Chapter 3 Flashcards
How are leases or rents recorded on financial statements?
The cash spent is deducted from your asset account and then same amount is added to the ‘prepaid rent’ account - both of which are asset accounts on the balance sheet.
When a business pays cash for insurance it is counted under ________ _________ on the balance sheet.
prepaid insurance
What is unearned revenue?
It is a liability that is incurred when we have an obligation to the customer to provide goods or services.
List some things that ratios are used for.
(1) Analyze current year financial statements
(2) Compare current year performance with prior year(s)
(3) Benchmark company performance against a competitor
How is the return-on-assets ratio calculated?
Net Income / Total Assets
When looking at the return-on-assets ratio, is it better to have a larger or smaller ratio?
Larger, it means that the company did a better job of managing its assets.
Think buying new equipment to create a higher quality product - you might be able to sell it for more due to the quality change which generates more revenue.
How is the debt-to-assets ratio calculated?
Total Liabilities / Total Assets
T or F: You want a larger debt-to-assets ratio.
False, a smaller ratio indicates that there is less debt risk for the company.
It answers the question: What portion of my assets are financed through liabilities?
How is the return-on-equity ratio calculated?
Net Income/Total stockholder’s equity
Do you want a higher or lower return-on-equity ratio?
Higher, it means they are doing better of generating revenue on the equity that exists w/in the business.
What is financial leverage?
It is the principle of increasing earnings through debt financing by investing money at a higher rate than the rate paid on the borrowed money.
