Exam One Flashcards
what is the purpose of accounting?
being able to measure profit
profit estimates what?
firm performance
what is the most important measure of firms?
profitability
why do you measure profit?
in order to make decisions
examples of internal decisions
Board of Directors, expansion, management, use of resources
examples of external decisions
banks, creditors, investors, consumers, politicians, shareholders, regulators
what do internal and external decisions do
increase long-run profitability
when is revenue recognized in cash accounting?
as soon as cash comes in
when is expense recognized in cash accounting?
as soon as cash leaves the door
what type of firms use cash accounting?
small private firms
when is revenue recognized in accrual accounting?
once it is earned (good delivered or service provided)
what is it called when revenue is only brought in once its earned?
revenue recognition
when firms report an expense in the same period the revenue for it is earned
expense matching
what are the two keys to accrual accounting?
revenue recognition and expense matching
what type of firms use accrual accounting?
all public firms, mid to large private firms
expenses that cannot be matched to a specific sale
period expenses
what expenses always must be period expenses?
advertising, legal, R&D
a written contract that requires firms to pay back the amount with interest
debt
money that does not need to be paid back, no written contract
equity
what do firms give up for equity money?
share of ownership/profit
why is debt risky?
cash flow risky, sales must be greater than interest
why is equity risky?
control risky
what is the funding from liabilities and equity used for?
buying assets
what does EBIT stand for?
earnings before interest and tax
who gets paid first, debt holders or equity holders?
debt holders
gross margin/profit=
sales revenue- COGS
EBIT=
gross margin/profit-period expenses
net income=
EBIT- interest expense- tax expense
how is net income returned to shareholders?
through increased value of shares
what increases with debits?
assets and expenses
what decreases with debits?
liabilities, equities, revenues
what increases with credits?
liabilities, equities, revenues
what decreases with credits?
assets, expenses
firm decisions are made within what context?
ethical and sustainable
investments include
liabilities and equities
how do shareholders make money?
dividends, selling stock, capital stock appreciation, buy back of a share
what does the buy back of a share cause for the current stockholders?
increased ownership
examples of debt/liabilities
loans, bonds, A/P
what equation must be true
assets= liabilities+equity
what do dividends come out of
retained earnings
