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Financial Concepts

Use this as a quick reference guide to key financial terms and concepts, as a way to further your own education, or as a resource as you train others. Most include an example that illustrates the concept.

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Above the Line, Below the Line
The "line" generally refers to gross profit. Above that line on the income statement, typically, are sales and COGS (cost of goods sold) or COS (cost of sales).
Accounts Receivable
Accounts receivable is the amount customers owe the company. Since revenue is a promise to pay (typically customers don’t pay when they receive the product or service;
Clearing up Acronyms
Just like in any field, finance and accounting use lots of acronyms. Here are some of the most common acronyms that are found in the income statement.
The conservatism principle requires that losses be recognized as soon as they can be quantified and that gains are recorded only when they are realized.
Cost of Goods Sold & Cost of Services
Cost of Goods Sold, or COGS, is also called cost of sales (COS) or cost of revenue. COGS is the category of expenses directly related to producing a product or service.
Current Ratio
Liquidity ratios tell you about a company’s ability to meet all its financial obligations, including debt, payroll, payments to vendors, taxes, and so on.
Days in Inventory
Days in Inventory or DII is also known as inventory days. Essentially, it measures the number of days inventory stays in the system.
Days Payable Outstanding
The Days Payable Outstanding (DPO) ratio shows the average number of days it takes a company to pay its own outstanding invoices.
Days Sales Outstanding
Days Sales Outstanding or DSO is a measure of accounts receivable. DSO is also known as average collection period, or receivable days.
The debt-to-equity ratio is one of the leverage ratios. It lets you peer into how, and how extensively, a company uses debt.

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