3.8: Key Terms

This section provides concise definitions of key financial terms introduced in this chapter. These definitions are presented in a static, printable format for reference and exam preparation. When viewed online, additional dynamic highlighting of terms may be available.

Term	Definition
Accounts payable (AP)	Amounts a company owes to suppliers for goods or services already received but not yet paid for.
Accounts receivable (AR)	Amounts owed to the company by customers for credit sales.
Acid-test ratio	Another name for the quick ratio; excludes inventory from current assets.
Accumulated depreciation	Total depreciation recorded on long-term assets to date.
Asset turnover	An efficiency ratio measuring how effectively assets generate sales.
Balance sheet	Reports assets, liabilities, and stockholders’ equity at a point in time.
Balance sheet identity	Assets = Liabilities + Stockholders’ Equity.
Capital expenditures (CapEx)	Cash spent on long-term assets; reported under investing activities.
Cash conversion cycle (CCC)	DSO + DIO − DPO; measures how long cash is tied up in operations.
Cash flow from operating activities (CFO)	Cash generated from core business operations.
Cash ratio	Liquidity ratio using only cash and cash equivalents.
Cost of goods sold (COGS)	Direct costs of producing or purchasing goods sold.
Current assets	Assets expected to be converted to cash within one year.
Current liabilities	Obligations due within one year.
Current ratio	Current Assets ÷ Current Liabilities.
Days inventory outstanding (DIO)	Average number of days inventory is held before sale.
Days payable outstanding (DPO)	Average number of days taken to pay suppliers.
Days sales outstanding (DSO)	Average number of days required to collect receivables.
Depreciation	A noncash expense allocating the cost of a long-term asset over its useful life.
EBIT	Earnings before interest and taxes; operating profit measure.
EBITDA	EBIT plus depreciation and amortization.
Gross margin	Gross Profit ÷ Sales.

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Term	Definition
Gross profit	Sales minus cost of goods sold.
Income statement	Reports revenues, expenses, and net income over a period.
Interest coverage ratio	EBIT ÷ Interest Expense.
Inventory turnover	Cost of Goods Sold ÷ Inventory.
Leverage ratios	Ratios assessing debt usage and financial risk.
Liquidity ratios	Ratios measuring short-term payment ability.
Net income	Profit after all expenses, interest, and taxes.
Net profit margin	Net Income ÷ Sales.
Net working capital	Current Assets − Current Liabilities.
Operating income	Profit from core operations.
P/E ratio	Share price ÷ earnings per share.
Profitability ratios	Ratios measuring earnings relative to sales, assets, or equity.
Quick ratio	(Current Assets − Inventory) ÷ Current Liabilities.
Ratio analysis	Using ratios to evaluate financial health.
Return on assets (ROA)	Net Income ÷ Total Assets.
Return on equity (ROE)	Net Income ÷ Stockholders’ Equity.
Return on invested capital (ROIC)	After-tax operating profit ÷ invested capital.
SEC EDGAR	The SEC’s official database of public-company filings.
Statement of cash flows	Explains cash inflows and outflows.
Stockholders’ equity	Owners’ residual claim after liabilities.
Trend analysis	Evaluating ratios over time.
Valuation ratios	Ratios linking market value to performance.
Working capital	Short-term operating resources and obligations.