Chapter 1 Flashcards
What is the function of economics?
To maximize social welfare (i.e., efficienct use and allocation of scare resources)
Assumption = we live in a world with limited resources
Difference between financial and managerial accounting
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
True/False
Accounting’s job is to ensure efficient allocation of limited resources
True
Financing comes from 2 sources. What are they?
- Equity-Investors (i.e., Shareholders or Owners)
- Debt-Investors (i.e., Bondholders or Creditors)
SEC
Securities and Exchange Commission (regulator)
FASB
Financial Accounting Standard Board (standard setter)
GAAP
GAAP = Generally Accepted Accounting Principles (within the US)
Function of GAAP, FASB, and SEC
Company produces financial statements, external auditors review/attest, in accordance with GAAP created by FASB, enforced by SEC.
What are the 4 principles of Business Activity?
- Establishing goals & strategies
- Obtaining financing
- Making investments
- Conduction operations
Business Activity = Earn Obscene Cash Money
True/False
If a company is doing poorly, it pays to be a shareholder
False
Order of claim: bondholders get paid before shareholders
What are the 5 areas of conducting business?
- Purchasing
- Marketing
- Production
- Administration
- R&D (Research & Development)
Conduct business via a “RAMPP”
What are the 3 principal financial statements?
- Balance sheet
- Income statement
- Statement of Cash Flow
School “principal” is “Big & In Charge”
True/False
Auditors reduce information asymmetry between investors and the firm
True
What is the Balance Sheet Equation (aka Basic Accounting Identity)?
Assets = Liabilites + Shareholders’ Equity
- Left-hand side = investing*
- Right-hand side = financing*
True/False
Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold
True
What is Accounts Receivable (AR)?
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
True/False
The most liquid asset gets listed last on the balance sheet
False, most liquid asset gets listed first
Difference between inventories and prepayments
Inventories = sold products (historical acquisition cost)
Prepayments = consumed products (i.e., insurance and expenses)
Difference between current and non-current assets
Current = short (available within 1 year)
Difference between Accounts Payable, Notes Payable, and Current Portion of Long-Term Debt?
AKA Current Liabilities
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
True/False
Corporate Bonds are an example of long-term debt
True
What makes up Shareholder Equity?
Common stock (contributed)
&
Retained earnings (earned)
What is the Basic Income Net Equation?
Net Income = Revenues - Expenses
P/L = Profit over Loss
- Revenues: sales or topline*
- Expenses: bottomline*
Sales Revenue - Cost of Goods Sold (COGS) =
Gross Profit (GP)
Gross Profit - SG&A (Selling, General, and Admin expenses) =
EBIT (Earning Before Interest and Taxes)
EBIT - Interest Expense =
EBT (Earnings Before Tax)
EBT - Tax =
Net Income
