Finance is the universal language in the corporation, the language of goals, objectives and results. No matter how
effective your methods or how impressive your ideas, your results are going to be measured in dollars and cents.
Many people see financial concepts as some sort of black magic. However at the end of this unit you’ll prove to
yourself that there is no magic and in fact you will be able to skillfully use financial concepts to translate performance
value to financial value and to close more business.
The intent of this section is not to provide the student with the knowledge of a CPA, but create a working knowledge of
financial terminology and tools. This module will make some simple connections of financial concepts. The student
who would like more in depth understanding in this area will now have a “menu” of items from which to choose as
he/she continues to read books and participate in additional seminars.
We will discuss:
- Financial Statements – What Happened?
- Financial Ratios – Why Did It Happened?
- Profit Planning – How Do I Make It Happen?
Three financial statements are prepared for every reporting period one for each financial imperative of business:
making profit, keeping financial condition in good shape, and controlling cash flow. The income statement and cash
flow statement are also known as operating statements.
- Promises Made
- Non-cash transactions to balance sheet accounts
- Cash changes to balance sheet accounts
- Deposits made
- Checks written
- What company owns
- Where funds came from
- Measures unfinished transactions
The Income Statement measures only the non-cash component of the transaction. Shows the promises made
contracts. Reports information about the business transaction that occurred during the reporting period. Reports an
interval of time.
Revenue - Revenue equals totals sales from operations.
Cost of Goods Sold - Cost of Goods Sold includes all expenses directly associated with the production of goods or
services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.
Gross Profit - Gross Profit equals Revenue minus Cost of Goods Sold. It identifies the amount available to cover other
Gross Profit Margin - Gross Profit Margin equals Gross Profit divided by Revenue, expressed as a percentage. The
percentage represents the amount of each dollar of Revenue that results in Gross Profit.
SG&A Expenses - Selling, General, and Administrative Expenses include all salaries, indirect production, marketing,
and general corporate expenses.
Operating Income - Operating Income equals Gross Profit minus SG&A Expenses. It is the income from current
Operating Margin - Operating Margin equals Operating Income divided by Revenue,
expressed as a percentage. The percentage represents the amount of each dollar of Revenue that results in
Nonoperating Income - Nonoperating Income is a residual category into which
miscellaneous Nonoperating revenues and expenses are netted.
Nonoperating Expenses - Nonoperating Expenses is the combination of "Other Taxes" and "Interest Expense." "Other
Taxes," also known as other operating expenses, for most
companies includes taxes other than income taxes (except excise taxes, which the company does not actually pay, but
only collects on behalf of the government). For financial companies, all expenses other than interest expense and
income taxes are included in Other Taxes."Interest Expense" is all fixed interest expenses net of capitalized interest.
This category also includes dividends on preferred stock of unconsolidated subsidiaries.
Income Before Taxes - Income Before Taxes is the income from total operations (continuing + discontinued
Income Taxes - Income Taxes include any taxes on income, net of any investment tax
Net Income After Taxes - Net Income After Taxes is the income from total operations
(continuing + discontinued) after taxes have been taken out.
Net Income from Continuing Operations - Net Income from Continuing Operations includes income taken after taxes
and before the following: Preferred Dividends, Extraordinary Gains and Losses, Income from Accumulative Effects of
Accounting Change, Non-Recurring Items, Income from Tax Loss Carry forward, and Other Gains/Losses.
Net Income from Discontinued Operations - Net Income from Discontinued Operations
represents the net (gain or loss) resulting from the selling or closing of discontinued operations of the company. This
excludes income from extraordinary gains/losses.
Net Income from Total Operations - Net Income from Total Operations is the income from the total operations
(continuing + discontinued operations) after taxes and minority interest and before extraordinary gains/losses.
Total Net Income - Total Net Income is the income after accounting for all corporate actions:
Income from Continuing Operations + Income from Discontinued Operations + Income from Extraordinary Items +
Income from Accumulative Effect of Accounting Changes + Income from Tax Loss Carryforward + Income from Other
Net Profit Margin - Net Profit Margin equals the Total Net Income divided by Revenue,
expressed as a percentage. The percentage represents the amount of each dollar of Revenue that results in Total Net
Diluted EPS from Continuing Operations - Diluted EPS from Continuing Operations equals the earnings from
continuing operations divided by the Shares Outstanding, assuming full dilution.
Diluted EPS from Discontinued Operations - Diluted EPS from Discontinued Operations
equals the earnings from discontinued operations divided by Shares Outstanding, assuming full dilution. This
excludes income from extraordinary gains/losses.
Diluted EPS from Total Operations - Diluted EPS from Total Operations equals Diluted
EPS from Continuing Operations plus Diluted EPS from Discontinued Operations.
