Ch. 7, Domain Six: PO 5 (Basic Financial Terminology)

Question 1

Administrative professionals are expected to have a basic knowledge of accounting concepts such as…

Answer 1

• Financial statements
• Journal entries for financial transactions
• Electronic funds transfers & bank reconciliation processes

Question 2

Equity

Answer 2

A stock or other security that represents an ownership interest in the company.

Question 3

If a company is privately held, what is the equity called?

Answer 3

Private equity

Question 4

If the equity is applied to a public company, it is called…

Answer 4

Stocks (aka stockholder’s equity)

Question 5

Receivables

Answer 5

Monies owed to a business by their debtors; recorded as ASSETS on a BALANCE SHEET.

Question 6

Long term receivables

Answer 6

Don’t come due for a long periods of time and are recorded as LONG-TERM ASSETS.

Question 7

Short-term assets

Answer 7

Recorded by most companies as part of their CURRENT ASSETS.

Question 8

Assets

Answer 8

A balance sheet item, show what the firm owns. Also a resource that an individual or a company owns or controls in expectation of reaping a future benefit (ex. selling the asset at some future point).

Question 9

Gross profit

Answer 9

The profit that remains after the COST OF THE GOODS is subtracted from the revenues.

Question 10

How can the GROSS PROFIT be calculated?

Answer 10

By looking at the INCOME STATEMENT and subtracting the COST OF GOODS sold from the REVENUE.

Question 11

Cost of goods

Answer 11

Refers to the direct costs of producing the product (goods) sold by the company; including the direct labor costs involved in manufacturing.

Question 12

Net income

Answer 12

A measure of profitability and often referred to as the BOTTOM LINE; calculated by looking at the revenue on the INCOME STATEMENT and subtracted the cost of doing business, depreciation, interest, taxes and other expenses.

Question 13

Revenue

Answer 13

the amount of money brought into the business through its operations and is also known as GROSS INCOME.

Question 14

Investment

Answer 14

An asset expected to go up in value or generate future income.

Question 15

Tax-exempt status

Answer 15

Refers to exemption from taxable income. TAX-EXEMPT status can provide partial or complete relief from taxes.

Question 16

Stocks

Answer 16

A type of ownership in a company that represents a claim on part of the corporation’s earning and assets. STOCKS are also known as SHARES and EQUITY.

Question 17

Bonds

Answer 17

Issued when an investor loans money to a corporate governmental entity for a defined period at a variable or fixed rate. Those who own bonds are debt holders, or creditors, of the entity issuing the bonds.

Question 18

Proprietor

Answer 18

The owner of a business or one who owns a property.

Question 19

Stockholder/Shareholder

Answer 19

The owner or one who holds a property.

Question 20

Creditor

Answer 20

Any person or entity who lends money to another person or entity to be repaid later. A CREDITOR is the opposite of a DEBTOR.

Question 21

Inventory

Answer 21

A periodic (often annual) listing of all merchandise, raw materials, projects in progress, finished goods, or other assets owned by the business.

Question 22

Sponsorships

Answer 22

Refers to the position of being a sponsor, as in “company’s sponsorship of an event,” or it can refer to the financial support received by a sponsor.

Question 23

Market value

Answer 23

The price of an ASSET in the marketplace.

Question 24

Capitalization

Answer 24

The number of outstanding shares and the price per share.

Question 25

Liquidity

Answer 25

Refers to assets that can be converted into cash quickly, with the most liquid asset being cash itself.

Question 26

Illiquid (not liquid)

Answer 26

Assets that take time to convert it to cash (such as real estate).

Question 27

Liquid assets

Answer 27

Assets that can be bought or sold quickly.

Question 28

Balance sheet

Answer 28

Shows the assets, liabilities, and capitalization (total financial value) of a business at a particular time. It also shows details of income and expenditures for the preceding period.

Question 29

P & L (profit and loss statement)

Answer 29

Another name for an INCOME STATEMENT.

Question 30

Statement of revenue and expenses

Answer 30

Another name for an INCOME STATEMENT.

Question 31

Cash flow

Answer 31

the amount of cash that flows into and out of a business. Cash inflows are generally due to investing, operating (including sales), and financing activities; outflows are due to expenses and investments.

