Chapter 14

Question 1

the portion of an organization’s revenue that is left over after the organization has paid the direct costs (wages, components, materials, etc.) associated with its products or service

Answer 1

Gross Profit Margin

Question 2

the portion of an organization’s revenue that is left after all operating expenses associated with its products or services have been paid

Answer 2

Profitability Margin

Question 3

3 statements managers rely on to analyze current financial situation

Answer 3

○ Statement of comprehensive income
○ Statement of changes in financial position
○ Statement of cash flows

Question 4

represent the flow of money within the organization that is directly related to day-to-day business dealings (revenue and expenses)

Answer 4

Operational Transactions

Question 5

are the decisions managers make with respect to investment and divestment of capital assets (buildings, equipment, business subsidiaries) that may be needed, or are no longer needed, as part of the organization’s business system

Answer 5

Capital Asset Transactions

Question 6

refers to a longer-term assessment of the financial stability of the organization

Answer 6

solvency

Question 7

refers to how effective the organization is in deploying its resources and managing its operational processes in the delivery of goods and/or services to the marketplace

Answer 7

efficiency

Question 8

is a general term that relates to an organization’s cash reserves and borrowing power

Answer 8

Capacity

Question 9

the financial statement that responds to the question of whether our business is earning a profit as a result of the sales we have made versus the expenses we have incurred in developing our goods and services and delivering them to the marketplace

Answer 9

Statement of Comprehensive Income (Income Statement)

Question 10

refers to a financial statement that provides managers with an understanding of the resources the organization has at its disposal at a given point in time, and the financial obligations the business has incurred as a result of purchasing these resources
○ Must adhere to the accounting equation: assets = liabilities + owners’ equity

Answer 10

Statement of Changes in Financial Position (Balance Sheet)

Question 11

refers to the resources that the organization has at its disposal and that it can utilize in the generation of business activities, and ultimately profit

Answer 11

assets

Question 12

the debts or financial obligations that an organization has incurred as a result of conducting its business

Answer 12

liabilities

Question 13

represents the value of capital received from the owners of the business that is used to fund the start-up or ongoing operations of the business, as well as reflecting the value of the organization’s retained earnings
= owners’ capital invested + retained earnings

Answer 13

Owner’s Equity

Question 14

represent the value of prior earnings that an organization had retained for future investment in business

Answer 14

Retained earnings

Question 15

provides managers with a full understanding of the total movement of cash (from all sources) into and out of the business; great indicator of liquidity

Answer 15

Statement of Cash Flows

Question 16

refers to the net movement in the cash position of the organization based on operating, financing, and investing activities

Answer 16

Net Change in Cash Position

Question 17

refers to adjustments to net income to reflect the actual cash provided by operating activities

Answer 17

Cash from Operational Activities

Question 18

refers to sources of cash flowing into the organization from non-operating activities

Answer 18

Cash from Financing Activities

Question 19

refers to uses of cash flowing out of the organizations from non-operating activities

Answer 19

Cash from Investing Activities

Question 20

seek to define the relationship between critical components of information found on the financial statements

Answer 20

Ratio Analysis

Question 21

analyze the financial obligations that an organization has against its financial resources in order to determine whether the organization possesses sufficient capital to meet its upcoming needs

Answer 21

Solvency and Liquidity Ratios
current ratio
quick ratio

Question 22

focus on the amount of debt an organization has taken on, the relationship of this debt value against its total asset base, and the ability of the organization to meet its debt servicing (payments) obligations

Answer 22

debt ratios
i.e. debt to asset
debt to equity
time interest earned

Question 23

assist mangers in assessing the efficiency and effectiveness of key components of an organization’s operations

Answer 23

Activity Ratios

i.e. days receivable, inventory turnover

Question 24

focus on assessing the amount of income the organization has earned in comparison to the operating activity that has taken place and the assets that have been used to support its generation

Answer 24

profitability ratios
i.e. ROS
ROA
ROE
EPS

Question 25

refers to the amount of debt an organization uses in order to finance its asset base

Answer 25

leverage analysis

Question 26

refers to management’s ability to project forward anticipated results for the upcoming quarter, year, or planning-cycle period

Answer 26

Forecasting and Budgeting