An accounting principle that matches revenues to expenses at the time in which the transaction occurs rather than when payments are made or received. This principle allows a company to combine current cash inflows and outflows with future expected inflows and outflows to give an accurate picture of the company's current financial condition.
All the jargon used in investing can seem overwhelming at times. Explore the Lexicon to learn the language that will help make you a smart investor.
The balance sheet shows what a company owns and what is owes at a particular point in time. It provides details about a company's assets, liability, and shareholder equity. The balance sheet is based on the accounting equation that shareholder equity is equal to a company's assets minus its liabilities. Investors should bear in mind that because a balance sheet is a “snapshot” of the company’s finances on a given day, events that happen immediately before or after that date might not be reflected.
The amount of money is the company is spending in the pre-revenue or start-up phase. It is called the burn rate because the company is using up its current cash without bringing in revenue to offset expenses. Investors can use the burn rate to work out how much longer the company can keep going before it has to raise more money.
A cash flow statement report a company's inflows and outflows of cash. Unlike the balance sheet, a cash flow statement shows changes over time rather than provided a snapshot of the company's activities at a fixed point in time.
The money spent directly on producing products. COGS includes direct costs such as raw materials and labor expenses for the people who make the product or provide the service. COGS does not include office overhead, just the direct costs of making the goods or providing the service.
A report summarizing the financial conditions of a company over a specified period of time. Financial statements generally include the balance sheet and income statement of a company, and often a statement of cash flows.
All income received by a company without deducting costs.
An income statement may also be referred to as a "profit and loss statement". The income statement provides information on how much revenue a company earned over a specific time period. The statement also shows the costs and other operating expenses the company encountered. The bottom line of the income statement shows the company's net earnings or losses.
All income received by a company minus all operating costs, including costs of goods and services, overhead expenses, and depreciation. Some people may think of this as a company’s profits.
The profit earned from a company's normal business operations. Operating profit does not include profits earned from a company's investments and does not take into account interests and taxes. Operating profit may also be represented as earnings before interest and tax (EBIT).
Financial statements prepared on the basis of some assumed events and transactions that have not yet occurred are referred to as “pro forma” financial statements. These statements have not been audited and are not prepared in accordance with generally accepted accounting principles. It is important that the investor understand the assumptions underpinning a pro forma financial statement and question the basis for those assumptions. Investors should ask whether any third party has investigated those assumptions, and whether any accountant has “checked the math” (CPAs can’t confirm whether pro forma financials are accurate, but they can check whether they are properly presented and add up.)
The indirect expenses of producing the company’s goods or services. These include HQ expenses, management costs, advertising, insurance and the like. SG&A expenses are different from costs of goods and services because SG&A cannot be linked directly to the production of products or services being sold.