Question 32

Liability

Answer 32

A legal obligation or debt that arises through business operations. Found on the RIGHT SIDE of the balance sheet under categories such as loans, mortgages, accounts payable, deferred revenues, and accrued expenses.

Question 33

Current liabilities

Answer 33

Those payable within ONE YEAR.

Question 34

Long-term liabilities

Answer 34

Debts due to be repaid over a longer period.

Question 35

Accounts receivable

Answer 35

Money owed to customers or another financial entity for goods and services that have been used or delivered but are not yet paid for. (Ex: Polo Ralph Lauren delivers 200 shirts to Dillard’s but does not receive the money right away; these funds are ACCOUNTS RECEIVABLE and are considered an asset on the balance sheet.

Question 36

Sales

Answer 36

Financial transactions between two parties where the buyer gets a product; service (tangible or intangible), or asset in exchange for money paid to the seller.

Question 37

Depreciation

Answer 37

Is an accounting method for allocating the cost of a tangible asset throughout its useful life. In general, assets lose value over time; businesses allocate this throughout the life of the asset for accounting and tax purposes.

Question 38

Deferral

Answer 38

An asset or liability that has not yet occurred. (Ex: when a person pays for car insurance for the whole year, the months still remaining for the policy are deferred revenue for the company. On the other hand, if the insurance company pays its annual property taxes in advance for the year, it has deferred expense: Cash has gone out, but the actual taxes are due in the future. The part used is considered an expense, and that part that still remains is recorded as a DEFERRAL.

Question 39

Withdrawal

Answer 39

The act of taking money out of an account.

Question 40

Dividends

Answer 40

Funds paid periodically to shareholders. Dividends are from profits or reserves and typically are paid quarterly. NOT ALL STOCKS PAY DIVIDENDS.

Question 41

Period costs

Answer 41

Are expenses incurred in the current period. (Ex: selling, advertising, traveling, and entertainment expenses. These costs are associated with the period in which they are incurred. Most administrative expenses are considered PERIOD COSTS.

Question 42

Accounting period

Answer 42

The time covered by a relevant set of books, ledgers, and other financial documents and records (usually 12 months).

Question 43

Bad debt expense

Answer 43

Refers to losses a company incurs when goods are sold without requiring immediate payment. BAD DEBT EXPENSE is recorded as an account receivable because it is an asset that has not been received.

Question 44

Contra-asset accounts

Answer 44

Are found in an ACCOUNT LEDGER and are used to reduce the value of another related account. Items recorded in the CONTRA-ASSET account are specifically designed to offset other transactions. If a debit is recorded in a related account, the CONTRA-ASSET account record will be a CREDIT. CONTRA-ASSET accounts help keep accounting records clean and make tax preparation easier and less time consuming.

Question 45

Credit terms

Answer 45

Refers to the terms and schedules of when payments are due from sales made on credit.

Question 46

Drawing on account

Answer 46

Applies to a sole proprietorship or partnership. The owners are in essence drawing funds from the business.

Question 47

Ledgers

Answer 47

Can be in book form, or more commonly, computer files. Ledgers are used to record and total transactions, which are measured and recorded for each account type. (Ex: sales volume is recorded as a final figure in the sales ledger).

Question 48

Sales discount

Answer 48

A price reduction offered by a seller to a buyer in return for an early payment by the buyer. (Ex: a seller might give a 3% discount if the buyer makes payment within 10 days).

Question 49

Wasting assets

Answer 49

Assets that lose value over time. Wasting assets generally include vehicles, machinery, or other assets that depreciate.

Question 50

Profitable

Answer 50

• Starts with a rough estimate made by looking at the GROSS PROFIT. All COSTS are taken into consideration to determine NET PROFIT. PROFITS can be put back into the business or shared with stockholders. This is true even with NONPROFITS or NOT-FOR-PROFIT organizations. These organizations aren’t expected to operate at a loss; they wouldn’t be able to continue their work if they didn’t generate revenue. There are, however, strict rules about how they can use their profits and who may benefit from them. FOR-PROFIT organizations as well as individuals can donate to NONPROFITS and gain a tax advantage.