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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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Matching Principle
The matching principle is a fundamental accounting rule for preparing an income statement. It simply states, “Match the sale with its associated costs to determine profits in a given period of time—usually a month, quarter, or year.”
Materiality
Material events or information are any events or facts that would affect the judgment of an informed investor.
Net Income / Net Profit
Net income is the bottom line of the income statement. It is what is left over from revenues after all costs and expenses are subtracted from revenue - cost of goods sold (for manufacturing businesses, or cost of services for service businesses), operating expenses, taxes, interest, one-time charges, noncash expenses such as depreciation and amortization, and any other costs not included in operating profit. Net profit, net income, and net earnings all mean the same thing.
Net Profit Margin

Net profit margin (also called net margin or net profit margin percentage) reflects the overall profitability of the company.
Non-GAAP Financials
Non-GAAP financials are often created for internal management purposes and can be publicly disclosed as supplements to GAAP financial reports when management believes that non-GAAP financials provide a better picture of the health of the “core” of the company.
Operating Expenses
Operating expenses are the costs that are required to keep the business going day to day (as opposed to expenses that are directly related to manufacturing a product or delivering a service - those are a different type of expense).
Operating Profit Margin
Operating profit margin (also called operating margin or operating margin percentage) reflects the profitability of the operations of the business.
Operating Profit or EBIT
Operating profit is the profitability of the business, before taking into account interest and taxes. To determine operating profit, operating expenses are subtracted from gross profit.
Property, Plant, and Equipment Turnover
This ratio tells you how many dollars of sales your company gets for each dollar invested in property, plant, and equipment (PPE).
Return on Assets

Return on assets (ROA) measures how much profit our assets are generating.

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