Key Terms
PURPOSE
Restate every line as a percentage so you can compare across periods, departments, and companies of different sizes.
Net Sales
Gross sales minus returns and allowances. The starting point for most calculations.
COGS
Direct costs of producing or purchasing the goods sold. For a retailer, it is the cost of merchandise purchased for resa
Gross Profit
Net Sales minus COGS. Measures how profitable the core product or service is before overhead, financing, or taxes enter
Operating Income
Gross Profit minus operating expenses (rent, utilities, salaries, depreciation). Reflects profitability of daily operati
Net Income
The final number after interest, taxes, gains, and losses. The "bottom line." Reflects the total financial result for th
Gains and Losses
Items outside normal business activity (selling old equipment, retiring debt). Reported below operating income so they d
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization.
Why it matters
Depreciation and amortization are noncash expenses; they reduce net income but no cash actually leaves the firm. EBITDA
Amortization
Spreading the cost of an intangible asset (patent, copyright) over its useful life. Same concept as depreciation, differ
FOUNDATION
The Accounting Equation Assets = Liabilities + Owner's Equity
Examples
Collections from customers, payments to suppliers, payroll, utilities paid.
Example
If COGS is $60,000 and net sales are $120,000, COGS is 50 percent of net sales.
Accounts
Common stock, preferred stock, additional paid-in capital.
Key account
Retained earnings.