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Most commonly confused Finance terms

Let's see together some terms or expressions that financial analysts and accounting specialists should never confuse, from basics to advanced...


💰 Revenue vs. 💵 Profit

Revenue is the total income generated by a business from its sales, while profit is the amount of earnings that remains after deducting all expenses from revenue.


🤑 Gross vs. 💰 Net

Gross refers to the total amount of something, while net refers to the amount remaining after deductions or adjustments have been made.


📊 Cost of Goods Sold (COGS) vs. 📈 Operating Expenses

COGS is the direct cost of producing goods sold by a company, while operating expenses are the indirect costs associated with running a business, such as rent, salaries, utilities, advertising, etc.


📉 Accrual vs. 📈 Deferral

Accruals are revenues or expenses that have been recognized but not yet paid or received, while deferrals are revenues or expenses that have been paid or received but not yet recognized.


📊 Horizontal Analysis vs. 📈 Vertical Analysis

Horizontal analysis compares financial statements over multiple periods to see how the company has changed over time, while vertical analysis compares different line items on a single financial statement to see what proportion of the total each item represents.


📊 Financial Statements vs. 📈 Financial Reports

Financial statements are the formal records of a company's financial activities, while financial reports are the written or oral presentations of those statements to interested parties.


📊 Current Ratio vs. 📈 Quick Ratio

Current ratio measures a company's ability to pay its current liabilities with its current assets, while quick ratio measures a company's ability to pay its current liabilities with its most liquid assets (they don't include inventory, for example).


📈 Gross Margin vs. 📉 Operating Margin

Gross margin is the percentage of revenue that remains after deducting the cost of goods sold, while operating margin is the percentage of revenue that remains after deducting all operating expenses.


📈 Gross Profit vs. 📉 Net Profit

Gross profit is the total revenue minus the cost of goods sold, while net profit is the total revenue minus all expenses, including taxes and interest.


🔷️Gross Revenue vs 🔹️Net Revenue

Gross revenue is the total amount of sales a business generates, while Net Revenue is the amount of revenue actually earned after deducting sales returns, allowances and discounts given to customers


🏷COGS (Cost of Goods Sold) vs. 📈 Cost of Sales

COGS only includes the direct costs associated with producing or purchasing the goods that a company sells, such as raw materials and labor. On the other hand, cost of sales includes all the costs associated with producing, marketing, and delivering the goods to customers, including both direct costs (COGS) and indirect costs such as marketing and distribution expenses.


📉 Amortization vs. 📈 Depreciation

Amortization and depreciation are both methods of accounting for the loss of value of an asset over time, but amortization is used for intangible assets like patents or trademarks, while depreciation is used for tangible assets like buildings or machinery.


📉 Impairment vs. 📈 Amortization

Impairment is the reduction in the value of an asset due to a decline in its fair market value, while amortization is the process of expensing the cost of an intangible asset over its useful life.

As we have seen before, these two terms differ from depreciation as well.


📈 EBIT vs. 📉 EBITDA

EBIT (Earnings Before Interest and Taxes) is a measure of a company's operating income (with important differences with this one, as we'll see), while EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) adds back non-cash expenses like depreciation and amortization to operating income.


💰 EBIT (Earnings Before Interest and Taxes) vs. 📈 Operating Income

EBIT is a financial metric that represents a company's overall earnings before deducting interest and taxes, and it includes non-operating positive and negative items: Operating income is = Revenue - COGS - Operating Expenses, and it gives the profit of the core business activity, without considering non-operating items nor interest and taxes.


📊 Liquidity Ratios vs. 📈 Solvency Ratios

Liquidity ratios measure a company's ability to meet its short-term obligations, while solvency ratios measure a company's ability to meet its long-term obligations.


📊 Book Value vs. 📈 Market Value

Book value is the value of a company's assets minus its liabilities, while market value is the current market price of a company's shares.


 📊 Accrual Accounting vs. 💰 Cash Accounting

Accrual accounting records revenue and expenses when they are earned or incurred, regardless of when cash is actually received or paid out. Cash accounting, on the other hand, records revenue and expenses only when cash is actually received or paid out.


💼 EBITDA vs. 💰 Operating Cash Flow

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) = Revenue - Expenses (excluding interest, taxes, depreciation, and amortization); while

OCF = Net Income + Depreciation & Amortization - Increase in Accounts Receivable + Increase in Accounts Payable - Increase in Inventory +/- Other Working Capital Changes


💹 Return on Investment (ROI) vs. 📈 Return on Equity (ROE)

ROI measures the profitability of an investment, while ROE measures the profitability of a company's equity.


💹 Dividends vs. 💸 Capital Gains

Dividends are a portion of a company's profits paid out to shareholders, while capital gains are the increase in value of an investment over time.


💼 Capital Expenditures vs. 🏭 Operating Expenses

Capital expenditures are investments in long-term assets like property or equipment, while operating expenses are day-to-day costs like rent or salaries.


📆 Fiscal Year vs. 🗓️ Calendar Year

A fiscal year is a company's 12-month accounting period that may not align with the calendar year, while a calendar year is simply January 1 to December 31.


🏦 Interest Rate vs. 📉 Inflation Rate

Interest rates are the cost of borrowing money, while inflation rates are the rate at which prices for goods and services are increasing.


🧾 Audit vs. 📝 Review

An audit is a detailed examination of a company's financial records by an independent auditor, while a review is a less extensive evaluation of financial records that may be performed by the company's own accounting team or a third-party reviewer.


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