Small Business Management Chapter 10

financial statements (accounting statements)
Reports of a firm’s financial performance and resources, including an income statement, a balance sheet, and a cash flow statement.
income statement (profit and loss statement)
A financial report showing the profit or loss from a firm’s operations over a given period of time.
cost of goods sold
The cost of producing or acquiring goods or services to be sold by a firm.
gross profit
Sales less the cost of goods sold.
operating expenses
Costs related to marketing and selling a firm’s product or service, general and administrative expenses, and depreciation.
operating profits
Earnings or profits after operating expenses but before interest and taxes paid.
interest expense
The cost of borrowed money.
profits before taxes (taxable profits)
Earnings after operating expenses and interest expenses but before taxes.
net profits
Income that may be distributed to the owners or reinvested in the company.
depreciation expense
The cost of a firm’s building and equipment, allocated over their useful life.
balance sheet
A financial report showing a firm’s assets, liabilities, and ownership equity at a specific point in time.
current assets
Assets that can be converted into cash within a company’s operating cycle.
accounts receivable
The amount of credit extended to customers that is currently outstanding.
inventory
A firm’s raw materials and products held in anticipation of eventual sale.
fixed assets
Relatively permanent assets intended for use in the business, such as plant and equipment.
depreciable assets
Assets whose value declines, or depreciates, over time.
accumulated depreciation
Total depreciation expense taken over the asset’s life.
net fixed assets
Gross fixed assets less accumulated depreciation.
other assets
Assets other than current assets and fixed assets, such as patents, copyrights, and goodwill.
debt
Business financing provided by creditors.
current debt (short-term liabilities)
Borrowed money that must be repaid within 12 months.
accounts payable (trade credit)
Outstanding credit payable to suppliers.
accrued expenses
Short-term liabilities that have been incurred but not paid.
short-term notes
Cash amounts borrowed from a bank or other lending sources that must be repaid within a short period of time.
long-term debt
Loans from banks or other sources with repayment terms of more than 12 months.
mortgage
A long-term loan from a creditor for which real estate is pledged as collateral.
ownership equity
Owner’s investments in a company plus profits retained in the firm.
retained earnings
Profits less withdrawals (dividends) over the life of a business.
cash flow statement
A financial report showing a firm’s sources of cash as well as its uses of cash.
accrual-basis accounting
An accounting method of recording profits when they are earned, whether or not the profits have been received in cash; additional expenses are recorded when they are incurred, even if payment has not been made.
cash-basis accounting
An accounting method of recording profits when cash is received and recording expenses when they are paid.
liquidity
The degree to which a firm has working capital available to meet maturing debt obligations.
current ratio
A measure of a company’s relative liquidity, determined by dividing current assets by current liabilities.
return on assets
A measure of firm’s profitability relative to the amount of assets invested in the company, determined by dividing operating profits by total assets.
operating profit margin
A measure of how well a firm is controlling its costs of goods sold and operating expenses relative to sales, determined by dividing operating profits by sales.
total asset turnover
A measure of how efficiently a firm is using its assets to generate sales, calculated by dividing sales by total assets.
debt ratio
A measure of what percentage of a firm’s assets are financed by debt, determined by dividing total debt by total assets.
return on equity
A measure of the rate of return of owners of a firm receive on their equity investment, calculated by dividing net profits by common equity.
gross fixed assets
Original cost of depreciable assets before any depreciation expense has been taken.