Accounting Flashcards
What is accounting?
The process of measuring, interpreting, and communicating financial information to support internal and external business decision-making
Why is accounting important to owners, shareholders, potential investors, and creditors?
To evaluate operations of the firm to make investment decisions.
Why is accounting important to management?
To plan and control.
Why is accounting important to employees and union officials?
To use in contract negotiations.
Why is accounting important to lenders and suppliers?
To evaluate credit ratings.
Why is accounting important to government agencies, economic planners, and consumer groups? (2)
To evaluate tax liabilities.
To approve new issues of stocks and bonds.
Which business activities involve accounting? (3)
-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.
What is Generally accepted accounting principles (GAAP)?
Principles that outline the conventions, rules, and procedures for deciding on the acceptable accounting practices at a particular time.
What is Accounting Standards Board (AcSB)?
The organization that interprets and modifies GAAP in Canada for private and not-for-profit businesses.
What are Canadian public companies are required to do?
To use International Financial Reporting Standards (IFRS). These standards allow for financial statements to be more easily compared from country to country.
What must Senior executives do?
Personally certify that the financial information reported by the company is correct.
What is Corruption of Foreign Public Officials Act?
A federal law that prohibits Canadian citizens and companies from bribing foreign officials to win or continue business (in US Sarbanes-Oxley Act).
What is the Accounting cycle?
The set of activities involved in converting information and individual transactions into financial statements
What is the basic data of accounting?
Transactions
What are the three elements of accounting processing?
Record
Classify
Summarize
What are the four financial statements?
Balance sheet
Income statement
Statement of changes in equity
Statement of cashflows
What do financial statements provide?
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..
What is a balance sheet?
Statement of a firm’s financial position (What the firm owns versus what it owes) at a specific point in time.
What are the three aspects of a balance sheet?
Assets
Liabilities
Owner’s equity
What are the three types of assets?
Current assets
Fixed assets
Intangible assets
What are current assets?
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.)
What are Fixed assets?
Tangible assets that are expected to last one year or more (plant, equipment, land, etc.)
What are Intangible assets?
Intangible assets that are expected to last one year or more (e.g., patents, copyrights, trademarks, etc.)
What are the two types of liabilities?
Current liabilities
Long-term liabilities
What are Current liabilities?
Liabilities expected to be paid off within one year (e.g., wages, bank line of credit, bills that have money still owing, etc.)
What are Long-term liabilities?
Liabilities expected to not be paid off within the next year (e.g., bank loans, mortgages, etc.)
What is the Accounting equation?
Assets = Liabilities + Owner’s equity
What is Balanced Accounts & Double-entry bookkeeping?
The process used to record accounting transactions; each individual transaction is always balanced by another transaction
What is an Income statement?
A financial record of a company’s revenues, expenses, and profits over a specific period of time
What do income statements do? (2)
-Reports profit or loss
-Focus on revenues and costs associated with
revenues
What is a Statement of changes in equity?
A record of the change in equity from the end of one fiscal period to the end of the next fiscal period
How does the statement of changes in equity work? (2)
-Begins with the amount of equity shown on the
balance sheet
-Net income is added, and cash dividends paid
to owners are subtracted
What is a Statement of cash flows?
A record of the sources and uses of cash during a period of time
What is Accrual accounting?
An accounting method that records revenue and expenses when they occur, not when cash actually changes hands
What are the three Categories of Basic Financial Analysis?
Ratio Analysis
Trend Analysis
Comparative Analysis
What does Ratio Analysis do?
Assesses and interpret the relationships among the financial results of a firm.
What does trend analysis do?
Looks at a firm’s financial trends over a period of time to see whether they are improving or declining.
What does comparative analysis do?
Compares financial metrics and ratios to firm’s the same industry or situation.
How does ratio analysis assess and interpret the relationships among the financial results of a firm? (2)
- Examines the relationships between critical components of information found on the financial statements.
