Glossary

Financial Glossary

Your Essential Guide to Financial & Tax Terms: A simplified, go-to reference for understanding the key terms, concepts, and compliance language used in accounting, VAT, tax consultancy, and business regulations. This glossary is designed to help entrepreneurs, business owners, and professionals navigate financial conversations with clarity and confidence.

COGS

COGS, or cost of goods sold, is a term used in accounting to refer to the direct costs associated with producing the goods or services that a business sells. COGS includes the direct labor, materials, and overhead costs that are directly tied to the production of a company’s goods or services. It does not include indirect costs, such as administrative or selling expenses, which are not directly tied to production. COGS is an important concept in accounting because it is used to calculate a company’s gross profit. Gross profit is the difference between a company’s revenue and its COGS. By subtracting COGS from revenue, a company can determine how much it earned from its sales after accounting for the direct costs of production. This information can be useful for evaluating a company’s financial performance and making decisions about its operations. For example, if a company has revenue of $100,000 and COGS of $60,000, its gross profit would be $40,000 ($100,000 – $60,000). This means that the company earned $40,000 in profit from its sales after accounting for the direct costs of production. By analyzing its gross profit, the company can determine whether it is generating enough profit from its sales and identify opportunities to improve its financial performance.

COGS calculation

To calculate COGS, you will need to first determine the direct costs that are associated with the production of a company’s goods or services. These costs may include the cost of raw materials, direct labor, and other direct expenses that are directly tied to the production process. Once you have identified these costs, you can use the following steps to calculate COGS:

Add up the total cost of raw materials that were used to produce the goods or services. This includes the cost of any materials that were directly used in the production process, such as the cost of ingredients for a food manufacturer or the cost of fabric for a clothing manufacturer.Add up the total cost of direct labor that was used to produce the goods or services. This includes the wages and salaries of any employees who worked directly on the production process, such as assembly line workers or production managers.

Add up the total cost of any other direct expenses that were incurred in the production process. This may include costs such as rent for a production facility, utilities, and other expenses that are directly tied to the production process.

Add up the total cost of raw materials, direct labor, and other direct expenses to calculate COGS. This is the total amount that a company spent on the direct costs of production.

For example, imagine that a company called ABC Inc. has the following costs associated with the production of its goods:

Raw materials: $10,000

Direct labor: $20,000

Other direct expenses: $5,000

To calculate ABC Inc.’s COGS, you would add up the total cost of raw materials, direct labor, and other direct expenses to get a total of $35,000. This means that ABC Inc. spent $35,000 on the direct costs of production. Once you have calculated COGS, you can use it to determine a company’s gross profit. To do this, you would subtract COGS from the company’s total revenue. For example, if ABC Inc. had revenue of $100,000, its gross profit would be $65,000 ($100,000 – $35,000). This means that ABC Inc. earned $65,000 in profit from its sales after accounting for the direct costs of production.

Calculate cost of sales

To calculate cost of sales, you will need to first determine the direct costs that are associated with the production of a company’s goods or services. These costs may include the cost of raw materials, direct labor, and other direct expenses that are directly tied to the production process. Once you have identified these costs, you can use the following steps to calculate cost of sales:

Add up the total cost of direct labor that was used to produce the goods or services. This includes the wages and salaries of any employees who worked directly on the production process, such as assembly line workers or production managers.

Add up the total cost of raw materials, direct labor, and other direct expenses to calculate cost of sales. This is the total amount that a company spent on the direct costs of production.

For example, imagine that a company called ABC Inc. has the following costs associated with the production of its goods:

Raw materials: $10,000

Direct labor: $20,000

Other direct expenses: $5,000

To calculate ABC Inc.’s cost of sales, you would add up the total cost of raw materials, direct labor, and other direct expenses to get a total of $35,000. This means that ABC Inc. spent $35,000 on the direct costs of production.

Once you have calculated cost of sales, you can use it to determine a company’s gross profit. To do this, you would subtract cost of sales from the company’s total revenue. For example, if ABC Inc. had revenue of $100,000, its gross profit would be $65,000

Calculate gross profit

For example, if a company has total revenue of $100,000 and COGS of $70,000, its gross profit would be $30,000, and its gross margin would be 30%. This means that for every $1 of revenue, the company is able to keep 30 cents as profit after accounting for the cost of producing and selling its products or services. Gross profit is an important metric for evaluating a company’s financial performance, as it indicates the amount of profit generated from the sale of its products or services before accounting for other expenses, such as administrative and selling expenses, and taxes.

Calculate gross profit margin

To calculate gross profit margin, you need to divide a company’s gross profit by its total revenue and multiply the result by 100 to express it as a percentage.

Here is the formula for calculating gross profit margin:

Gross profit margin = (Gross profit / Total revenue) x 100.

For example, if a company has total revenue of $100,000 and gross profit of $30,000, its gross profit margin would be calculated as follows:

Gross profit margin = ($30,000 / $100,000) x 100 = 30%

This means that for every $1 of revenue, the company is able to keep 30 cents as profit after accounting for the cost of producing and selling its products or services.

