Exam One

Question 1

what is the purpose of accounting?

Answer 1

being able to measure profit

Question 2

profit estimates what?

Answer 2

firm performance

Question 3

what is the most important measure of firms?

Answer 3

profitability

Question 4

why do you measure profit?

Answer 4

in order to make decisions

Question 5

examples of internal decisions

Answer 5

Board of Directors, expansion, management, use of resources

Question 6

examples of external decisions

Answer 6

banks, creditors, investors, consumers, politicians, shareholders, regulators

Question 7

what do internal and external decisions do

Answer 7

increase long-run profitability

Question 8

when is revenue recognized in cash accounting?

Answer 8

as soon as cash comes in

Question 9

when is expense recognized in cash accounting?

Answer 9

as soon as cash leaves the door

Question 10

what type of firms use cash accounting?

Answer 10

small private firms

Question 11

when is revenue recognized in accrual accounting?

Answer 11

once it is earned (good delivered or service provided)

Question 12

what is it called when revenue is only brought in once its earned?

Answer 12

revenue recognition

Question 13

when firms report an expense in the same period the revenue for it is earned

Answer 13

expense matching

Question 14

what are the two keys to accrual accounting?

Answer 14

revenue recognition and expense matching

Question 15

what type of firms use accrual accounting?

Answer 15

all public firms, mid to large private firms

Question 16

expenses that cannot be matched to a specific sale

Answer 16

period expenses

Question 17

what expenses always must be period expenses?

Answer 17

advertising, legal, R&D

Question 18

a written contract that requires firms to pay back the amount with interest

Answer 18

debt

Question 19

money that does not need to be paid back, no written contract

Answer 19

equity

Question 20

what do firms give up for equity money?

Answer 20

share of ownership/profit

Question 21

why is debt risky?

Answer 21

cash flow risky, sales must be greater than interest

Question 22

why is equity risky?

Answer 22

control risky

Question 23

what is the funding from liabilities and equity used for?

Answer 23

buying assets

Question 24

what does EBIT stand for?

Answer 24

earnings before interest and tax

Question 25

who gets paid first, debt holders or equity holders?

Answer 25

debt holders

Question 26

gross margin/profit=

Answer 26

sales revenue- COGS

Question 27

EBIT=

Answer 27

gross margin/profit-period expenses

Question 28

net income=

Answer 28

EBIT- interest expense- tax expense

Question 29

how is net income returned to shareholders?

Answer 29

through increased value of shares

Question 30

what increases with debits?

Answer 30

assets and expenses

Question 31

what decreases with debits?

Answer 31

liabilities, equities, revenues

Question 32

what increases with credits?

Answer 32

liabilities, equities, revenues

Question 33

what decreases with credits?

Answer 33

assets, expenses

Question 34

firm decisions are made within what context?

Answer 34

ethical and sustainable

Question 35

investments include

Answer 35

liabilities and equities

Question 36

how do shareholders make money?

Answer 36

dividends, selling stock, capital stock appreciation, buy back of a share

Question 37

what does the buy back of a share cause for the current stockholders?

Answer 37

increased ownership

Question 38

examples of debt/liabilities

Answer 38

loans, bonds, A/P

Question 39

what equation must be true

Answer 39

assets= liabilities+equity

Question 40

what do dividends come out of

Answer 40

retained earnings