Chapter 1 Reading Notes Flashcards
what are the purpose of ratios?
companies & investors use ratios to make decisions
ratios are a significant part of financial analysis
what are the 5 ratio categories?
liquidity (solvency) ratios
financial leverage ratios
efficiency (turnover) ratios
profitability ratios
market value ratios
liquidity (solvency) ratios = ?
ability to pay short-term obligations
financial leverage ratios = ?
ability to pay long-term obligations
efficiency (turnover ratios) = ?
measures how efficiently companies use their assets
profitability ratios = ?
measure how profitable the company is
market value ratios = ?
relate financial information to the actual market price on the open market
do some ratios have thresholds?
yes
what are three characteristics of ratios?
some ratios have thresholds
ratios can be analysed using benchmarks
ratios can be compared to prior periods to notice trends
what are common concerns of customers?
whether to trade with the company
what are common concerns of competitors?
how to outcompete the company
what are common concerns of employees?
whether to keep working at the company
what are common concerns of the government?
whether the company is complying with tax laws
what are common concerns of community representatives?
whether to provide economic support to the company
what are common concerns of lenders?
whether to lend to the company
what are common concerns of investment analysts?
whether to advise clients to invest
what are common concerns of suppliers?
whether to supply goods to the company
what are common concerns of managers?
whether performance needs to improve
what are common concerns of owners?
whether to invest more or sell/liquidate
accounting information can be used to monitor …
whether users are being treated fairly and remunerated fairly
what outlets may investment analysts use as a source of information about a company?
- meetings w/ managers
- business public announcements
- newspaper articles
- radio & TV reports
- economy-wide reports
- websites
accounting information can be used to dictate…
the prices at which shares can be traded
the volume of shares that are traded
shares = ?
portions of ownership within a company
what are the 2 fundamental qualitative characteristics of accounting information?
faithful representation
relevant
relevance = ?
to be relevant, accounting information must cross a threshold of materiality
materiality = ?
the quality of accounting information
faithful representation = ?
accounting information must portray what it’s supposed to portray
what qualities enhance accounting information usefulness?
- comparability
- timeliness
- verifiability
- understandability
comparability = ?
users may want to make comparisons between other periods & competitors
verifiability = ?
providing assurance of faithfulness
timeliness = ?
lack of timeliness undermines usefulness
understandability = ?
clear & concise
what are the 2 distinct strands of acconting?
financial accounting & management accounting
financial accounting = ?
seeks to meet the needs of owners, lenders and other users
looks at past financial events
external
management accounting = ?
seeks to meet the accounting needs of managers
makes future projections
internal
what is sole proprietorship?
where an individual is the sole owner of a business
often a small business
business isn’t separate from the owner
owner has autonomy
what is a partnership?
where two or more individuals go into business together
often quite small in size
partners often have unlimited liability (unless it’s an LLP)
what are the pros & cons of a partnership?
pros - sharing the burden, opportunity to specialise, ability to raise capital
cons - risk of sharing w/ unsuitable individuals, limitations of authority
what is a limited company?
company with separate legal existence from that of its owners
can be very large businesses
subject to audits
owner’s debt is only limited to the magnitude of their share in the company
do limited companies require audits?
yes
do sole proprietorships and partnerships require audits?
no
what is an LLP?
limited liability partnership
partnership where each partner’s liability obligation is limited to the magnitude of their share in the business
what is the departmental structure of a business?
board of directors at the top
4 departments below
- finance
- HR
- marketing
- operations
what is the finance department?
responsible for managing cash flows, costing business activities, wages, billings etc.
what is the HR department?
responsible for people, communication, schedules etc.
what is the marketing department?
deals with advertising, maintaining relationships, customers etc.
what is the operations department?
deals with repairs, maintenance, functions etc.
