All business degree students need to take accounting to learn key terms that all businesses use in the work world; however, like many other industries, it’s riddled with jargon. Words like “financials”, “COGS” (cost of goods sold), and “capital” are very common phrases used in accounting. Many business students focus on the math aspect of accounting and forget to remember key words or phrases associated with the industry.
When the term financials is used, companies are talking about the financial sheets. There are four financial sheets that businesses use: the balance sheets, income statements, owner’s equity, and cash flow. Business students should become very familiar with the balance sheet and the income statement, because they are the most important of the four financial statements. The balance sheet shows what the company has in assets, liabilities, and owner’s equity. Assets are items the company uses to keep the business running. Examples of assets are cash, inventory, and buildings. Liabilities are also on the balance sheet and these are items that the company owes other companies or individuals. Examples of liabilities are mortgages, accounts payable, and loans. The last part of the balance sheet is the owner’s equity, which shows what the owner’s claim is on the business or another way of looking at it is how much the company is worth.
The term income statement is important as well, because it shows if a company is profitable or if it is losing money. A company’s sales or revenue are the first items on an income statement. Cost of goods sold, or COGS, is found on the income statement right after the revenue and is the cost of inventory that is sold for that period of time. By subtracting COGS from sales you get what is called the margin. A margin is how much a company marks up its inventory to make a gross profit. The income statement then lists all the company’s expenses after the gross profit. What is left after expenses is either a net income, if revenue is higher than expenses or a net loss if expenses are higher than revenue. The net income or net loss is found at the bottom of the income statement and that is why it is called the “bottom line.”
Another financial sheet is the cash flow statement. The cash flow statement is not as widely used as the balance sheet or the income statement, but is just as important. The cash flow statement shows how a company spent its cash and how much cash a company has left after a certain period of time. It also shows how much a company paid in dividends. Dividends are payments that shareholders get for owning a share of stock. Dividends can be as little as a few cents per share per year or can be as large as that Microsoft gave in 2004 of $3.00 a share (“Microsoft Dividend,”2008).
Another term that is used a lot in the business world is liquid. If a company is considered to be liquid, that means that they have a surplus of cash at their disposal. Also, it could mean that the company has many assets that could be converted to cash in a very short time span.
The last word that all business majors should know is the word capital. The word capital means money or equivalent to money. Such items could be foreign currency, c.d.’s, commercial paper, or money market securities. All these items would be considered to be a form of capital. The more capital a company has, the more assets they can buy to make their company more profitable.