Glossary
3-Statement Modeling
Every term in the track, defined in plain English. These definitions also pop up when you hover the dotted terms inside lessons - and feed your flashcard review.
Concepts
- Accrual accounting
- Recording revenue when earned and expenses when incurred, regardless of when cash moves. The reason profit and cash differ.
- Accounting identity
- Assets = Liabilities + Shareholders' Equity. The rule the balance sheet must always obey.
- Roll-forward
- Beginning balance + inflows - outflows = ending balance. The pattern that connects a balance sheet account across periods.
Statements
- Income statement
- A period statement of profitability: revenue down through costs to net income.
- Balance sheet
- A point-in-time snapshot of assets, liabilities, and equity. Always satisfies Assets = Liabilities + Equity.
- Cash flow statement
- A period statement reconciling profit to actual cash across operating, investing, and financing activities.
Income statement
- Net incomeNI
- The bottom line of the income statement; the starting point of the cash flow statement and an addition to retained earnings.
- EBIT
- Earnings before interest and taxes; operating profit before financing and tax.
- Gross margin
- Gross profit as a percent of revenue; a common, stable driver for projecting COGS.
- Depreciation & amortizationD&A
- Non-cash charge for aging assets; subtracted on the income statement and added back on the cash flow statement.
Balance sheet
- Retained earnings
- Cumulative net income kept rather than paid as dividends; the main link from the income statement into equity.
- Working capital
- Operating current assets minus operating current liabilities; its period-over-period change drives operating cash flow.
- Accounts receivableA/R
- Money owed by customers for sales already booked. An increase uses cash.
- Accounts payableA/P
- Money owed to suppliers for purchases already made. An increase provides cash.
- Inventory
- Goods held for sale. An increase ties up cash until the goods are sold.
- PP&E
- Property, plant & equipment. Rolls forward as beginning + CapEx - depreciation.
Cash flow
- Cash from operationsCFO
- Cash generated by core operations; built from net income plus D&A minus the change in working capital.
- Cash from investingCFI
- Cash used for or from investments, chiefly capital expenditures and acquisitions.
- Cash from financingCFF
- Cash from debt and equity activity: borrowings, repayments, issuance, buybacks, and dividends.
- Indirect method
- Building operating cash flow by starting at net income and adjusting for non-cash items and working-capital changes. The standard approach.
Linking
- Revolver
- A revolving credit line that auto-funds cash shortfalls in a model, acting as the secondary balancing plug after cash.
- Circular reference
- A loop where a value depends on itself - classically, debt interest reducing net income, which changes cash and the revolver, which changes interest.