Meaning of Accounting Terms

Turnvover, Revenue, Profit, Earnings

[derekwong28]

Can somebody explain in simple layman terms the definition of Turnvover, Revenue, Profit, and Earnings?

[Morocco]

Derek,

Turnover: For a company, the ratio of annual sales to inventory; or equivalently, the fraction of a year that an average item remains in inventory. Low turnover is a sign of inefficiency, since inventory usually has a rate of return of zero. here also called inventory turnover.

revenue: Total dollar payment for goods and services that are credited to an income statement over a particular time period.

profit: The positive gain from an investment or business operation after subtracting for all expenses. Its the opposite of loss.

earnings: Revenues minus cost of sales, operating expenses, and taxes, over a given period of time.

[sun818]

Is there a distinction between profit and earnings?

[Morocco]

In laymens terms they are very similar. Earnings become important to investors because they give an indication of the company's expected future dividends and its potential for growth and capital appreciation. That does not necessarily mean that low or negative earnings always indicate a bad stock; for example, many young companies report negative earnings as they attempt to grow quickly enough to capture a new market, at which point they'll be even more profitable than they otherwise might have been.

Technically you will project earnings and not profit. Earninigs can curtail into a various spectrum of financial capabiities. Profit is something that ultimately becomes deducted from yur actual earnings. For example we deduce a very large portion of our quarterly earnings towards future investment and developement. Once we dudect that number we then apply the final remainder towards our profit. Ultimately we deduct from our earnings a number which signifies the amount we MAY spend...

[derekwong28]

Hi Morocco

Thanks very much for your reply. I suppose myself and others on this forum have been mixing things up.

I wonder then is turnover expressed as a percentage rather than a monetary figure? If it does depend on inventory, does it mean that companies which sell services only and do not have any inventory will have no turnover?

Also, does it mean that earnings are always higher than profit?

When you are valuating a company, in what order of importance would you put these terms? How would liabilties come in?

[Sathish]

derekwong28,

this should be usesful -
[ventureline.com...]
[accountz.com...]

I learnt few definitions today :)

[derekwong28]

Thanks, this is interesting:

"In Great Britain, TURNOVER means sales"
So I was no wrong afterall since we use UK standards. Also I always thought that revenue meant profits.

[jsinger]

30 years ago defining those terms would have been much easier. During the stock market bubble of the 90s, publicly owned companies often employed and even invented terms and measurements to present their company in the best light: Cash Flow, Net Cash Flow, Cash Flow from Operating Activities, EBITDA (earnings before interest, taxes, depreciation and amortization!)

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Turnover can be stated several ways. It is mostly used in retailing to indicate how many times in a year a store sells its average inventory. A store with $100,000 in inventory (at retail) and $300,000 in annual sales is said to have a 3X turnover.

In some industries wholesale inventory value is used rather than retail. (resulting in a much higher "turn" figure. Some businesses may measure turn on a monthly basis. You are correct in saying that service businesses don't use the term.

High turnover isn't always good, It may suggest the inventory is too lean resulting in lost sales. A turnover of 3 or 4 is considered average in a clothing store while that rate would be disastrous for a fish market! Therefore, turnover is usually used to compare businesses in the same field.

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Revenue usually means sales... how much a company takes in before deducting expenses, interest, payroll, taxes, etc. It is usually the TOP line on a financial statement.

Even that term can be hard to define. For example, a website sells airline tickets. Are its revenues the total of the tickets it sells, or its commission on those tickets, a vastly smaller sum?

I believe that U.S. accounting standards now say that only the commission should be counted as revenue.

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Why are things so confused? Because in the 90s shareholders wanted puffery, not precision, and management (and some CPAs) were thrilled to oblige.