Accounting and Principles Flashcards
What is accounting?
Answer: Accounting is the process of recording, summarizing, and reporting financial transactions to provide information useful for decision-making.
What are the three main types of financial statements?
- Income Statement: Shows profits or losses over a period.
- Balance Sheet: Shows the company’s financial position at a specific date.
- Cash Flow Statement: Shows cash inflows and outflows over a period.
Benefit of income statement?
Tracks Profitability: Helps assess whether the company is generating a profit or incurring a loss over a specific period.
Decision-Making: Provides data to make decisions on expenses, revenue strategies, and pricing.
Investor Confidence: Offers potential investors and stakeholders insight into the company’s ability to generate revenue.
Trend Analysis: Enables tracking of financial performance trends over time.
Benefit of balance sheet?
Snapshot of Financial Health: Shows the company’s assets, liabilities, and equity at a specific point in time, offering a clear view of financial stability.
Debt Management: Highlights the company’s ability to meet its short-term and long-term obligations.
Investment Assessment: Assists investors in evaluating whether the company is financially sound and worth investing in.
Liquidity Insights: Indicates the company’s liquidity position, i.e., how easily it can convert assets into cash.
Benefit of cash flow statement?
Tracks Cash Movement: Provides a detailed view of cash inflows and outflows, showing how effectively cash is being managed.
Operational Efficiency: Highlights whether the company’s core operations generate sufficient cash to sustain itself.
Investment Planning: Helps in planning capital expenditure or understanding the cash needed for future investments.
Avoiding Insolvency: Ensures the company has enough liquidity to avoid running out of cash.
What are assets?
Answer: Assets are resources owned by a business that have economic value, such as cash, inventory, property, and equipment.
What are liabilities?
Answer: Liabilities are obligations or debts a business owes to others, such as loans, accounts payable, or accrued expenses.
What is the difference between revenue and profit?
Answer:
Revenue: The total income generated from sales of goods or services.
Profit: The amount left after deducting all expenses from revenue (also called net income).
