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Final exam Flashcards

1
Q

Who needs accounting? (6)

A

Managers, Shareholders, Employees, Creditors, Suppliers, Government Agencies

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1
Q

What is accounting

A

system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization.

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2
Q

Types of accountants? (5)

A
  1. Private accountants
  2. Internal Auditors
  3. Public accountants
  4. Government accountants
  5. Forensic accountants
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3
Q

What does financial accountants do?

A

Branch of accounting that addresses the needs of external stakeholders (shareholders, creditors, government regulators, etc.) by preparing and analyzing financial statements

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4
Q

What is the IFRS?

A

International Financial Reporting Standards. accounting standards that are used in the preparation of financial statements.

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5
Q

What did the IFRS replace?

A

The GAAP (generally accepted accounting procedures)

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6
Q

What does the IFRS ensure? (4)

A

ensures that financial statements are
- relevant
- reliable
- consistent
- comparable

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7
Q

What are the three basic financial statements?

A
  1. Balance Sheet
  2. Income statement
  3. Statement of cash flows
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8
Q

Who publishes annual reports with all three financial statements?

A

Corporations with publicly held stock

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9
Q

What is a balance sheet?

A

Summarizes a firm’s financial position at a specific point in time

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10
Q

What is the accounting equation?

A

Assets = Liabilities + Owner’s Equity

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11
Q

What are current assets?

A

Cash and other assets that will be used up or converted to cash within the year

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12
Q

What are fixed assets?

A

Plant, Property and Equipment. Takes accumulated depreciation into account.

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13
Q

What are intangible Assets?

A

Patents, copyrights, trademarks, and goodwill (intellectual property of the firm)

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14
Q

What are current liabilities?

A

Debts which come due within one year of the date of the Balance Sheet

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15
Q

What are long-term liabilities?

A

Debts which don’t come due until more than one year of the date of the Balance Sheet

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16
Q

What is owner’s equity?

A

the claim which the owners have against the firm’s assets. what is left after Liabilities are subtracted from Assets to ensure that the Balance sheet stays in balance

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17
Q

What is the number rule with the balance sheet?

A

It must always balance! Assets = Liabilities + Owner’s Equity

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18
Q

What does the Income statement do?

A

summarizes the profit and loss from a firm’s operations over a given period of time. AKA profits & Losses

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19
Q

What is the Income Statement equation?

A

Revenue - Expenses = Net Income

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20
Q

What is Revenue?

A

represents the increase in assets (usually cash and receivables) from ongoing operations

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21
Q

What are expenses?

A

indicates the cash a firm spends to carry on business and generate its Revenue

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22
Q

What is a statement of cash flow?

A

Identifies a firm’s sources (inflows) and uses (outflows) of cash from operating activities, investing activities and financing activities

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23
Q

Who looks at statements of cash flows?

A

Stakeholders want to know if there is adequate cash to pay workers, creditors, suppliers, and the Canada Revenue Agency.

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24
Q

What are Statement of retained earnings?

A

reports how retained earnings have changed from one period to the next

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25
Q

What are Shareholders’ equity statement?

A

reports how net income, dividends and the issuance of stock affect retained earnings

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26
Q

What is an Independent Auditor’s Report?

A

Necessary stamp of approval.
- Publicly traded corporations are required to have an accounting firm perform an external audit
- The auditor will issue an unqualified, qualified, or adverse opinion
- Auditors must be independent

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27
Q

What are Notes to Financial Statements?

A

A Critical and often underused Tool
- Provide additional information about operations
- Clarify and supplement the numbers
- Explain accounting methods or changes
- Detail status of lawsuits, investigations, etc.

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28
Q

What are comparative statements?

A

The IFRS requires publicly traded companies to provide information about previous years
Horizontal analysis – uses comparative statements from previous years to identify changes and trends in key accounts’ values over time

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29
Q

What is Managerial accounting? (3)

A

provides reports and analyses to managers on a department, functional or project basis:
- helps make informed business and resource allocation decisions
- To assess project success or failure
- To determine incentive and bonus payments

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30
Q

How does managerial accounting help managers make key business decisions? (3)

A
  1. Determining product costing
  2. Performing incremental analysis
  3. Developing budgets
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31
Q

What is product costing?

A

Costs assigned to products by managers with direct costs or indirect costs.

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32
Q

What are direct costs? (3)

A

costs that can be easily and directly traced to production
2 types:
1. Direct Labour
2. Direct Material costs

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33
Q

What are Indirect Costs?

