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Intro to Business Management > Accounting > Flashcards

Accounting Flashcards

1
Q

What is accounting?

A

The process of measuring, interpreting, and communicating financial information to support internal and external business decision-making

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2
Q

Why is accounting important to owners, shareholders, potential investors, and creditors?

A

To evaluate operations of the firm to make investment decisions.

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3
Q

Why is accounting important to management?

A

To plan and control.

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4
Q

Why is accounting important to employees and union officials?

A

To use in contract negotiations.

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5
Q

Why is accounting important to lenders and suppliers?

A

To evaluate credit ratings.

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6
Q

Why is accounting important to government agencies, economic planners, and consumer groups? (2)

A

To evaluate tax liabilities.

To approve new issues of stocks and bonds.

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7
Q

Which business activities involve accounting? (3)

A

-Financing activities provide necessary funds to start a business and expand it after it begins operating.
• Investing activities provide valuable assets required to run a business.
• Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

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8
Q

What is Generally accepted accounting principles (GAAP)?

A

Principles that outline the conventions, rules, and procedures for deciding on the acceptable accounting practices at a particular time.

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9
Q

What is Accounting Standards Board (AcSB)?

A

The organization that interprets and modifies GAAP in Canada for private and not-for-profit businesses.

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10
Q

What are Canadian public companies are required to do?

A

To use International Financial Reporting Standards (IFRS). These standards allow for financial statements to be more easily compared from country to country.

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11
Q

What must Senior executives do?

A

Personally certify that the financial information reported by the company is correct.

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12
Q

What is Corruption of Foreign Public Officials Act?

A

A federal law that prohibits Canadian citizens and companies from bribing foreign officials to win or continue business (in US Sarbanes-Oxley Act).

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13
Q

What is the Accounting cycle?

A

The set of activities involved in converting information and individual transactions into financial statements

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14
Q

What is the basic data of accounting?

A

Transactions

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15
Q

What are the three elements of accounting processing?

A

Record
Classify
Summarize

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16
Q

What are the four financial statements?

A

Balance sheet
Income statement
Statement of changes in equity
Statement of cashflows

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17
Q

What do financial statements provide?

A

They provide managers with the info they need to evaluate the firm’s profitability, its overall health, and its liquidity position - the ability to meet its current obligations and needs by converting assets into cash..

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18
Q

What is a balance sheet?

A

Statement of a firm’s financial position (What the firm owns versus what it owes) at a specific point in time.

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19
Q

What are the three aspects of a balance sheet?

A

Assets
Liabilities
Owner’s equity

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20
Q

What are the three types of assets?

A

Current assets
Fixed assets
Intangible assets

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21
Q

What are current assets?

A

Cash or tangible liquid assets that can be easily converted into cash and are expected to be used within the next year (cash, supplies, inventory, etc.)

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22
Q

What are Fixed assets?

A

Tangible assets that are expected to last one year or more (plant, equipment, land, etc.)

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23
Q

What are Intangible assets?

A

Intangible assets that are expected to last one year or more (e.g., patents, copyrights, trademarks, etc.)

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24
Q

What are the two types of liabilities?

A

Current liabilities

Long-term liabilities

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25
Q

What are Current liabilities?

A

Liabilities expected to be paid off within one year (e.g., wages, bank line of credit, bills that have money still owing, etc.)

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26
Q

What are Long-term liabilities?

A

Liabilities expected to not be paid off within the next year (e.g., bank loans, mortgages, etc.)

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27
Q

What is the Accounting equation?

A

Assets = Liabilities + Owner’s equity

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28
Q

What is Balanced Accounts & Double-entry bookkeeping?

A

The process used to record accounting transactions; each individual transaction is always balanced by another transaction

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29
Q

What is an Income statement?

A

A financial record of a company’s revenues, expenses, and profits over a specific period of time

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30
Q

What do income statements do? (2)

A

-Reports profit or loss
-Focus on revenues and costs associated with
revenues

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31
Q

What is a Statement of changes in equity?

A

A record of the change in equity from the end of one fiscal period to the end of the next fiscal period

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32
Q

How does the statement of changes in equity work? (2)

A

-Begins with the amount of equity shown on the
balance sheet
-Net income is added, and cash dividends paid
to owners are subtracted

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33
Q

What is a Statement of cash flows?

A

A record of the sources and uses of cash during a period of time

34
Q

What is Accrual accounting?

A

An accounting method that records revenue and expenses when they occur, not when cash actually changes hands

35
Q

What are the three Categories of Basic Financial Analysis?

A

Ratio Analysis
Trend Analysis
Comparative Analysis

36
Q

What does Ratio Analysis do?

A

Assesses and interpret the relationships among the financial results of a firm.

37
Q

What does trend analysis do?

A

Looks at a firm’s financial trends over a period of time to see whether they are improving or declining.

38
Q

What does comparative analysis do?

A

Compares financial metrics and ratios to firm’s the same industry or situation.

