Absorption Costing
Profit and Loss Statement
Methodology at which a part of the indirect cost is allocated to the direct costs centers and as such become a part of the production cost price of the product.

Accounting principles
Financial Management
Basis for “translating” events into numbers

Accrual accounting = Period recognition
Profit and Loss Statement
Allocation of the cost to the period depends on the usage for revenue purposes. When purchased, produced or paid is irrelevant. If produced but not sold, on balance sheet. If used for revenue but no invoice received jet a manual booking is made (latter is accrual)

Accuracy of the cost
Financial Management
Accounting Principle: All costs are correct

Acid test = Quick Ratio 
Profitability, Solvency and Liquidity
Current Assets – inventories / short term debt.

Activity Based Costing (ABC)
Profit and Loss Statement
Method of cost allocation that uses cost drivers like number of employees for the HR department or M2 for housing as the basis for the allocation of the secondary costs to the primary functions based on their usage.

Activity ratio’s
Operational improvements
How well is the company managed?

Annual Report
Financial Management
The Annual report consists out of the report from the Corporate Board and the Supervisory Board, the financial statements, the accountant’s declaration and other information with detailed explanations of the financials.

Asset turnover = Day’s Assets Outstanding
Operational improvements
Activity ratio’s  Assets / Revenues * 365.

Assets
Balance Sheet
On the left side of the Balance sheet all items are listed the company uses to run the business.

Balance sheet
Balance Sheet
Snapshot of a moment in time in which the assets, debts and equity of the company are shown.

Break-even point
Profit and Loss Statement
Number of units / amount of revenue at which the costs (direct and indirect) are equal to revenue.

Budget
Financial Management
Estimated future P&L, Balance sheet or cash flow statement for planning and alignment purposes.

Capitalising of Expenses = CAPEX
Profit and Loss Statement
Costs that occur for the company in one specific year that will lead to better performance in the coming years can be capitalized. Examples are IT systems that are implemented, renovation of buildings or research costs. By putting the cost on the balance sheet the profit in the first year is higher and of the subsequent years the profit will be lower. The expected use (time) of the asset determines the annual depreciation.

Cash flow statement = Cash flow schedule
Cash Flow Statement
Period overview in which the incoming and outgoing money flows are displayed.

Categorical P&L
Profit and Loss Statement
P&L statement in which the cost are grouped according to the cost categories.

Common shares
Balance Sheet
Ownership of the firm is build up according to the stock volumes. Common shares have the highest risk and therefore demand the highest return.

Comparability
Financial Management
Accounting Principle: Between periods and companies

Completeness of the revenue
Financial Management
Accounting Principle: All activities are accounted for

Consistent
Financial Management
Accounting Principle: In the methods used

Consolidation
Financial Management
Combining of several individual companies towards one in which the links (deliveries to and from, profits etc) between the individuals are eliminated.

Continuity
Financial Management
Accounting Principle: Assuming the company will remain active and does not go bankrupt

Contribution Margin = Gross Profit
Profit and Loss Statement
Revenue – Direct cost

Cost
Profit and Loss Statement
Economic value of the used goods, time etc. to realize the revenue.

Cost benefit overview = Profit and Loss (P&L)
Profit and Loss Statement
Overview which always represents a period in which the economic value of the activities is shown and the accompanying costs that have occurred for realizing the revenues.

Cost carrier
Profit and Loss Statement
Primary department of activity to which costs of supporting general activities are allocated.

Cost categories
Profit and Loss Statement
The type of costs like personnel cost, travel. Telephone etc.

Cost center
Profit and Loss Statement
Department without revenue responsibility with a specific function (like finance, IT, etc). Cost centers always only have loss.

Creditors
Balance Sheet
Outstanding receivables from your suppliers.

Creditors turnover = Day’s Creditors Outstanding
Operational improvements
Activity ratio’s: Creditors / COGS * 365 or Creditors / purchasing value * 365.

Current Assets
Balance Sheet
Assets that are consumed in the process like stocks, cash and debtors.

Current liabilities
Balance Sheet
Debt capital that has to be repaid to the lender within 1 year.