A

costs that aren’t tied directly to production and are the result of general operations
Examples – Property tax, Insurance … Known as Overhead Costs

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34
Q

What is Activity-based costing?

A

technique used to assign product costs based on links between activities that drive costs and the production of specific goods

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35
Q

What is Incremental analysis?

A

evaluates the financial impact of different alternatives in a decision-making situation. “What if…” analysis

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36
Q

What are some examples of Incremental Analysis?

A
  • Make parts or buy from supplier?
  • Repair equipment or buy new?
  • Perform warranty repairs or outsource?
  • Eliminate or sell product line/business
37
Q

What is budgeting (5)

A
  • Outlines how resources will be used to meet goals
  • Translates goals into measurable quantities and identifies resources
  • Communication and coordination among managers and employees
  • Motivates achievement of goals and attainment of bonuses
  • Monitors progress, success, failure
38
Q

Why do firms need to raise funds? (3)

A
  • to carry on business
  • to meet payroll and finance inventory
  • To finance long term investments in plant, machinery and property
39
Q

What do financial managers do? (5)

A
  • Evaluate financial performance
  • Plan financial resources
  • Manage working capital
  • Evaluate investment opportunities
  • Determine appropriate strategies and capital structure
39
Q

How do financial managers create wealth?

A

maximize shareholder value & meeting social responsibilities (to customers, employees, other stakeholders and the environment)

39
Q

What is Ratio analysis in finance?

A

compares two elements for the same year’s financial figures (called ratios because they are computed by dividing one element of a financial statement by another)

40
Q

What is trend analysis in finance?

A

Process of comparing financial data from year to year in order to see how they have changed

41
Q

What are the benefit of using ratios? (2)

A
  1. Highlights important relationships and measure performance
  2. Sets standards and benchmarks by comparing with industry averages
42
Q

What are the two rules of ratio analysis?

A
  1. Avoid drawing too strong of a conclusion from any one ratio
  2. Once ratios have presented a general indication, refer back to specific data involved to see whether the numbers confirm what the ratio suggests
43
Q

What do financial ratios do?

A

Financial ratios provide insight into the financial strengths & weaknesses of a firm

44
Q

What data is used for financial ratios?

A

financial data from balance sheet and income statement

45
Q

What are the 4 basic categories of financial ratios?

A
  1. Liquidity Ratios
  2. Asset Management Ratios
  3. Leverage Ratios
  4. Profitability Ratios
46
Q

What does liquidity ratios measure?

A

measures ability to convert assets into cash to pay off short term liabilities

47
Q

What does asset management ratios measure?

A

measures effectiveness of asset use to generate net income (profit)

48
Q

What do leverage ratios measure?

A

measures the extent of the use of leverage (debt) to meet financing needs

49
Q

What do profitability ratios measure?

A

measures how successful a firm is in meeting its ultimate goal – making a profit

50
Q

What are the equations for liquidity ratios? (2)

A

Current Ratio: Current Assets / Currents Liabilities

Quick ratio (aka the acid-test ratio): Current assets (less inventory) / current liabilities

51
Q

What does current ratio measure?

A

Can you pay the bills
Higher the ratio, the more assurance that debts will be paid

52
Q

What does the quick ratio (acid-test ratio) measure?

A

your ability to access cash quickly to support immediate demands (short-term liquidity)
A ratio of 1.0 or greater is generally acceptable, A comparatively low ratio can mean that your company might have difficulty meeting your obligations

53
Q

What are the equations for asset management ratios? (3)

A

Inventory Turnover: Cost of Goods Sold / Average Inventory

Accounts receivable turnover: Sales / Accounts Receivable

Average Collection period: Accounts Receivable / (Sales/365)

54
Q

What does Inventory Turnover measure?

A

Measures the number of times inventory has been turned over(sold and replaced) during the year.
(are we making too much stuff or not enough?)

55
Q

What does accounts receivable turnover measure?

A

measure how well a company’s credit and collection policies are working by indicating how frequently accounts receivable are converted into cash
The higher, the better – ideally 12 times or more

56
Q

What does average collection period measure?

A

measure how well a company’s credit and collection policies are working by indicating how long (in days) accounts receivable are converted into cash
The lower (quicker), the better – ideally below 30 days
Example: Costco cashes their accounts receivable 2x faster than their accounts payable

57
Q

What are the equations for leverage ratios? (2)

A

Debt to Equity: Total Liabilities / Shareholders’ Equity

Debt to Total Assets: Total Liabilities / Total Assets

58
Q

What does debt to equity measure?

