AFM 132 - Chp 12: Accounting

Question 1

why is accounting the language of business

Answer 1

financial statements can tell the story of how a company is doing, providing a comprehensive view into their operations and performance

Question 2

what’s Accounting?

Answer 2

involves the process of recording, summarizing, and analyzing financial transactions to report financial information to various decision makers

Question 3

what are some common business activities that would be recorded?

Answer 3

buying supplies - include the money spent, value of supplies purchased

paying employees - payroll expense, cash paid to employees

obtaining a loan from the bank - money received, what is owed to the bank

selling a product - revenue earned, cash collected

Question 4

what are the 3 steps to the accounting information system

Answer 4

inputs - “paper trail” (documentation) to support each transaction
processing - recording + categorizing the details from the inputs where AIS can provide a glimpse into specific totals
outputs - reports + statements created that summarize financial transactions in a meaningful way to various stakeholders

Question 5

how has technology benefited the accounting world?

Answer 5

more efficiency, accurate and tiemly finanical records,

Question 6

what’s the role of accountatns?

Answer 6

use their professional judgement and interpret he numbers while considering the qualitative factors impacting the business over time - analyzing, interpreting, and making recommendations to grow the company for the future

Question 7

who are some internal statkeholders

Answer 7

marketing personnel - to set a price for a product through assessing costs
operations personnel - monitoring product costs
human resources personnel - manage various costs of employees

Question 8

who are some external stakeholders

Answer 8

investors - to grow their wealth
analysts - make recommendations to investors on potential investment opportunities
lenders - want assurance that they can be repaid in a timely manner
government - CRA for tax purposes

Question 9

what are some immediate tasks related to AFM when starting a business

Answer 9

set up for operations -set up bank accounts + signing authorities, tracking inventory, record keeping, designing a process to send and receive invoices
business planning - cash flow management, forecasting
tax compliance - sales tax, payroll tax, knowing tax

Question 10

define a cash burn rate

Answer 10

assess how quickly they are burning through cash - calculated by taking cash _ dividing it by monthly operating expenses

Question 11

define managerial accounting

Answer 11

preparing financial infor for decision-makers inside a company with a focus on optimizing business areas

Question 12

define financial accounting

Answer 12

financial info prepared for disclosure to stakeholders outside of a company for their decision-making purposes

Question 13

define private accountants

Answer 13

work in industry within a single company, government, or non-profit organization

Question 14

define public accountants

Answer 14

provide professional services for a fee - involved in external audits to review if the financial statements are fairly presented and share an accurate story of a company’s position

Question 15

what’s the relationship between financial statement and accounting standards

Answer 15

financial statements are prepared based on a set of professional accounting standards followed by a company

Question 16

what’s the purpose of accounting standards

Answer 16

to ensure consistent reporting and disclosure of financial information - to enhance comparability and usefulness of the info provided to external stakeholders

Question 17

what are the 2 most common GAAP followed?

Answer 17

IFRS or ASPE

Question 18

IFRA vs ASPE

Answer 18

IFRS - publicly traded companies must use

ASPE - alternative option that is simpler to implement + more relevant/adaptable for private/non-public companies

Question 19

what’s accounting framework for accounting standards

Answer 19

what info to present - consider the potential users + decision they will make based on the info
the qualitative characteristics of the info presented - relevance + faithful representation, comparability, verifiability, timeliness, understandability
quantifying financial statement elements - recognition, measurement

Question 20

what’s the point of a balance sheet

Answer 20

shows what a company owns and owes at a specific point in time - provides a snapshot of the business at a given moment

Question 21

what’s the purpose of a income statement

Answer 21

shows earnings and expenses over a specific period of time - shows the company’s profitability

Question 22

what’s the purpose of a cash flow statement

Answer 22

shows cash inflows and outflows over a specific period of time

Question 23

why does a balance sheet balance?

