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FINANCE FINALS Flashcards

1
Q

It is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making economic
decisions.
—Accounting Standards Council (ASC)
It is an art of recording, classifying, summarizing in a significant manner and in terms
of money, transactions, and events which are, in part at least, of a financial
character, and interpreting the results thereof.
-American Institute of Certified Public Accountants (AICPA)
The process of identifying, measuring, and communicating economic information to permit
informed judgements and decisions by users of the information.
—American Accounting Association (AAA)

A

Definition of Accounting

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2
Q

INTERNAL STAKEHOLDERS

A

EMPLOYEES
MANAGERS
OWNERS

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3
Q

EXTERNAL STAKEHOLDERS

A

SUPPLIERS
SOCIETY
GOVERNMENT
CREDITORS
SHAREHOLDERS
CUSTOMERS

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4
Q

SERVICE CONCERN
The business derived its income from services rendered to clients
MERCHANDISING
CONCERN
The business is engaged in buying goods or commodities or any form of finished products and sells them at a profit.
MANUFACTURING
CONCERN
The business is engaged in buying of raw materials and supplies to be processed or manufactured
AGRICULTURE
The business is engaged planting of crops and sells its products
either in raw or finished form at a profit
HYBRID COMPANIES
Are those involved in more than one type of activity which are manufacturing, merchandising and service.

A

Nature of Business Organization

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5
Q

The business derived its income from services rendered to clients

A

SERVICE CONCERN

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6
Q

The business is engaged in buying goods or commodities or any
form of finished products and sells them at a profit.

A

MERCHANDISING
CONCERN

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7
Q

The business is engaged in buying of raw materials and supplies to
be processed or manufactured

A

MANUFACTURING
CONCERN

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8
Q

The business is engaged planting of crops and sells its products
either in raw or finished form at a profit

A

AGRICULTURE

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9
Q

Are those involved in more than one type of activity which are
manufacturing, merchandising and service.

A

HYBRID COMPANIES

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10
Q
  • a report issued annually by a
    corporation to its stockholders. It
    contains basic financial statements
    as well as management’s analysis
    of the firm’s past operations and
    future prospects.
A

ANNUAL REPORT

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11
Q

The end products of one
accounting cycle, which reveal the
formal record of the financial activities
of an entity for the purpose of
communicating the same to the endusers (stakeholders) as their source
reference in making decisions.

A

FINANCIAL
STATEMENTS

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12
Q

Generally Accepted
Accounting Principles
(GAAP)

Conceptual Framework
for Financial Reporting

Accounting Standards
(e.g. IFRS/PFRS and
IAS/PAS)

Applicable Government
Laws (e.g. Taxation)

A

BASES FOR
FINANCIAL STATEMENTS

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13
Q

ENTITY
MONEY MEASUREMENT
PERIODICITY
ACCRUAL
MATCHING
GOING CONCERN
COST
REALIZATION
DUAL ASPECT
CONSERVATION
CONSISTENCY
MATERIALITY

A

ACCOUNTING CONCEPT

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14
Q

REAL ACCOUNTS (PERMANENT) & NOMINAL ACCOUNTS (TEMPORARY)

A

Elements of Financial Statements

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15
Q

RA
ASSET
LIABILITY
EQUITY

NA
INCOME
EXPENSE

A

Elements of Financial Statements

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16
Q

REAL ACCOUNTS

A

ASSET LIABILITY EQUITY

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17
Q

NOMINAL ACCOUNT

A

INCOME EXPENSE

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18
Q

A present economic resource controlled
by the entity as a result of past events.
An economic resource is a right that has
the potential to produce economic
benefits

A

Asset

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19
Q

A present obligation of the entity to
transfer an economic resource as a result
of past events. An obligation is a duty of
responsibility that the entity has no
practical ability to avoid

A

Liability

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20
Q

residual interest in the assets of the
entity after deducting all its liabilities.

A

Equity

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21
Q

increase in the economic benefits
during the accounting period in the
form of inflows or enhancements of
assets or decrease of liabilities that
result in increases in equity, other
than those relating to contributions
from equity participants.

A

Income

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22
Q

decreased in economic benefits
during the accounting period in the
form of outflows or depreciation of
assets or incurred of liabilities that
result in decreases in equity, other
than those relating to distributions to
equity participants.