A

measure management’s reliance on debt and the business’s indebtedness compared to the amount invested by its owners.
Indicates the amount of liabilities the business has for every dollar of shareholder’s equity. Good indicator of a business’s capacity to repay its creditors. The lower, the better – should be below 1.00, ideally below 0.50

59
Q

What does debt to total assets measure?

A

serves as a simple measure of a company’s ability to carry long-term debt (if we sold all the assets and paid off our debts, what is left?) – should not exceed 50% of the value of the total assets

60
Q

What are the equations for profitability ratios? (5)

A

Return on sales: (Net Income – Preferred Dividends) / Net Sales

Return on Equity: (Net income – Preferred Dividends) / Total Equity

Earnings per share: (Net income – Preferred Dividends) / # of shares outstanding

Return on Assets: Net Income / Total Assets

Return on investment: Net income / Total Investment

61
Q

What does return on sales measure?

A

how much profit a business makes for each dollar of sales

62
Q

What does return on equity?

A

how much profit a business makes for each dollar of shareholder investment – higher return, better for the shareholders

63
Q

What does earnings per share measure?

A

profit earned for each share of stock understanding

64
Q

What does return on assets measure?

A

how much profit a business makes for each dollar a company has invested in assets

65
Q

What does return on investment measure?

A

the success of a project or acquisition

66
Q

What are the two pro forma financial statements?

A
  1. Budgeted Income statement
  2. Budgeted Balance Sheet
67
Q

What does a budgeted income statement measure?

A

forecasts sales, expenses, and net income for the planning period

68
Q

What does a budgeted balance sheet measure?

A

forecasts the types and amounts of assets a firm will need to carry out plans

69
Q

What is a cash budget? (2)

A

Used to get an understanding of the timing of cash flows during the planning period. This is called phasing of cash flows.

Provides a detailed projection of cash flows to determine when cash shortages and surpluses will occur

70
Q

What is Net working capital?

A

the difference between current assets and current liabilities; working capital (Cash, Accounts Receivable, Inventory) must be managed on a daily basis

71
Q

Why do we need cash

A

Cash is needed to pay bills, employees, dividends, taxes

72
Q

How do we manage cash?

A

cash does not earn returns so we must invest it or use it productively or else your shareholders will want it for themselves

73
Q

How do companies report cash?

A

actual cash and cash equivalents

74
Q

What are cash equivalents? (3)

A
  1. Commercial paper (secured and unsecured)
  2. Treasury bills (T-Bills)
  3. Money market funds
75
Q

What are accounts receivable?

A

represent what credit customers owe the firm

76
Q

How do we manage accounts receivable? (3)

A
  1. Set credit terms
  2. Establish credit standards
  3. Design an appropriate collection policy
77
Q

What are Inventories?

A

stocks of finished products, raw materials and partly finished products

78
Q

How are inventories an investment for firms? (3)

A
  1. money tied up in their value while they sit idle
  2. warehousing costs
  3. insurance
79
Q

What are the four methods of short-term financing for firms?

A
  1. Spontaneous financing - A natural result of business operations. Ex: Trade Credit
  2. Short-term bank loans - Ex: Promissory note, line of credit, revolving credit agreement
  3. Factoring - Selling your receivables at a discount
  4. Commercial paper - High quality corporate IOU’s
80
Q

What is capital budgeting?

A

a systematic evaluation of a firm’s major long-term capital investment opportunities

81
Q

What does capital budgeting evaluate? (4)

A
  1. When to replace machines and equipment
  2. When to purchase new machines and equipment
  3. When to build a new factory, warehouse, or office
  4. When to introduce a new product line
82
Q

What is the present value?

A

How much a given amount of cash received in a future period is worth today, given the time value of money

Present value depends on the interest rate the invested money will earn

83
Q

How do managers calculate the present value?

A

Discounting

84
Q

What is the Net Present Value?

A

the present value of all cash flows associated with an investment, including the initial cash flow of the investment

85
Q

What are the three sources of long-term capital

A

Capital structure – the mix of equity and debt
financing a firm uses for financing needs
Debt financing (from creditors)
Equity financing (from owners)

86
Q

What are the pros of debt financing? (2)

A
  • Interest payments are tax deductible
  • Owners don’t have to invest more of their own money
87
Q

What are the cons of debt financing? (2)

A
  • Fixed payments required
  • Creditors may impose conditions (covenants) … and may even foreclose
88
Q

What are the sources of equity financing?

A
  1. Direct contributions by owners (ie. through newly issues stocks for corporations)
  2. Retained earnings
  3. Equity financing provides more flexibility and less default risk than debt financing … but at a cost to the owners
89
Q
A

Business (4 decks)

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