Cap table

A cap table (short for capitalization table) is a spreadsheet or database that shows the ownership structure of a company. It typically includes a list of the company’s shareholders and their respective ownership stakes, as well as information on the company’s equity, such as the number and type of shares outstanding and any options, warrants, or other securities that have been issued. Cap tables are used by companies to track their ownership structure and to make decisions about equity-related matters, such as issuing new shares or buying back shares from shareholders. They are also used by investors to understand the ownership dynamics of a company and to evaluate potential investment opportunities.

Capital

Capital is a term that has several related meanings in finance and economics. In the most general sense, capital refers to the assets, resources, and wealth that are used to produce goods and services. In a business context, capital typically refers to the money or other assets that are used to start, maintain, and expand a company. This can include cash, investments, property, equipment, and other resources that are owned or controlled by the company. In an economic context, capital can refer to the total stock of physical and financial assets that are available to a country or region. This can include the infrastructure, technology, and human capital that are used to produce goods and services. In a financial context, capital refers to the funds that are provided by investors, lenders, or shareholders to a company. This can include equity capital, which is provided by shareholders, and debt capital, which is provided by lenders. Overall, capital is an important resource that is essential for businesses, economies, and financial markets to function and grow. Here is an example to illustrate the concept of capital:

Imagine that a company called ABC Inc. is starting a new business that sells handmade crafts. To get the business off the ground, the company needs to purchase supplies, rent a storefront, and hire employees. To do this, the company needs to raise capital. The company’s owner decides to invest $50,000 of their own money into the business, which is considered equity capital. This capital is used to purchase the necessary supplies and equipment, as well as to rent the storefront and hire employees. In addition to the owner’s investment, the company also takes out a loan from a bank for $25,000. This loan is considered debt capital, and it is used to supplement the equity capital provided by the owner. In this example, the company’s capital includes the $50,000 investment from the owner and the $25,000 loan from the bank. This capital is used to start and operate the business, and it is expected to generate profits and returns for the owner and the lender.

Capital expenditures (CapEx)

Capital expenditures (CapEx) are funds used by a business to acquire, maintain, or improve its physical assets, such as property, buildings, or equipment. CapEx is different from operating expenses, which are the costs associated with running a business on a day-to-day basis, such as salaries, utilities, and supplies. CapEx is typically a long-term investment that is expected to generate future benefits for the business.

For example, a company may make a CapEx investment in a new manufacturing plant that is expected to increase production and revenue in the future. CapEx is an important source of funding for businesses, and it is typically financed through a combination of debt and equity.

Cash accounting

Cash accounting is a method of accounting that recognizes revenue and expenses only when cash is received or paid out. This means that revenue is not recognized until it is actually received in the form of cash, and expenses are not recognized until they are actually paid in the form of cash. Cash accounting is different from accrual accounting, which recognizes revenue when it is earned and expenses when they are incurred, regardless of when the cash is actually received or paid. Cash accounting is typically used by small businesses and individuals, as it is simpler and easier to implement than accrual accounting. It provides a more immediate and intuitive view of a company’s financial performance, as it only includes transactions that involve actual cash flows. However, cash accounting can also be less accurate than accrual accounting, as it does not take into account the timing of revenue and expenses. For example, a company that uses cash accounting may not recognize revenue that has been earned but not yet received, or expenses that have been incurred but not yet paid. This can lead to an overstatement or understatement of the company’s financial performance. Here is an example to illustrate the concept of cash accounting:

Imagine that a company called XYZ Inc. sells a product to a customer for $100. The customer agrees to pay for the product in 30 days. If the company uses accrual accounting, the transaction would be recorded as revenue in the company’s books of accounts when the product is sold, regardless of when the cash is actually received. This means that the company would recognize $100 in revenue in the current period, even though it has not yet received the cash from the customer. On the other hand, if the company uses cash accounting, the transaction would only be recorded as revenue in the company’s books of accounts when the cash is actually received from the customer. In this case, the company would not recognize any revenue in the current period, because it has not yet received the cash from the customer. Instead, the company would recognize the $100 in revenue in the next period, when the cash is received. Overall, cash accounting provides a more immediate and intuitive view of a company’s financial performance, but it can also be less accurate than accrual accounting.

Cash flow

Cash flow is a financial term that refers to the movement of cash into and out of a business, investment, or financial product. It is the net amount of cash that is generated or consumed in a given period of time, and it is typically measured in terms of cash inflows (receipts) and outflows (payments).

Cash flow is an important measure of a business’s financial health and performance. A positive cash flow indicates that the business is generating more cash than it is spending, which can be used to pay off debts, invest in growth, or distribute to shareholders. A negative cash flow indicates that the business is spending more cash than it is generating, which can put strain on the business’s liquidity and solvency.

