Finance Glossary

Finance Acumen Glossary with Formulas

• Assets: What a company owns. Formula (Basic Accounting Equation): Assets = Liabilities + Equity

• Liabilities: What a company owes—debts or obligations.

• Equity: Ownership interest in the business. Formula: Equity = Assets – Liabilities

• Revenue: Total income from sales. Formula (for a product-based business): Revenue = Selling Price × Quantity Sold

• Expenses: Costs incurred to generate revenue. No specific formula, but categorized as fixed or variable.

• Net Income: Profit after all expenses are deducted. Formula: Net Income = Revenue – Expenses – Taxes – Interest

• Cash Flow: Movement of cash in and out of a business. Types: Operating, Investing, Financing Formula (Free Cash Flow): FCF = Operating Cash Flow – Capital Expenditures

• ROI (Return on Investment): Measures profitability. Formula: ROI = (Net Profit / Investment Cost) × 100

• EBITDA: Evaluates operating performance. Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

• Balance Sheet: Snapshot of financial position. Key Formula: Assets = Liabilities + Equity

• Income Statement: Shows financial performance over a period. Key Relationships: Gross Profit = Revenue – Cost of Goods Sold (COGS) Operating Income = Gross Profit – Operating Expenses

• Budgeting: Planning future income and expenses. No fixed formula, but typically includes forecasting all revenue and costs.

• Forecasting: Predicting future trends using past data. Uses statistical methods like: Linear Forecast = Current Value + (Average Change × Time)

• Capital Expenditure (CapEx): Long-term investment in assets. No fixed formula, but appears on the cash flow statement under investing activities.

• Operating Expenditure (OpEx): Day-to-day costs to run operations. Included in: Operating Income = Gross Profit – OpEx

ROI stands for Return on Investment, which is a measure used to evaluate the efficiency or profitability of an investment. It is calculated as 

$\frac{\text{Net Profit}}{\text{Investment Cost}}\times 100\backslash frac\{\backslash text\{Net\; Profit\}\}\{\backslash text\{Investment\; Cost\}\}\; \backslash times\; 100$.

The Balance Sheet provides a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and equity.

Net profit is calculated as $\text{Revenue}-\text{Expenses}\backslash text\{Revenue\}\; -\; \backslash text\{Expenses\}$, representing the actual profit after all costs have been deducted from the total revenue.

Diversification involves spreading investments across various assets to reduce risk. It ensures that poor performance in one investment does not significantly impact the overall portfolio.

Liquidity refers to the ease with which an asset can be converted into cash without affecting its market price. High liquidity means quick and easy conversion.

The time value of money is a fundamental financial concept stating that money available today is worth more than the same amount in the future due to its earning potential. This is because money can be invested to earn interest or returns.

In finance, 'capital' refers to the funds or assets used to start or operate a business. It can include cash, equipment, or other resources necessary for business operations.

The Current Ratio measures a company's ability to pay short-term obligations. It is calculated as $\frac{\text{Current Assets}}{\text{Current Liabilities}}\backslash frac\{\backslash text\{Current\; Assets\}\}\{\backslash text\{Current\; Liabilities\}\}$. A higher ratio indicates better liquidity.

A budget is a financial plan that helps track expenses and allocate resources effectively. It ensures that spending aligns with income and financial goals.

Equity represents the ownership interest in a company. It is calculated as $\text{<b>"Assets</b>}<b>-</b>\text{<b>Liabilities"</b>}\backslash text\{Assets\}\; -\; \backslash text\{Liabilities\}$ and reflects the residual value for shareholders.