative
possible outcomes (scenarios). The analysis is designed to allow improved decision-making by
allowing more complete consideration of outcomes and their implications.
Selling, General & Administrative Expense (SG&A): Reported on the income statement, it is
the sum of all direct and indirect selling expenses and all general and administrative expenses
Sensitivity Analysis: A technique used to determine how different values of an independent
variable will impact a particular dependent variable under a given set of assumptions. Sensitivity
analysis is a way to predict the outcome of a decision if a situation turns out to be different
compared to the key prediction(s).
Short-Term Debt: A current liability on the company's balance sheet. Includes any debt incurred
by the company that is due within one year, e.g., any credit card balance.
Statement of Cash Flows: see “Cash Flow Statement
Stockholder's Equity: see “Owner’s Equity”
Times Burden Covered: see “Debt Service Coverage”
Times Interest Earned (TIE): A metric used to measure a company's ability to meet its current
interest obligations. It is calculated as EBIT/Interest Expense It is usually quoted as a ratio and
indicates how many times a company can cover its interest charges on a pretax basis.
Unearned Revenue: A liability (usually current) created when a company receives cash for a
service or product that has yet to deliver.

7
Valuation: The process of estimating the current worth of an asset or company. There are many
techniques that can be used to determine value, e.g., DCF analysis and Comparables.
Variable Cost: A cost that changes in proportion to an increase in a company's activity or
business. Sales commissions are an example of a variable cost. As revenue increases, so does the
level of commissions.
Wages Payable: A current liability account representing wages owed to employees for work
already done, but for which they have not yet been paid.
Working Capital: The difference between a company’s current assets and its current liabilities.
The level of working capital is often used to assess both a company's efficiency and its short-term
financial health. A higher number means a company has more working capital.