Key Financial Terms Explained

1. Balance Sheets

• Definition: Financial statements totaling up all debts and assets.
• Equation: Assets = Liabilities + Equity.

2. Liquidity

• Concept: How quickly an asset can be converted into cash.
• Examples: Cash is the most liquid; stocks are also liquid, land and real estate are least liquid.

3. GAAP (Generally Accepted Accounting Principles)

• Definition: Rules and conventions governing company financial reporting.
• Usage: Companies report earnings as GAAP or non-GAAP.

4. Capital Gains

• Definition: Increase in asset value above purchase price.
• Types: Realized (sold) and Unrealized (not sold).
• Taxation: Taxes paid on realized capital gains.

5. Net Income

• Formula: Total revenue minus expenses.

6. Equity

• Definition: Money in stock/asset after subtracting debts.
• Negative Equity: When debts exceed asset value.

7. Depreciation

• Concept: Decrease in asset value over time.
• Exception: Real estate often appreciates.

8. EPS (Earnings Per Share)

• Calculation: (Net Income - Dividends) / Number of Shares.
• Importance: Used to assess company profitability.

9. Net Worth

• Calculation: Value of all owned assets minus liabilities.

10. Amortization

• Definition: Accounting for intangible assets over time.
• Examples: Patents, copyrights, trademarks.

11. Capital Markets

• Function: Markets where financial assets like stocks/bonds are traded.
• Participants: Companies, institutions, mutual funds, hedge funds.

12. Profit Margin

• Calculation: Net Income / Revenue.
• Indicator: Company's profitability margin.

13. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

• Usage: Describes company's cash flow.

14. FICO Score

• Definition: Credit score from Fair Isaac Corp.
• Range: 300 to 850.
• Factors: Payment history, credit length, and total owed.

15. Stock Options

• Definition: Right to buy company stock at a set price.
• Usage: Often given to employees.

16. Bonds

• Concept: Loan from bond purchaser to the seller.
• Forms: Government bonds (loans to the government).

17. Stocks

• Definition: Shares or portions of a company.
• Valuation: Based on company earnings potential.

18. Cash and Cash Equivalents

• Definition: Assets easily converted to cash.

19. Income Statement

• Purpose: Summarizes income and expenses over time.
• Also Known As: Profit and loss statement.

20. ROI (Return on Investment)

• Calculation: (Income - Cost) / Cost x 100.
• Expression: Indicated as a ratio.

21. Cash Flow

• Definition: Net balance of cash in and out.
• Categories: Operating, investing, and financing cash flows.

22. Compound Interest

• Definition: Interest on previously earned interest.
• Effect: Increases investment size over time.

23. Valuation

• Concept: Worth of an asset or company.
• Factors: Income, EBITDA, revenue, cash flow.

24. Liabilities

• Definition: Debts or obligations.
• Examples: Employee wages, supplier payments.

25. Working Capital

• Definition: Difference between assets and liabilities.
• Function: Cash available for operations.

26. Term Life Insurance

• Definition: Insurance for a set term.
• Outcome: Beneficiaries receive money if policyholder dies within term.