Frequently Used Terms in Finance
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Accrual Accounting
Accrual accounting is a method of tracking income and expenses based on when transactions occur, rather than when cash is exchanged. This allows for a more accurate representation of a company's financial position.
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Assets
Assets are resources owned by a company that have future economic value. Examples include cash, inventory, property, and equipment. They are listed on a company's balance sheet.
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Balance Sheet
A balance sheet is a financial statement that provides a snapshot of a company's financial position at a particular point in time. It includes assets, liabilities, and equity.
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Bond
A bond is a debt instrument issued by a company or government to raise capital. Investors who buy bonds are essentially lending money in exchange for periodic interest payments and the return of the principal amount at maturity.
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Budget
A budget is a financial plan that details income and expenses for a specific period. It helps companies allocate resources, set financial targets, and monitor performance.
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Cash Flow
Cash flow refers to the movement of money into and out of a company. Positive cash flow indicates the company is receiving more cash than it is spending, while negative cash flow suggests the opposite.
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Depreciation
Depreciation is the gradual reduction in the value of an asset over time, reflecting wear and tear, obsolescence, or other factors. It is recorded as an expense on the income statement.
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Equity
Equity represents ownership in a company and reflects the residual interest in the assets after deducting liabilities. It can be in the form of common stock, preferred stock, retained earnings, or other components.
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Financial Statements
Financial statements are reports that present the financial performance and position of a company. The main statements are the balance sheet, income statement, and cash flow statement.
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GAAP (Generally Accepted Accounting Principles)
GAAP refers to the standardized accounting principles, conventions, and procedures that companies in the United States must follow when preparing financial statements. It ensures consistency and comparability.
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Hedge
A hedge is an investment strategy used to reduce the risk of adverse price movements in an asset or portfolio. It involves taking offsetting positions to protect against potential losses.
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Interest
Interest is the cost of borrowing money or the return on investment received by lending money. It is typically expressed as a percentage and calculated based on the principal amount and time period.
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Liabilities
Liabilities are obligations or debts owed by a company to external parties. They include loans, accounts payable, accrued expenses, and other financial obligations.
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Net Income
Net income, also called net profit or net earnings, is the amount of revenue left after deducting all expenses, including taxes. It provides a measure of a company's profitability.
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Operating Expenses
Operating expenses are the costs associated with running a business on a day-to-day basis. They include salaries, rent, utilities, marketing expenses, and other overhead costs.
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Profit Margin
Profit margin is a financial metric that measures the profitability of a company. It represents the percentage of revenue remaining after deducting all expenses, indicating how efficiently a company generates profit.
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Return on Investment (ROI)
Return on investment is a measure of the profitability of an investment. It is calculated by dividing the net profit from the investment by the initial cost of the investment and expressing it as a percentage.
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Stock
Stock represents ownership in a company. It can be in the form of common stock or preferred stock. Stockholders have rights to vote on corporate matters and may receive dividends.
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Tax Deduction
A tax deduction is an expense or allowance that reduces taxable income, resulting in a lower tax liability. It includes items such as business expenses, mortgage interest, and charitable contributions.
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Working Capital
Working capital is a measure of a company's short-term liquidity and operational efficiency. It is calculated by subtracting current liabilities from current assets and represents the funds available for day-to-day operations.