Here is an example to illustrate the concept of cash flow:

Imagine that a company called ABC Inc. sells a product for $100. The product costs $50 to produce, and the company incurs $10 in other operating expenses, such as rent and utilities. In this case, the company’s operating cash flow would be $40 ($100 in sales – $50 in costs – $10 in expenses). This indicates that the company is generating $40 in cash from its core operations. In addition to its operating cash flow, the company also has investing and financing cash flows.

For example, if the company buys a new piece of equipment for $10,000, its investing cash flow would be -$10,000 (a cash outflow). If the company raises $5,000 by issuing new shares of stock, its financing cash flow would be $5,000 (a cash inflow).

Overall, the company’s total cash flow would be the sum of its operating, investing, and financing cash flows.

In this example, the company’s total cash flow would be $35,000 ($40 in operating cash flow – $10,000 in investing cash flow + $5,000 in financing cash flow).

This indicates that the company is generating more cash than it is consuming, which is a positive sign for its financial health and performance. There are several different types of cash flow, including operating cash flow, investing cash flow, and financing cash flow. Operating cash flow measures the cash generated or consumed by a business’s core operations, such as the sale of goods and services. Investing cash flow measures the cash generated or consumed by a business’s investments in long-term assets, such as property, plant, and equipment. Financing cash flow measures the cash generated or consumed by a business’s financing activities, such as the issuance of new equity or debt. Overall, cash flow is a key metric for businesses, investors, and lenders, as it provides insight into the ability of a business to generate and manage its cash resources.

Cash flow management

Cash flow management is the process of carefully tracking and managing the amount of cash coming into and going out of a business. It is a crucial aspect of financial management that helps businesses ensure that they have sufficient cash on hand to meet their short-term and long-term obligations. Effective cash flow management can help businesses avoid financial difficulties, such as running out of cash or defaulting on loans. It can also help businesses identify opportunities to invest excess cash and improve their financial performance. Imagine that a company called ABC Inc. has $100,000 in cash on hand. The company has several short-term obligations that it needs to pay, such as rent, salaries, and utilities. It also has a long-term loan that it needs to repay within the next year. To manage its cash flow, ABC Inc. creates a cash flow budget that outlines all of its expected cash inflows and outflows over the next month. The budget shows that the company expects to receive $50,000 in revenue from customers and $10,000 in interest income. It also shows that the company expects to pay $40,000 in salaries and $5,000 in utilities. After accounting for all of its expected inflows and outflows, the cash flow budget shows that ABC Inc. will have a positive cash flow of $15,000 at the end of the month. This means that the company will have enough cash on hand to meet its short-term obligations and make a payment on its long-term loan. If the company’s actual cash inflows and outflows differ from what was predicted in the budget, ABC Inc. can use the budget as a tool to identify any potential issues and make adjustments to its spending or income-generating activities as needed. This can help the company maintain a healthy cash flow and avoid financial difficulties.

Chart of accounts

A chart of accounts is a list of the accounts that a business uses to record its financial transactions. The chart of accounts typically includes different types of accounts, such as asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. Each account has a unique name and number, and is used to track a specific type of financial transaction.

The chart of accounts is an important tool for businesses because it provides a standard system for organizing and classifying their financial transactions. By using a chart of accounts, businesses can ensure that their financial records are complete, accurate, and consistent. It also helps businesses analyze their financial performance and make informed decisions about their operations.

The specific accounts included in a chart of accounts can vary depending on the size and type of business, as well as other factors. However, most charts of accounts include a core set of accounts that are commonly used by businesses, such as accounts for cash, accounts receivable, accounts payable, and inventory.

Imagine that a company called GHI Inc. has a chart of accounts that includes the following accounts:

101 – Cash

201 – Accounts Receivable

301 – Inventory

401 – Accounts Payable

501 – Sales Revenue

601 – Cost of Goods Sold

GHI Inc. uses the chart of accounts to record its financial transactions and track its financial performance. For example, when GHI Inc. receives a payment from a customer, it would record the transaction in the “Cash” account (account 101) and the “Accounts Receivable” account (account 201). When GHI Inc. purchases inventory from a supplier, it would record the transaction in the “Inventory” account (account 301) and the “Accounts Payable” account (account 401).By using the chart of accounts, GHI Inc. can ensure that its financial records are organized and consistent, and that it has the information it needs to analyze its financial performance and make informed decisions. For example, by looking at the balance in the “Inventory” account (account 301), GHI Inc. can determine how much inventory it has on hand and whether it needs to make additional purchases. By looking at the balance in the “Accounts Payable” account (account 401), it can determine how much it owes to its suppliers and whether it needs to make additional payments. This information can help GHI Inc. manage its operations and improve its financial performance.

Request A Call Back

Would you like to speak with one of our service experts over the phone? We would be happy to help. Just submit your details and we’ll be in touch shortly. If you prefer, you can also email us at elevate@adsauditors.com.

For Businesses: Do you have questions about how our services can help your company? Send us an email and we’ll get in touch shortly, or phone +971 56 404 5966— we would be delighted to speak with you.