Unit 3, Part 2: Business Finance and Accounting

22 terms. Say what each one means, then open the card to check.

• Accounting

  Recording, sorting and reporting every money transaction a business makes, so owners, managers, lenders and investors can see how it is doing.

  Example. Each week the bookkeeper at a fictional flower shop logs every sale and bill, and at year end those records become the shop's financial statements.

• Financial management

  Planning how a business raises money and how it spends, saves and invests that money to reach its goals.

  Example. The owners of a fictional climbing gym weigh whether to pay for a second location with saved profits or with a bank loan.

• Budget

  A plan of expected revenue and spending for a coming period. Comparing actual results with it shows where the business is ahead of or behind its plan.

  Example. A fictional food co-op plans to spend 5,000 dollars on advertising in the spring; when it spends 5,750 dollars, the manager sees an unfavorable variance of 750 dollars.

• Fixed cost

  A cost that stays the same in total when output changes over a normal range, such as rent, insurance or an equipment lease.

  Example. A fictional pottery studio pays 1,800 dollars in rent each month whether it fires 50 bowls or 500.

• Variable cost

  A cost that rises and falls with the amount a business produces or sells, such as materials, packaging or a fee charged on each sale.

  Example. A fictional soap maker spends about 2 dollars on oils and wrapping for each bar, so making 300 more bars adds about 600 dollars of cost.

• Break-even point

  The output at which total revenue equals total cost, so there is no profit and no loss. In units, it is fixed costs divided by (price minus variable cost per unit).

  Example. A fictional tutoring center with 4,500 dollars of monthly fixed costs earns 30 dollars per session above its variable cost, so it breaks even at 150 sessions a month.

• Depreciation

  Spreading the cost of a long-lived asset over the years it is used, as a yearly expense. Straight-line depreciation charges the same amount each year.

  Example. A fictional moving company buys a 50,000-dollar truck it expects to use for 10 years and then scrap for nothing, so it records 5,000 dollars of depreciation a year.

• Debt financing

  Raising money by borrowing, through a loan, a line of credit or bonds. The money must be repaid with interest, but the owners keep full ownership.

  Example. A fictional machine shop borrows 120,000 dollars from a bank for a new lathe and repays it in monthly payments over six years.

• Equity financing

  Raising money by selling part of the ownership of a business to investors. Nothing is repaid on a schedule, but the owners give up a share of control and future profits.

  Example. The two founders of a fictional app company sell a 15 percent stake to a venture capital firm in exchange for money to hire engineers.

• Retained earnings

  Profits a business keeps and reinvests instead of paying them out to its owners. They are a source of money that needs no loan and no new investor.

  Example. A fictional print shop keeps two years of profits in the business and uses them to buy a second press without borrowing.

• Revenue

  The money a business earns from selling its goods or services during a period, before any costs are subtracted. It is the top line of the income statement.

  Example. A fictional lemonade stand that sells 600 cups at 2 dollars each earns 1,200 dollars of revenue, no matter what the lemons cost.

• Cost of goods sold

  The direct cost of the products a business sold during a period: the materials and labor to make them, or what a store paid for the goods it resold.

  Example. A fictional bookstore that paid 9 dollars for each novel it later sold counts those 9 dollars per book in its cost of goods sold.

• Gross profit

  Revenue minus cost of goods sold. It shows what is left from sales to pay operating expenses, interest and taxes.

  Example. A fictional bike shop with 92,000 dollars of sales and 55,000 dollars of cost of goods sold has a gross profit of 37,000 dollars.

• Net income

  What is left after every expense, including cost of goods sold, operating expenses, interest and taxes, is subtracted from revenue. It is the bottom line.

  Example. A fictional dog bakery has a healthy gross profit but, after rent, wages, loan interest and taxes, ends the year with net income of only 3,000 dollars.

• Net profit margin

  Net income divided by revenue, usually given as a percent. It shows how much of each dollar of sales the business keeps as profit.

  Example. A fictional furniture maker earns net income of 60,000 dollars on revenue of 750,000 dollars, a net profit margin of 8 percent.

• Asset

  Something of value a business owns or is owed, such as cash, accounts receivable, inventory, equipment or buildings.

  Example. The ovens, the flour in storage and the money a fictional restaurant is owed by a catering client are all assets on its balance sheet.

• Liability

  A debt a business owes to someone else, such as accounts payable to suppliers, wages owed or a bank loan.

  Example. A fictional hardware store that received a shipment of paint and has 30 days to pay the supplier records the amount as accounts payable, a liability.

• Owner's equity

  The owners' claim on the business: total assets minus total liabilities. It is the business's book net worth, and assets always equal liabilities plus equity.

  Example. A fictional cleaning company with 90,000 dollars of assets and 35,000 dollars of liabilities has owner's equity of 55,000 dollars.

• Working capital

  Current assets minus current liabilities. A positive amount means the business has more coming in within a year than it owes within a year.

  Example. A fictional toy shop with 45,000 dollars of cash, receivables and inventory and 30,000 dollars of bills due this year has working capital of 15,000 dollars.

• Cash flow statement

  A financial statement that shows the cash that came in and went out during a period, sorted into operating, investing and financing activities.

  Example. A fictional nursery's cash flow statement shows cash from plant sales under operating activities and a new greenhouse purchase under investing activities.

• Financial audit

  An independent review in which outside accountants test a business's records and say whether its financial statements present its results fairly.

  Example. Before a fictional water-bottle maker can get a large bank loan, the bank asks for statements checked by an outside accounting firm.

• Internal controls

  Rules and checks a business uses to protect its money and keep its records accurate, such as splitting duties among people and requiring approval for large payments.

  Example. At a fictional garden center, one clerk counts the cash drawer at closing and a second person checks the count against the day's sales records.