Explanation of Some Financial Terms

In cash flow these are some of the terms which are new to me:

  1. Operational activities (OA): The day to day core business earnings or loss like sales, advertising, raw materials etc. I mean as the name suggest this is almost clear
  2. Investing activities (IA): This term was new for me but again as the name suggest it is actually the same. Company also invest like in land, factories/plant they can even invest in Fixed deposit or some other shares/equities of an startup etc. Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.). Payments related to mergers and acquisition.
  3. Financing activities (FA): This is where the paying interest to the debt company has borrowed comes in. They can also do some corporate borrowing via some contract for short term cash. This also include dividend payouts. Buyouts of companies own share. This always looks very good to investors as this directly impacts the the share value(it goes up). As the shares in the market will denote higher percentage value of the company.

Cash flow has inflow(good), outflow (huh) means the same as name suggest.

Depreciation, Amortization: Very important to understand how Financial report works. If the company is buying a huge land or establishing a new factory or buying equities in another company in a given time this means a huge investment. May be many folds more than what company’s profit will be this year. So the balance sheet will go for a toll in this scenario. Even when the company is going to reap the benefit of this investment in coming years may be for lifetime. For this reason we have Amortization which means that this kind of huge investment will have a time period defined over which the expenditure will be added to balance sheet.

Then we have Depreciation which means that if you have car which you are using/or not using doesn’t matter the value of that car will go down to zero at some point in time. May be if you keep it long it may go up as antique but you got my point. This is called depreciation again this is also predefined for each kind of equipment how much the value will depreciate over time.

Asset: I get confuse about this asset and debt but I got a simple example to understand this. Let us say you have bought a house of value 50x for which you got loan of 40x(debt) and 10x you paid. Now you have an asset worth 50x of which debt is 40x but remember the asset is 50x so you need to subtract the debt from asset to get a clear picture.

I don’t know about this one so read on wiki Deferred tax  Somehow you don’t pay tax and defer it for later for what earnings in what scenario does it imply I do not have to pay interest on the tax ?  I don’t know read !! 🙂

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