Chapter: 15 understand accounting and financial statements

Question 1

define accounting

Answer 1

• interpreting and measuring financial info
• helps make informed buisness decisions.

Question 2

Types of accounting

Answer 2

• financial accounting: prepare finance info for users outside organization.
• management accounting: prepare data for managers within organization.

Question 3

what is a financial plan

Answer 3

• documents outlining funds needed for a certain period of time, sources and intended use of those of funds.

Question 4

private vs public accounts

Answer 4

1. private: in-house accountant or corporate accounts
   - businesses, government agencies and non-for profits.
2. Public accountants: work independently of the buisness they serve.
   - need a certified public accountants license

Question 5

Fundamental accounting principles

Answer 5

1. assets: what is owned
2. liabilities: what they owe
3. Owners equity:
   ASSETS-LIABILITIES=OWNERS EQUITY

Question 6

Accrual vs Cash basis

Answer 6

1. Accrual–> revenue is recorded when sale is made
   - expense is recorded when it is incurred
2. cash basis–> revenue is recorded when it is received,

Question 7

Components in a balance sheet

Answer 7

• picture of a firms financial position on a particular date
• shows what company owns (assets) and what they owe (liabilities), and owners stake in company (equity)

Question 8

what is an audit

Answer 8

• evaluate fairness and reliability of financial statements

Question 9

define Generally accepted accounting principles (GAAP)

Answer 9

Standards and practices that are used by the public corporations in the US in preparation of financial statements

Question 10

what are external auditors

Answer 10

• independent accounting firms that provide auditing services for public companies.

Question 11

define International financial reporting standards (IFRS)

Answer 11

According to standards used in many countries outside the US.

Question 12

define Sarbanes Oxley

Answer 12

legislation designed to
improve the integrity and accountability of
financial information

Question 13

what does the double entry bookeeping mean

Answer 13

• two accounts are affected
• always balanced

Question 14

define depreciation

Answer 14

• spreading cost of tangible assets over estimated useful life.

Question 15

Define income statement

Answer 15

• revenues, expenses, profits over a given period of time.

Question 16

parts in a income statement

Answer 16

Cost of goods sold: cost of producing a good
Gross profit: net sales- cost of goods sold
Operating expenses: all costs of operation that are not included under cost of goods sold
EBITDA→ earnings before interest, tax depreciation and amortisation

Question 17

describe cash-flow statement

Answer 17

• tracks cash coming in and the cash coming out

1. operating activities–> selling products or services
2. investing activities–> cash flow from buying or selling assets (equipments or investments)
3. financial activities–> cash flow for borrowing or repaying loans, shares.

Question 18

describe how financial statements are analysed

Answer 18

• trend analysis: compare financial data from year to year
• ratio analysis:

Question 19

Types of financial ratios

Answer 19

1. profitability ratios
   - return on sales : Net income/net sales
   - return on equity: Net income/total owners equity
   - earnings per share: net income/ average number of sales
2. Liquidity
   - current ratio: current assets/current liabilities
   - quick ratio: current assets-inventory/current liabilities
   Activity:
3. Inventory turnover ratio
   - cost of goods sold/inventory
4. accounts receivable turnover ratio
   - net sales/average accounts receivable
   Leverage
5. debt-to equity rartio: total liabilities/total equity
6. debt-to assets ratio: total liabities/total assets

Question 20

define distributed ledger

Answer 20

• method of recording transactions that replace the individual ledger.

Question 21

define blockchain

Answer 21

• new transactions captured in blocks

benefits:
- low costs
- less errors
- fast transactions

Question 22

what are the uses of blockchain

Answer 22

• Financial services
  Chain management
  Human resources