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Accounting > Chapters 1 and 2 > Flashcards

Chapters 1 and 2 Flashcards

1
Q

What are assets

A

What the company owns

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2
Q

What are liabilities?

A

What the company owes

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3
Q

What is equity?

A

What company owes to shareholders

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4
Q

Elements of equity

A
  1. Share capital: invested by shareholders
  2. Retained earnings: profits not paid out to shareholders
  3. Reserves: funds used in less profitable times as safety buffers
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5
Q

Elements of a cash flow statement

A
  1. Operating cash flow: activities you make profits with
  2. Investing cash flow: Transactions regarding long-term assets
  3. Financing cash flow: Transactions related to raising capital
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6
Q

Elements of income statement

A
  1. Operating income (income generated from primary activity of the business
  2. Financing (interest expenses)
  3. Tax expenses
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7
Q

What is accounting?

A

Accounting is the process of identifying, measuring and communicating financial information

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8
Q

Types of accounting

A
  1. Financial accounting (for external parties)
  2. Managerial accounting (for internal purposes)
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9
Q

Who uses accounting information

A
  1. (potential) shareholders
  2. Creditors and suppliers
  3. Managers and directors
  4. Financial analysts
  5. Other users such as unions, and government (tax) agencies
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10
Q

Why do (potential) shareholders use accounting information?

A

Shareholders rely on financial information to assess manager performance. They can invest capital in the business and need an accurate picture of business performance. Financial information reduces uncertainty about future and thus raises stock price.

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11
Q

Why do creditors and suppliers use financial information?

A

Creditors use financial information to assess the default risk of the company they want to lend money to in order to decide whether to lend money or not.

Suppliers use FI to establish credit terms and their commitment to the relationship

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12
Q

Why do managers and directors use financial information?

A

They use it for performance benchmarks tied to their compensation packages.

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13
Q

Why do financial analysts use financial information?

A

Financial analysts are professionals who analyze FI for clients.

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14
Q

What is disclosure?

A

Disclosure is the practice of releasing financial information.
This is necessary for loans but giving away too much information can create competitive disadvantage.

Always comply with minimum reporting standards.

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15
Q

What types of business activities are there in accounting?

A
  1. Planning activities
  2. Investing activities
  3. Financing activities
  4. Operating activities
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16
Q

What are planning activities?

A

These are the company’s goals and the methods of achieving those. This requires constant consideration of market condition. This is proprietary information.

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17
Q

What are investing activities?

A

The buying and selling of resources to produce and sell (assets)
These can be long-term and short-term assets. Differs per company

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18
Q

What are financing activities?

A

Methods of funding investments. Can be done through:
1. Equity financing= raising capital through share sales
2. Debt financing = raising capital by taking on liabilities.

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19
Q

What are operating activities?

A

The production, promotion and selling of goods. Consists of input and output markets

20
Q

Input markets

A

Markets in which goods required to produce products are exchanged. Transactions create operating expense

21
Q

Output markets

A

Markets in which company’s products are sold to customer and creates revenue

22
Q

Wat are the main financial statements

A
  1. Balance sheet
  2. Income statement
  3. Statement of cash flows
  4. Statement of changes in equity
23
Q

What does a balance sheet do

A

A balance sheet reports financial position at a certain point in time (mostly the end of the reporting period). Divides financial position in assets, liabilities and equity.

24
Q

What does an inome statement show

A

Reports changes in equity value over time. It breaks done revenue (increase in equity value) and expenses (decrease in equity value).
Net income is the increase in equity value

25
Q

What does a statement of cash flow show

A

Give insight in the cash that actually came in to and got out of the business.

26
Q

What does a statement of changes in equity show

A

It reports changes in the total equity value through changes in:
1. contributed capital (through share issues)
2. Retained earnings (net profit -dividends)
3. other equity

27
Q

What are the 3 key linkages in the financial statements

A
  1. Cash flow statement links Cash on beginning balance sheet to cash on ending balance sheet
  2. Income statement links beginning and ending retained earnings in statement of changes in equity
  3. Statement of changes in equity links beginning and ending equity on balance sheet.
28
Q

What is GAAP

A

GAAP stands for Generally Accepted Accounting Principles

Set of standards and practices based on underlying principles in order to create financial statements. They vary per country

29
Q

What is IFRS

A

IFRS stands for International Financial Reporting Standards. To improve comparability between companies in different countries, this reporting standard was created. Most countries have adopted IFRS (but not US and Canada)

Audition is mandaated to ensure reliability of financial information

30
Q

How do you calculate Return on Equity (ROE) and what is it used for

A

It is calculated: Net income/ Average total equity

It is used to calculate the return generated for shareholders.

31
Q

What are the considerations using ROE

A
  1. Only compare ROE to company in same industry.
  2. Window-dressing
  3. Differences in fiscal year (different operating cycles)
  4. customer/supplier demographics
32
Q

How do you calculate the Debt-to-equity ratio?

A

Total liabilities / Total equity

33
Q

What does the Debt-to-equity ratio show?

A

It shows the ratio of debt over equity to determine credit risk. The lower the ratio the safer

34
Q

When are assets reported?

A

Assets are reported when they fit two requirements:
1. Likely has future economic benefits for the company
2. Cost/value can be reliably measured

35
Q

How are assets measured?

A

Most assets are measured by historical cost because of its objectivity

Some assets like securities are reported at fair/current value for relevance.

36
Q

When are liabilities reported

A

Liabilities are reported when:
1. Economic sacrifice is probable
2. Obligation amount is relatively certain.

37
Q

What are executory contracts?Contri

A

Contract fulfilling criteria when transaction that caused the debt has not yet occurred. The transaction will occur on a later date.

38
Q

What is contributed capital

A

Contributed capital is the nominal value of issued shares - nominal value of repurchased shares.

39
Q

What is earned capital

A

Retained earnings- acc. other comprehensive income/loss

40
Q

How is gross profit calculated

A

Revenue - cost of goods sold

41
Q

How is net working capital calculated

A

Current assets - current liabilities

42
Q

What are considerations about the net working capital

A

It doesn’t take into account the size of the company. $1 million in NWC for Microsoft is bad, but good for VG.

43
Q

What is the cash operating cycle

A
  1. Cash
  2. Cash is used to purchase inventories
  3. Those are sould and earned on accounts receivables
  4. Those are paid to return cash to the company
  5. Cash is used to pay accounts payable.
44
Q

How is the current ratio calculated and what does it do?

A

Current ratio = current assets - current liabilities. should be 1<CR<2

Helps take into account the different sizes of companies.

45
Q

How is quick ratio calculated?

A

QR = (cash + short-term securities + Acc. Receivable)/current liabilities

46
Q

Quick ratio characteristic and considerations

A

QR is more selective than CR
2. One should take into account different operating cycles
3. There could be differences in inventory, receivables and payables management efficiency.

47
Q

What is the difference between operating and nonoperating expenses.

A

Operating expenses are expenses incurred in support of the company’s main activities

Nonoperating expenses come from financing and investing activities.

Accounting (6 decks)

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