Answer 23

balances bc of double-entry bookkeeping

Question 24

define an asset

Answer 24

owned economic resources that have value - generally recorded if controlled by a company as a result of a past transaction and result in future benefit to the company - usually listed by liquidity on the balance sheet

Question 25

define current assets, long-term assets, intangible asset

Answer 25

current asset: can convert to cash within a year

long-term assets - used in operations for more than 1 year and are generally owned to maintain/grow operations and generate revenue

intangible assets - not physical in nature, have value that should be recognized

Question 26

define liabilities, current liabilities, long-term liabilities

Answer 26

liabilities: amounts that a company owes to others - generally recorded if they are a present debt obligation of the company, as a result of a past transaction, and result in a future cost to the company

current liabilities: obligations due within 1 year

long-term liabilities: obligations due beyond 1 year

Question 27

define owners equity, common stock, retained earnings, contributed surplus

Answer 27

owners equity: represents what has been invested by owners plus the accumulated earnings that remain in the company

common stock: what’s invested by shareholders

retained earnings: accumulated earnings from operations retained and not paid out to shareholders

contributed surplus: earnings generated outside of operations

Question 28

define revenue, COGS, expenses

Answer 28

revenue: represents the money received for goods/services sold

COGS: represents the direct costs of making a product

expenses: the cost involved in running the company, and are resources used with no residual economic value to recognize

Question 29

calculate gross margin

Answer 29

revenue - COGS

Question 30

what are some common expenses for a business?

Answer 30

selling expenses, general expenses, administration expenses

Question 31

define operating activities, investing activities, financing activities

Answer 31

operating: cash transaction in day-to-day operations

investing: cash used to buy long-term assets

financing: cash used to finance the business with debt and equity

Question 32

what’s the point of ratio analysis

Answer 32

used to assess the performance and financial condition of a company

help to examine the relationships between various accounts and activities - help to identify strengths + weaknesses in a company

Question 33

how to compare results of ratios for meaningful info?

Answer 33

comparing to prior year figures/competitors/industry averages

Question 34

define liquidity ratios and importance

Answer 34

evaluate how fast assets can be converted into cash (with emphasis on an ability to pay short term debts that may come due) - liquidity ratios help gauge whether a company has immediate resources to pay short-term obligations

Question 35

what’s the current ratio?

Answer 35

current ratio = current assets/current liabilities

compares current assets to current liabilities

Question 36

what does it mean for a current ratio of greater than 1, and what’s the general rule of thumb

Answer 36

when greater than 1, a company is financially secure + can easily cover their current liabilities - lenders feel safe if it’s high bc they can be paid back right away with current assets on hand

general rule of thumb is 2:1 (2 assets for every 1 liability)

Question 37

what’s the quick (acid-test) ratio? what’s the ideal ratio

Answer 37

quick ratio asset test = (Current assets - inventory - prepaid expenses)/(current liability)

measures immediate short-term liquidity

the ideal ratio is 1:1 as it demonstrates that a company can completely pay off its current liabilities without having to sell its inventory

Question 38

what’s a leverage ratio

Answer 38

evaluates how much a company uses borrowed funds in their operations compared to investments made by owners - the more debt a company has, the more “levered” they are

Question 39

what’s the debt to asset ratio

Answer 39

debt to asset ratio: (total liabilities)/(total assets)

highlights the percentage of assets financed by debt

Question 40

what’s the debt to equity ratio

Answer 40

debt to equity ratio = (total liabilities)/(owners’ equity)

anything over 1 means that the company has more debt than equity - not unusual for companies to manage some level of debt to increase/expand their operations

some high debt levels may be more acceptable/common in some industries that others

Question 41

what’s the profitability ratio

Answer 41

evaluate how effectively a company uses its resources to achieve profits - used to assess management performance

Question 42

what’s earnings per share

Answer 42

EPS = net income/ average number of common shares

considers how much net income is earned per share

growing EPS = sign that a company can continue to grow

Question 43

define a return on sales (operating profit margin)?

what does it mean if a return on sales if increasing over time?

Answer 43

return on sales = net income/net sales

examines operating performance - indirectly looks at how well costs/expenses are managed - if return on sales increases over time, it signals that a company is managing its costs effectively and retaining more earnings

Question 44

define a return on equity? what does a increasing growth in ROE mean?

Answer 44

return on equity = net income/average owners’ equity

measure profitability of an owner’s investment by showing how much is earned for each dollar invested

year over year growth in ROE, shows that investors’ funds are being used effectively to grow the business

Question 45

define activity ratios

Answer 45

evaluated how effectively assets are managed to generate returns