Accounting for Financial Success

Question 1

What is Accounting?

Answer 1

Accounting is systematically collecting, recording, classifying, reporting, and analyzing financial activities.

Question 2

What is financial accounting?

Answer 2

Financial accounting focuses on preparing external financial reports used by outside stakeholders.

Question 3

What is managerial accounting?

Answer 3

Managerial accounting provides financial information that managers inside the organization can use to evaluate and make decisions.

Question 4

What is an accounting system?

Answer 4

An accounting system includes selling products to customers, purchasing raw materials from suppliers, paying employee salaries, receiving loans from banks, and purchasing delivery vehicles.

Question 5

What are the steps in the accounting cycle?

Answer 5

1. Analyze business transaction documents 2. Record business transactions in journal 3. Post journal entries to ledgers 4. Prepare trial balance 5. Prepare financial statements and management reports from account data 6. Analyze reports.

Question 6

What are the three financial statements?

Answer 6

1. Balance Sheet (Statement of Financial Position) 2. Income Statement (Statement of Income) 3. Statement of Cash Flows (Cash Flow Statement).

Question 7

What is a Balance Sheet?

Answer 7

The Balance Sheet shows financial position/condition at a specific point in time, detailing what you own and what you owe on a certain day.

Question 8

What is an Income Statement?

Answer 8

The Income Statement includes revenue, expenses, net income, and taxes, serving as a profit/loss statement that shows changes in sales and costs over a period.

Question 9

What is a Statement of Cash Flows?

Answer 9

The Statement of Cash Flows tracks the flow of money in and out, detailing receipts and payments, and shows the change in cash position.

Question 10

What is the accounting equation?

Answer 10

The accounting equation is Assets = Liabilities + Owner’s Equity.

Question 11

What are current assets?

Answer 11

Current assets are expected to be converted to cash within the next 12 months, including cash, marketable securities, accounts receivable, and inventory.

Question 12

What are fixed assets?

Answer 12

Fixed assets are long-term assets that will generate revenues for more than one year, such as land, buildings, machinery, and equipment.

Question 13

What are intangible assets?

Answer 13

Intangible assets are assets of value that have no physical existence, including patents, copyrights, trademarks, and goodwill.

Question 14

What are current liabilities?

Answer 14

Current liabilities are obligations that will be paid off within the next 12 months, such as accounts payable and accrued expenses.

Question 15

What are long-term liabilities?

Answer 15

Long-term liabilities are obligations that will take longer than one year to pay off, including bank loans and mortgages.

Question 16

What is liquidity?

Answer 16

Liquidity is the ease at which an asset can be converted to cash, especially in emergency situations.

Question 17

What is the Income Statement (Statement of Comprehensive Income)?

Answer 17

The Income Statement identifies sources of revenue and categorizes a firm’s expenses, including cost of goods sold and operating expenses.

Question 18

What is the formula for net profit (loss) in the Income Statement?

Answer 18

The formula is revenues - expenses = net profit (loss).

Question 19

What are gross sales?

Answer 19

Gross sales are the total dollar value of a company’s sales.

Question 20

What are net sales?

Answer 20

Net sales are gross sales less discounts, returns, and allowances.

Question 21

What is the Cost of Goods Sold?

Answer 21

Cost of Goods Sold is the total expense of buying or producing the firm’s goods or services, including variable costs that vary directly with sales volume.

Question 22

What is the Income Statement formula?

Answer 22

The formula is revenue - COGS = gross profit; gross profit - operating expenses = net income from operations; net income from operations - taxes = net income (loss).

Question 23

What does the Statement of Cash Flows report?

Answer 23

The Statement of Cash Flows reports the cash inflows and outflows that occurred during the same time interval as the income statement.

Question 24

operating activities

Answer 24

Cash related to the production of goods and services

Question 25

Investment Activities

Answer 25

Cash related to the purchase and sale of fixed assets.

Question 26

Financing Activities

Answer 26

Cash related to debt and equity financing.

Question 27

Financial Statement Analysis

Answer 27

Methods of analysis:
* Compare the company’s current performance to
past performance
* Compare the company’s current performance to
the performance of competitors

Question 28

current ratio

Answer 28

=current assests/current liabilities
should be over 2
measures liquidity

Question 29

profitability ratio

Answer 29

earnings per share= net income/# of common shares

net profit margin= net income/revenue

return on equity= net income/total owner’s equity

how effectively a firm uses its resources to achieve profits

Question 30

what does ROE mean

Answer 30

measures how much was earned for each dollar invested by owners

Question 31

activity ratio

Answer 31

inventory turnover= COGS/ Average inventory

measure speed of inventory moving through the firm and is turned into sales

acceptable ratio depends on the industry

Question 32

leverage ratio

Answer 32

debt to equity= total liabilities/owner’s equity

measures the degree and the effect of a company’s use of borrowed funds to finance its operations

relationship between the amount of debt capital and equity capital

ratio above 1 (or 100%) is more risky

important for investors because debt obligations often have a higher priority if a company goes bankrupt