Chapter 1

Question 1

What is the function of economics?

Answer 1

To maximize social welfare (i.e., efficienct use and allocation of scare resources)

Assumption = we live in a world with limited resources

Question 2

Difference between financial and managerial accounting

Answer 2

Financial accounting is an external report primarily used by investors (goal is to minimize/eliminate information assymetry)

Managerial accounting is an internal report primarily used by managers

Question 3

True/False

Accounting’s job is to ensure efficient allocation of limited resources

Answer 3

True

Question 4

Financing comes from 2 sources. What are they?

Answer 4

1. Equity-Investors (i.e., Shareholders or Owners)
2. Debt-Investors (i.e., Bondholders or Creditors)

Question 5

SEC

Answer 5

Securities and Exchange Commission (regulator)

Question 6

FASB

Answer 6

Financial Accounting Standard Board (standard setter)

Question 7

GAAP

Answer 7

GAAP = Generally Accepted Accounting Principles (within the US)

Question 8

Function of GAAP, FASB, and SEC

Answer 8

Company produces financial statements, external auditors review/attest, in accordance with GAAP created by FASB, enforced by SEC.

Question 9

What are the 4 principles of Business Activity?

Answer 9

1. Establishing goals & strategies
2. Obtaining financing
3. Making investments
4. Conduction operations

Business Activity = Earn Obscene Cash Money

Question 10

True/False

If a company is doing poorly, it pays to be a shareholder

Answer 10

False

Order of claim: bondholders get paid before shareholders

Question 11

What are the 5 areas of conducting business?

Answer 11

1. Purchasing
2. Marketing
3. Production
4. Administration
5. R&D (Research & Development)

Conduct business via a “RAMPP”

Question 12

What are the 3 principal financial statements?

Answer 12

1. Balance sheet
2. Income statement
3. Statement of Cash Flow

School “principal” is “Big & In Charge”

Question 13

True/False

Auditors reduce information asymmetry between investors and the firm

Answer 13

True

Question 14

What is the Balance Sheet Equation (aka Basic Accounting Identity)?

Answer 14

Assets = Liabilites + Shareholders’ Equity

• Left-hand side = investing*
• Right-hand side = financing*

Question 15

True/False

Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold

Answer 15

True

Question 16

What is Accounts Receivable (AR)?

Answer 16

The balance of money due to a firm for goods or services delivered or used but not yet paid for by customers

Will typically be paid between 30 & 90 days

Question 17

True/False

The most liquid asset gets listed last on the balance sheet

Answer 17

False, most liquid asset gets listed first

Question 18

Difference between inventories and prepayments

Answer 18

Inventories = sold products (historical acquisition cost)

Prepayments = consumed products (i.e., insurance and expenses)

Question 19

Difference between current and non-current assets

Answer 19

Current = short (available within 1 year)

Question 20

Difference between Accounts Payable, Notes Payable, and Current Portion of Long-Term Debt?

AKA Current Liabilities

Answer 20

Accounts Payable = non-cash payments (will be paid within 30&90 days)

Notes Payable = short-term borrowing

Current Portion of Long-Term Debt = obligation due within 1 year

Question 21

True/False

Corporate Bonds are an example of long-term debt

Answer 21

True

Question 22

What makes up Shareholder Equity?

Answer 22

Common stock (contributed)

&

Retained earnings (earned)

Question 23

What is the Basic Income Net Equation?

Answer 23

Net Income = Revenues - Expenses

P/L = Profit over Loss

• Revenues: sales or topline*
• Expenses: bottomline*

Question 24

Sales Revenue - Cost of Goods Sold (COGS) =

Answer 24

Gross Profit (GP)

Question 25

Gross Profit - SG&A (Selling, General, and Admin expenses) =

Answer 25

EBIT (Earning Before Interest and Taxes)

Question 26

EBIT - Interest Expense =

Answer 26

EBT (Earnings Before Tax)

Question 27

EBT - Tax =

Answer 27

Net Income