Current Ratio
Profitability, Solvency and Liquidity
Liquidity ratio’s Current Assets / short term debt.

Day’s Inventory Outstanding = Inventory turnover
Operational Improvements
Activity ratio’s: Inventory / revenue * 365.

Day’s Assets Outstanding = Asset turnover
Operational Improvements
Activity ratio’s: Assets / Revenues * 365.

Day’s Creditors Outstanding = Creditors turnover
Operational Improvements
Activity ratio’s: Creditors / COGS * 365 or Creditors / purchasing value * 365.

Day’s Debtors Outstanding = Debtors turnover
Operational Improvements
Activity ratio’s  Debtors / Revenue * 365.

Debt ratio = Gearing = Leverage
Balance Sheet
Debt / Assets  To what level is the company financed (or burdened) by debt?

Debt to Equity ratio
Profitability, Solvency and Liquidity
Debt / Equity. There is no perfect Debt Equity ratio.

Debtors
Balance Sheet
Outstanding receivables from your customers.

Debtors turnover = Day’s Debtors Outstanding
Operational Improvements
Activity ratio’s:  Debtors / Revenue * 365.

Depreciation of assets
Balance Sheet
The opposite of capitalizing. Reduction of the value of the asset on the balance sheet by reducing a part of the value and taking the costs in the profit and loss statement.

Direct cost
Profit and Loss Statement
Also often referred to as production cost. Cost that can be allocated directly to the activities  performed / revenues realized.

Direct method
Profit and Loss Statement
All cash flows are registered based on the actual in and outflow of money..

Discounted Cash Flow method = Present Value
Investment metrics
+ cash flow year 1 / WACC + cash flow year 2 / WACC2 + ……. Present value of all future cash flows.

Dividend
Balance Sheet
Payment of (a part of) the Net profit to the holders of the stocks at a public company / to the owners of the private company.

Earnings Before Interest and Tax =EBIT = Operating Profit
Profit and Loss Statement
Revenue – Cost or Contribution margin – Indirect cost

Earnings per share =EPS
Operational Improvements
Solvability ratio: Net profit / number of nominal shares. EPS in relation to the dividend paid provides an indication whether the company is saving up for later / growing or is overpaying stockholders.

Earnings Before Interest and Tax, Depreciation and Amortisation = EBITDA
Profit and Loss Statement
Earnings before Interest, Tax, Depreciation and Amortisation

Equity = Equity, share capital & reserves
Balance Sheet
The equity of the form consists out of the paid in stock, profit from the past (retained earnings) and provisions

Finance cash flow
Cash Flow Statement (Video lesson)
Cash flow from the attraction or repayment of loans or the issuing or purchasing of own shares.

Financial Statements 
Financial Management
The Financial statement consists always out of 3 overviews. The profit and loss statement, the balance sheet and the cash flow statement.

Fixed Assets
Balance Sheet
Assets that I use multiple times The company needs to be able to produce, or needs to deliver the services like buildings, machines, patens etc.

Fixed cost
Profit and Loss Statement
Costs that do not alter with the production volume of the company. (or only at very large volume changes).

Full Time Equivalent =FTE
Profit and Loss Statement
Number of hours that is officially worked in the company at a full contract. An FTE can therefore differ by company. Number of people or “heads” in comparison to number of FTE.

Functional P&L
Profit and Loss Statement
P&L statement at which the function, product or activities form the basis for the allocation of the costs. Examples are P&L by sales region, by product segments etc.

Gearing = Leverage = Debt ratio
Balance Sheet
Debt / Assets  To what level is the company financed (or burdened) by debt?

Goodwill
Balance Sheet
The difference between the market value at which the company or item has been bought and the book value it represents. A company you buy for the customer base, sales force, knowledge it has. Those items are not on the balance sheet. The sum of the book values are usually lower. The delta is recognized in the accounts of the purchasing company as goodwill.