Diluted EPS from Total Net Income - Diluted EPS from Total Net Income is the Diluted
EPS after accounting for all corporate actions: EPS from Continuing Operations + EPS from Discontinued Operations
+ EPS from Extraordinary Items + EPS from Accumulative Effect of Accounting Changes + EPS from Tax Loss
Carryforward + EPS from Other Gains/Losses.
Dividends per Share - The cash payment, per share, made by the company to its
shareholders. Payment is usually made quarterly, but can be paid biannually (ADRs)
The balance sheet shows the results of all the business transactions that affected the company from its inception to
the date of the report, point in time. Reports what the company is worth for a specific point it time. Presents a
snapshot of resources of a company and claims on those resources. Includes cash and no-cash accounts.
Cash - Cash consists of cash and may include cash-like items such as short-term
investments that can be quickly converted to cash.
Net Receivables - Net Receivables are amounts owed to the company, net of any provisions for bad debts.
Inventories - Inventories is merchandise bought for resale or supplies and raw materials
purchased for use in revenue producing operations.
Other Current Assets - Other Current Assets includes prepayments, deferred charges, and amounts (other than
trade accounts) due from parents and subsidiaries. It also includes any other current assets that are not assigned to
cash and cash equivalents, receivables, or inventories.
Total Current Assets - Total Current Assets equals Cash and Equivalents + Receivables + Inventories + Other
Current Assets. Total Current Assets is the total amount of assets that are considered to be convertible into cash
within a relatively short period of time, usually a year.
Net Fixed Assets - Net Fixed Assets are the assets of a company that are of a relatively
permanent nature and are not intended for resale, such as property, plants, and equipment. The figure is stated as
cost minus accumulated depreciation and amortization.
Other Noncurrent Assets - Assets that are not assigned to Net Fixed Assets or intangibles.
Total Assets - Total Assets equals Total Current Assets + Total Noncurrent Assets.
Accounts Payable - Money owed (payable) to suppliers for goods or services purchased on credit that must be paid
within a year.
Short-Term Debt - Short-Term Debt represents the amount of borrowings (principal and
interest) that must be paid in the near future (usually within one year).
Other Current Liabilities - Other Current Liabilities includes all other liabilities not assigned to Short-Term Debt or
Total Current Liabilities - Total Current Liabilities equals Accounts Payable + Short-Term Debt + Other Current
Liabilities. Total Current Liabilities is the total amount of liabilities that are considered to be due within a relatively
short period of time, usually a year.
Long-Term Debt - Long-Term Debt represents the amount of borrowings due more than one year from the date of the
Other Noncurrent Liabilities - The liabilities that are not assigned to Long-Term Debt or
deferred Income Taxes.
Total Liabilities - Total Liabilities equals Total Current Liabilities + Total Noncurrent
Preferred Stock Equity - Preferred Stock Equity is the amount of shareholders' equity
attributable to the preferred stock issued by the parent company. Preferred Stock Equity equals the Number of
Preferred Shares issued (less any preferred shares in the Treasury) x Involuntary Liquidating Value per share (usually
Common Stock Equity - Common Stock Equity is the amount of shareholders' equity
attributable to common stock. Common Stock Equity generally consists of common stock (all issues) at par value,
capital surplus or additional paid-in capital, retained earnings or earned surplus (net of foreign exchange
Total Equity - Total Equity equals Preferred Stock Equity + Common Stock Equity.
Shares Outstanding - Shares Outstanding is the outstanding number of shares of the class of common stock that is
most actively traded.
All transactions have two components cash and non-cash. Cash is the connection between the income statement
and the balance sheet. Together the Income Statement and Cash Flow Statement glues the beginning and ending
Balance Sheet together to show the results of both the cash and non-cash activity for a specific period of time. What
are the cash inflows and outflows for the period?
Net Operating Cash Flow - Net Cash Flow from Operating Activities is taken directly from the Statement of Cash Flows.
Net Investing Cash Flow - Net Cash Flow from Investing Activities is taken directly from the Statement of Cash Flows.
Net Financing Cash Flow - Net Cash Flow from Financing Activities is taken directly from the Statement of Cash Flows.
Net Change in Cash - Net Change in Cash is the difference between the Cash and Cash
Equivalents at the beginning of the reporting period minus the amount at the end of the
Depreciation and Amortization - Depreciation and Amortization is a noncash charge that
represents a reduction in the value of fixed assets due to wear, age, or obsolescence. This figure also includes
amortization of leased property, intangibles, and goodwill, and depletion. This number is an add-back to the
Statement of Cash Flows.
Capital Expenditures - Capital Expenditures are capital outlays undertaken by the firm - -
this number is the "Purchase of Property Plant and Equipment" figure from the Statement of Cash Flows.
Cash Dividends Paid - The cash payment made by the company to its shareholders.
Payment is usually made quarterly, but can be paid biannually (ADRs).