39
Q

How does ratio analysis assess and interpret the relationships among the financial results of a firm? (2)

A
  • Examines the relationships between critical components of information found on the financial statements.
  • Produces a standardized metric
40
Q

What is Ratio analysis is a tool for?

A

Measuring a firm’s liquidity, profitability, and reliance on debt financing, and how effectively management uses the firm’s resources

41
Q

What does Liquidity ratios measure?

A

A firm’s ability to meet its short-term obligations

42
Q

What does Current ratio compare?

A

Current assets to current liabilities

Current ratio = Current assets/Current liabliities

43
Q

What does the Acid-test (or quick) ratio measure?

A

The ability of a firm to meet its debt payments on short notice.

44
Q

What is the acid-test formula?

A

acid-test ratio = (current assets - inventory) / Liabilities

45
Q

What does Efficiency ratios measure?

A

How effectively management uses the firm’s resources.

46
Q

What does Inventory turnover ratio indicate?

A

The number of times merchandise moves through a business.

47
Q

What is the inventory turnover ratio formula?

A

Inventory turnover = cost of goods sold / average inventory

48
Q

What does Total asset turnover ratio indicate?

A

How much in sales each dollar invested in assets generates.

49
Q

What is the Total asset turnover ratio formula?

A

Total asset turnover ratio = sale / average total assets

50
Q

What does Receivables turnover ratio indicate?

A

The number of times receivables turnover in a year.

51
Q

What does Leverage ratios measure?

A

How much a firm relies on debt financing.

52
Q

What are the two leverage ratios?

A

Debt ratio

Long-term debt to equity

53
Q

What is the debt ratio formula?

A

Debt ratio = total liabilities / total assets

54
Q

What is the Long-term debt to equity formula?

A

Long-term debt to equity = long-term debt / owner’s equity

55
Q

What does a total liabilities to total assets ratio (debt ratio) greater than 50 percent indicate?

A

That a firm is relying more on borrowed money than owners’ equity.

56
Q

What does Profitability ratios measure?

A

The organization’s overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses.

57
Q

What is the gross profit margin formula?

A

gross profit margin = gross profit / sales

58
Q

What is the net profit margin formula?

A

net profit margin = net income / sales

59
Q

What is the return on equity formula?

A

return on equity = net income / average equity

60
Q

Which three metrics examine the profitability of the firm?

A

Net Profit Margin
Return on Equity
Gross Profit Margin

61
Q

What does Net Profit Margin Identify?

A

The profit produced by one dollar in sales revenues.

62
Q

What does Return on Equity Identify?

A

The profit produced by every dollar invested by owners in the firm.

63
Q

What does Gross Profit Margin Identify?

A

The gross profit produced by every dollar of sales.

64
Q

What do Liquidity Ratios Examine and which 2 metrics are a part of it?

A

The ratio of short term financial obligations relative to the firm`s liquid financial assets. How much the firm owns in cash-like assets versus how much it owes over the next year

  • Acid-test ratio
  • Current ratio
65
Q

What does the Current Ratio Identify?

A

How much current activities are available to payoff current liabilities.

66
Q

What does the Acid Test Ratio Identify?

A

How much cash and cash equivalent assets are available to payoff current liabilities

67
Q

What do Leverage Ratios Measure and which 2 metrics are a part of it?

A

How much the firm relies on debt financing, which is riskier than equity financing.

  • Debt to Asset Ratio
  • Long-term Debt to Equity
68
Q

What does the Debt Ratio Examine?

A

The ratio of assets that back up the debt.

69
Q

What does Long-term Debt to Equity Examine?

A

The firm`s ability to cover long-term debt.

70
Q

What does Activity Ratios Examine and which two metrics are a part of it?

A

How efficient the firm is at operating.

  • Inventory Turnover
  • Total Asset Turnover
71
Q

What does inventory turnover ratios measure?

A

How many times inventory is sold or turned over in a year.

72
Q

What does Total Asset Turnover Indicate?

A

How efficient a firm is at deploying its resources.

73
Q

Why are gross profit margins a critical number for calculating breakeven analysis?

A

Because gross profit tends to vary in proportion to production and sales.

74
Q

What does a current ratio under 1 suggest?

A

That the firm would not be able to pay its short-term obligations.

75
Q

What should a firm’s acid-test ratio be generally?

A

Generally should be higher than 1.1 but this varies with industry.

76
Q

How does Long-term Debt to Equity vary with industry?

A

Capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

77
Q

Why is Faster inventory turnover is efficient?

A

Because it lowers the possibility of inventory deterioration or out of style. It also lowers inventorying costs.

78
Q

What characterizes efficient Total Asset Turnover?

A

Fewer assets required to make a sale the more efficient the operation.

79
Q

What does Comparative Financial Analysis do?

A

Compare financial metrics, values, and ratios to other firms (usually in the same industry).

80
Q

Which two questions does Comparative Financial Analysis attempt to answer?

A

-Is your firm better or worse than the other
firms in the industry?
-What is the standard in the industry?

Intro to Business Management (4 decks)

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