Gross Profit = Contribution Margin
Profit and Loss Statement
Revenue – Direct cost

Indirect cost = operating expenses = OPEX = selling, general & Administrative = SG&A
Profit and Loss Statement
Cost that cannot be allocated directly to the performed activity or rendered service. Predominantly Management, Finance, Sales, R&D, IT etc.

Indirect method
Cash Flow Statement (View the video lesson)
Cash flow is deducted from the P&L. First profit is taken and subsequently all non-cash items are corrected for. Example, Depreciation is a cost but not a cash flow. Increase in inventory is profit neutral but reduces cash flow.

Intangible Assets
Balance Sheet
Assets that you cannot touch that the company needs to be able to produce, or needs to deliver the services rendered like, patents, rights or goodwill.

Interest
Profit and Loss Statement
Cost of debt

Internal rate of return = IRR
Investment metrics
Investment = cash flow year 1 / IRR + cash flow year 2 / IRR2 + ……. At which interest rate is the current value of the future cash flows equal to the current investment?

Inventory turnover = Day’s Inventory Outstanding
Operational Improvements
Activity ratio’s: Inventory / revenue * 365.

Investment cash flow
Cash Flow Statement
Cash flow from investing or divesting assets of the balance sheet like land, buildings or machinery.

Investment decisions
Investment metrics
Where to put my money based on Risk and Time

Leverage = Debt ratio = Gearing
Balance Sheet
Debt / Assets  To what level is the company financed (or burdened) by debt?

Liabilities = Debt capital
Balance Sheet
Capital attracted to the firm by borrowings like obligations, loans and creditors.

Liabilities and Equity
Balance Sheet
On the right hand side of the balance sheet it is recorded how the Assets have been paid for.

Liquidity ratio’s
Operational Improvements
How well is the company able to repay its short term debt?

Margin %
Profit and Loss Statement
Margin / revenue

Market share capital
Balance Sheet
Market value of the outstanding shares, based on the stock exchange value. This is not recorded on the balance sheet of the company itself.

Material assets
Balance Sheet
Assets that I can touch Items that the company needs to be able to produce, or needs to deliver the services like buildings, machines, inventory etc.

Net Present Value = NPV
Investment metrics
– investment + cash flow year 1 / WACC + cash flow year 2 / WACC2 + …….
What is the current value of all future cash flows related to the investment? The outcome gives an absolute value to the investment. The methodology presumes the WACC of the investment known.

Net Profit
Profit and Loss Statement
Operating Profit – Interest – Tax Available for the owners of the company.

Nominal share capital
Balance Sheet
Total carrying value of the shares (as is printed on them) times the number outstanding. This value is registered on the balance sheet.

Notes to the accounts
Financial Management
Annual Report  Description of the choices made by the Company in preparing the financial statements. These explanations are especially important when comparing companies and to explain changes in methods used.

Operating expenses =OPEX = selling, general & Administrative =SG&A = Indirect cost
Profit and Loss Statement
Cost that cannot be allocated directly to the performed activity or rendered service. predominantly Management, Finance, Sales, R&D, IT etc.

Operating Profit = Earnings Before Interest and Tax = EBIT
Profit and Loss Statement
Revenue – Cost or Contribution margin – Indirect cost

Operational cash flow
Cash Flow Statement
Cash flow from regular / normal daily activities of the company.

Pay Back Period
Investment metrics
Number of years and months it takes for the original investment to be paid back. The time value of money is not taken into account. This measure is important because it indicates when the next decision can be made.

Period recognition = Accrual accounting
Profit and Loss Statement
Allocation of the cost to the period depends on the usage for revenue purposes. When purchased, produced or paid is irrelevant. If produced but not sold, on balance sheet. If used for revenue but no invoice received jet a manual booking is made (latter is accrual)

Preferred stock
Balance Sheet
Preferred stock holders receive the fixed return after the debt holders have been paid and before common stock holders. Preferred stock sometimes has extraordinary voting rights.

Present Value = Discounted Cash Flow method
Investment metrics
+ cash flow year 1 / WACC + cash flow year 2 / WACC2 + …….
Present value of all future cash flows.