- Produces a standardized metric
What is Ratio analysis is a tool for?
Measuring a firm’s liquidity, profitability, and reliance on debt financing, and how effectively management uses the firm’s resources
What does Liquidity ratios measure?
A firm’s ability to meet its short-term obligations
What does Current ratio compare?
Current assets to current liabilities
Current ratio = Current assets/Current liabliities
What does the Acid-test (or quick) ratio measure?
The ability of a firm to meet its debt payments on short notice.
What is the acid-test formula?
acid-test ratio = (current assets - inventory) / Liabilities
What does Efficiency ratios measure?
How effectively management uses the firm’s resources.
What does Inventory turnover ratio indicate?
The number of times merchandise moves through a business.
What is the inventory turnover ratio formula?
Inventory turnover = cost of goods sold / average inventory
What does Total asset turnover ratio indicate?
How much in sales each dollar invested in assets generates.
What is the Total asset turnover ratio formula?
Total asset turnover ratio = sale / average total assets
What does Receivables turnover ratio indicate?
The number of times receivables turnover in a year.
What does Leverage ratios measure?
How much a firm relies on debt financing.
What are the two leverage ratios?
Debt ratio
Long-term debt to equity
What is the debt ratio formula?
Debt ratio = total liabilities / total assets
What is the Long-term debt to equity formula?
Long-term debt to equity = long-term debt / owner’s equity
What does a total liabilities to total assets ratio (debt ratio) greater than 50 percent indicate?
That a firm is relying more on borrowed money than owners’ equity.
What does Profitability ratios measure?
The organization’s overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses.
What is the gross profit margin formula?
gross profit margin = gross profit / sales
What is the net profit margin formula?
net profit margin = net income / sales
What is the return on equity formula?
return on equity = net income / average equity
Which three metrics examine the profitability of the firm?
Net Profit Margin
Return on Equity
Gross Profit Margin
What does Net Profit Margin Identify?
The profit produced by one dollar in sales revenues.
What does Return on Equity Identify?
The profit produced by every dollar invested by owners in the firm.
What does Gross Profit Margin Identify?
The gross profit produced by every dollar of sales.
What do Liquidity Ratios Examine and which 2 metrics are a part of it?
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
What does the Current Ratio Identify?
How much current activities are available to payoff current liabilities.
What does the Acid Test Ratio Identify?
How much cash and cash equivalent assets are available to payoff current liabilities
What do Leverage Ratios Measure and which 2 metrics are a part of it?
How much the firm relies on debt financing, which is riskier than equity financing.
- Debt to Asset Ratio
- Long-term Debt to Equity
What does the Debt Ratio Examine?
The ratio of assets that back up the debt.
What does Long-term Debt to Equity Examine?
The firm`s ability to cover long-term debt.
What does Activity Ratios Examine and which two metrics are a part of it?
How efficient the firm is at operating.
- Inventory Turnover
- Total Asset Turnover
What does inventory turnover ratios measure?
How many times inventory is sold or turned over in a year.
What does Total Asset Turnover Indicate?
How efficient a firm is at deploying its resources.
Why are gross profit margins a critical number for calculating breakeven analysis?
Because gross profit tends to vary in proportion to production and sales.
What does a current ratio under 1 suggest?
That the firm would not be able to pay its short-term obligations.
What should a firm’s acid-test ratio be generally?
Generally should be higher than 1.1 but this varies with industry.
How does Long-term Debt to Equity vary with industry?
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.
Why is Faster inventory turnover is efficient?
Because it lowers the possibility of inventory deterioration or out of style. It also lowers inventorying costs.
What characterizes efficient Total Asset Turnover?
Fewer assets required to make a sale the more efficient the operation.
What does Comparative Financial Analysis do?
Compare financial metrics, values, and ratios to other firms (usually in the same industry).
Which two questions does Comparative Financial Analysis attempt to answer?
-Is your firm better or worse than the other
firms in the industry?
-What is the standard in the industry?
