Chapter 2

Question 1

What is a qualified balance sheet?

Answer 1

This groups together similar assets and similar liabilities

Question 2

What are current assets?

Answer 2

Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer

Question 3

What is a operating cycle?

Answer 3

The average time required to go from cash to cash in producing revenue, purchasing inventory, produce, then sell to customers

Question 4

What are intangible assets?

Answer 4

Assets that do not have physical substance?

Question 5

What are current liabilities?

Answer 5

Obligations that the company is to pay within the next year or operating cycle, whichever is longer

Question 6

What are long-term liabilities?

Answer 6

Obligations that a company expects to pay after on year

Question 7

What is a ratio analysis?

Answer 7

This expresses the relationship among selected items of financial data

Question 8

What is a profitability ratio?

Answer 8

Measures the operating success of a company for a given period of time

Question 9

What is earnings per share?

Answer 9

This measures the net income earned on each share of common stock

Question 10

How is EPS calculated?

Answer 10

(Net income - preferred dividends) / Average number of common shares outstanding during the year

Question 11

What is liquidity?

Answer 11

Ability to pay obligations expected to become due within the next year

Question 12

What is working capital?

Answer 12

Current assets - Current Liabilities

Question 13

What is the current ratio?

Answer 13

Current assets / current liabilities

Question 14

What is solvency?

Answer 14

Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Question 15

What does a solvency ratio due?

Answer 15

Measures ability of the company to survive over a long period of time

Question 16

What is the debt to assets ratio?

Answer 16

total liabilities / total assets

Question 17

What is the formula for free cash flow?

Answer 17

Net cash - Capital expenditures - cash dividends

Question 18

When does accounting information have relevance?

Answer 18

If it would make a difference in a business decision

Question 19

What is materiality?

Answer 19

A company-specific aspect of relevance

Question 20

What is the monetary unit assumption?

Answer 20

This requires that only things that can be expressed in money are included in the records

Question 21

What is the economic entity assumption?

Answer 21

States that every economic entity can be separately identified and accounted for

Question 22

What is periodicity assumption?

Answer 22

States that life of a business can be divided into artificial time periods

Question 23

What is the going concern assumption?

Answer 23

States that the business will remain in operation for the business will remain in operationfor the future?

Question 24

What is the historical cost principle?

Answer 24

This when a company dictates that companies record assets at their original price