Chapter 6 - Depreciation and Financial Accounting

Question 1

Name the 3 categories of asset depreciation.

Answer 1

1. Use related physical loss
2. Time Related Physical Loss
3. Functional loss

Question 2

What is use related physical loss?

Answer 2

Wear and tear.

Usually measured in units of production, kilometers driven, hours or use, etc.

Question 3

What is Time Related Physical Loss?

Answer 3

Usually measured in units of time as an unused car will rust and lose value over time.

Question 4

What is Functional Loss?

Answer 4

Usually expressed in terms of function lost inluding fashion, legislative (pollution control, safety devices) and technical changes.

Question 5

What is the Market Value of an asset?

Answer 5

The value of an asset in the open market.

Question 6

What is the Book Value of an asset?

Answer 6

The value of an asset calculated from a depreciation model for accounting purposes.

Question 7

What is Straight Line Depreciation?

Answer 7

SLD assumes rate of loss of an asset’s value s constant over its useful life.

Question 8

What is Declining-Balance Depreciation?

Answer 8

DBD method models loss in value of an asset in a period as a constant proportion (percentage) of the asset’s current value.

Question 9

What is Managerial Accounting?

Answer 9

It’s concerned with the costs and benefits of the activities of an enterprise and providing such to managers in decision-making.

Question 10

What is Financial Accounting?

Answer 10

It’s concerned with recording/analyzing the financial data of a business with the objective of providing information to internal management and external parties who wish to make decisions about an enterprise such as Managers, Investors, and Creditors.

Question 11

What is a company’s Balance Sheet?

Answer 11

It is a snapshot of a firm’s financial position at a particular point in time. It summarizes Assets, Liabilities and Owner’s Equity.

Question 12

What is a Company’s Income Statement?

Answer 12

It summarizes the revenues and expenses over a period of time.

In the end, it shows the companies Profit (or income)

Question 13

What is the basic accounting equation?

Answer 13

Assets = Liabilities + Equity

think ALE or A = L + E

Question 14

What are the two types of assets?

Answer 14

1. Current Assets - Can be converted into cash within one year.
2. Fixed Assets (Capital Assets) - Have a life greater than one year

Question 15

Which two components show as Owner’s Equity on the balance sheet?

Answer 15

1. Stocks or shares
2. Retained Earnings

Question 16

What are Liquidity Ratios?

Answer 16

They assess a firm’s ability to meet short term financial obligations & weather fluctuations in cash flows (ie deal with temporary losses)

1. Current Ratio
2. Acid Test Ratio

Question 17

What is working capital and what is it’s equation?

Answer 17

Reserve of cash and liquid assets

Working Capital = Current Assets - Current Liablities

Question 18

What is the Current Ratio?

Answer 18

Current Ratio = Current Assets/ Current Liabilities

Question 19

What is the Acid Test ratio?

Answer 19

Acid Test Ratio = Quick Assets/ Current Liabilities

Question 20

What are Debt Management Ratios?

Answer 20

They show the extent in which the firm relies on debt.

1. Equity Ratio

Question 21

What is the Equity Ratio?

Answer 21

Equity Ratio = Total Equity/ Total Assets

Question 22

What are efficiency ratios?

Answer 22

They assess the efficiency of use of it’s assets.

1. Inventory Turnover Ratio

Question 23

What is the Inventory Turnover ratio?

Answer 23

Inventory Turnover Ratio = Sales/ Inventories

Question 24

What are profitability ratios?

Answer 24

How productive assets have been employed in producing a profit.

1. Return on Assets
2. Return on Equity

Question 25

What are the ROA and ROE ratios?

Answer 25

ROA = Net Income/ Total Assets

ROE = Net Income/ Total Equity