Pre-tax profit
Profit and Loss Statement
Operational Profit – Interest

Price Earnings ratio
Operational improvements
Solvability ratio How many times the profit do I have to pay to be able to get the share. This measure is an indication of the perceived growth potential of the company.Market price of the share / EPS.

Profit % = Return on Sales ROS
Profit and Loss Statement
Operational Profit / Revenue.

Profit and Loss =P&L = Cost benefit overview
Profit and Loss Statement
Overview which always represents a period in which the economic value of the activities is shown and the accompanying costs that have occurred for realizing the revenues.

Profit center
Profit and Loss Statement
Department with revenue responsibility. These departments are held accountable for the margin or profit generating ability.

Profitability ratio’s
Operational improvements
How profitable is my company?

Provisions
Balance Sheet
In the past reserved profit with a specific goal. Most often the cash related to the provisions is used to expand.

Prudence
Financial Management
Accounting principle: With estimates remain conservative

Quick Ratio = Acid test
Profitability, Solvency and Liquidity
Liquidity ratio’s Current Assets – inventories / short term debt.

Regularity of the expenditures
Financial Management
Accounting Principle: Is this the goal I want to spend my money on?

Relevance and Materiality
Financial Management
Accounting Principle: Available and interesting information

Reliability
Financial Management
Accounting Principle: Unbiased, neutral and verifiable

Return on Assets ROA
Operational Improvements
Profitability ratio’s: The cake / number of people at the party  Operational profit / Total assets.

Return on Capital Employed = ROCE
Operational Improvements
Profitability ratio’s
The cake – big brother / cake eaters   Operational profit – tax / Total assets – non interest bearing liabilities.

Return on Equity =ROE
Operational Improvements
Profitability ratio’s: Operational profit / Equity.

Return on Invested Capital = ROIC
Operational Improvements
Profitability ratio’s The cake – big brother / cake eaters + baker   Operational profit – tax / Total assets – non interest bearing liabilities + Capitalized R&D + Historic goodwill.

Return on Net Assets = RONA
Operational Improvements
Profitability ratio’s: The cake / cake eaters  Operational profit / Total assets – non interest bearing liabilities.

Return on Sales = ROS = Profit %
Profit and Loss Statement
Operational Profit / Revenue.

Revenue = Sales = Turnover
Profit and Loss Statement
Economic value of the performed activities or delivered goods from the period described.

Sales = Turnover = Revenue
Profit and Loss Statement
Economic value of the performed activities or delivered goods from the period described.

Selling, general & Administrative =SG&A = Indirect cost = operating expenses = OPEX
Profit and Loss Statement
Cost that cannot be allocated directly to the performed activity or rendered service. predominantly Management, Finance, Sales, R&D, IT etc.

Sensitivity analyses 
Operational Improvements
Profitability ratio’s: Investment analyses (NPV, IRR, Pay back) at which several input parameters are calculated based on conservative estimations (worst case) or optimistic estimations (best case) versus the most likely estimations (base case).

Solvability ratio’s 
Profitability, Solvency and Liquidity
How well is the company able to repay its long term obligations and future investments?

Target
Profit and Loss Statement
Kind of budget but with an improvement aspect included.

Taxes
Profit and Loss Statement
Everybody knows what those are 😉       

Timeliness
Financial Management
Accounting Principles: Information should be included on time

Times Interest Earned  
Operational Improvements
Solvability ratio: EBIT / Interest expense
How likely is it for the providers of debt that the company is able to pay the interest?

Turnover = Revenue = Sales
Profit and Loss Statement
Economic value of the performed activities or delivered goods from the period described.

Variable cost
Profit and Loss Statement
Cost that increase or decrease in line with the production volumes.

Variance 
Profit and Loss Statement
Delta between actual realization and budget or target.

Weighted average cost of capital = WACC
Investment metrics
Return on equity * % of equity + return on debt * (1-tax %) * % debt = WACC
The market dictates how much return on the equity is required based on the risk profile from the company. To calculate what the percentage is use above formula.

Working capital
Balance Sheet
Current Assets – current liabilities In every day practice the working capital is often worked out as stocks + work in process+ debtors – creditors.