A

Expense

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23
Q

reports the company’s financial position
and it consists (1) assets, (2) liabilities, and
(3) stockholders’ equity at a specified date

A

Statement of Financial Position
(Balance Sheet)

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24
Q

reports the company’s profitability
(revenues/gains minus expenses/losses)
during a specified period of time

A

Statement of Financial Performance
(Income Statement)

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25
Q

reports the changes in cash composition
during a specified period and is
divided into three parts: (1) operating
activities, (2) investing activities, and (3)
financing activities.

A

Statement of Cash Flows
(Direct/Indirect)

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26
Q

reports the changes or movements in
in the equity section during a specified
period of time

A

Statement of Stockholder’s
Equity (Changes in Equity)

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27
Q

presents assumptions used,
disclosures and relevant
information regarding the
computation of figures in FS

A

Notes to Financial Statements

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28
Q

Assets:
Current (e.g. Cash, Accts Receivables, Prepayments, Inventories)
Non-current (e.g. Fixed Assets)
Liabilities:
Current (e.g. Accts Payable, Accrued Exp., Short-Term Notes)
Non-current (e.g. Long-Term Notes, Loans and Bonds)
Equity
Capital (e.g. Common and Preferred Stocks, Partners’ Capital, etc.)
Retained Earnings (where nominal accounts are closed)
Dividend payments & Withdrawals

A

STATEMENT OF FINANCIAL POSITION/
BALANCE SHEET

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29
Q

Formula :________ = Liabilities + Equity

A

Assets

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30
Q

Only the cash and cash
equivalents account
represents actual
spendable money.

Working Capital =
Current Assets

Net Working Capital =
Current Assets minus
Current Liabilities.

Net Operating Working
Capital (NOWC) =
Current assets minus
non-interest-bearing
current liabilities.

The cost of Fixed Assets
are periodically
depreciated
(e.g. SLM, SYD, DDB)

Prepayments (e.g.
Insurance & Rent) are
periodically amortized

A

Keynotes in SFP/BS

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31
Q
A
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32
Q

Operating Income:
Sales revenue
Non-operating income and other income:
Interest, Rent and Royalties
Gains in selling Long-Term Assets and Securities
Operating Expenses:
Cost of Good Sold
Administrative & Selling (e.g. Salaries, Utilities, Marketing, etc.)
Depreciation & Amortization
Non-operating expenses and losses:
Interests & Taxes
Losses in selling Long-Term Assets and Securities)
Formula : Net Income = Revenues/Gains - Expenses/Losses

A

STATEMENT OF FINANCIAL
PERFORMANCE/INCOME STATEMENT

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33
Q
  1. Operating activities include cash activities
    related to net income.
  2. Investing activities include cash activities
    related to noncurrent assets.
  3. Financing activities include cash activities
    related to interest-bearing liabilities and equity
    for the purpose of raising a capital.
A

STATEMENT OF CASH FLOWS

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34
Q

include cash activities
related to net income.

A

. Operating activities

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35
Q

include cash activities
related to noncurrent assets.

A

. Investing activities

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36
Q

include cash activities
related to interest-bearing liabilities and equity
for the purpose of raising a capital.

A

Financing activities

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37
Q

OPERATING
INCESTING
FINANCING

A

DIRECT CASH FLOWS

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38
Q

Authorized shares are the number of
shares that a corporation is legally
allowed to issue.
Issued Stocks (Common or Preferred
Stocks) represents shares that the
corporation has actually sold.
Treasury Stocks are issued shares of
stocks which are reacquired by the
issuing corporation.
Additional Paid-in Capital (APIC)
arises when stocks are issued in excess
to par value per share.
Retained Earnings include net income
for the period and dividends declared or
paid.

A

STATEMENT OF
STOCKHOLDER’S EQUITY

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39
Q

are the number of
shares that a corporation is legally
allowed to issue.

A

Authorized shares

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40
Q

(Common or Preferred
Stocks) represents shares that the
corporation has actually sold.

A

Issued Stocks

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41
Q

are issued shares of
stocks which are reacquired by the
issuing corporation.

A

Treasury Stocks

42
Q

arises when stocks are issued in excess
to par value per share.

A

Additional Paid-in Capital (APIC)

43
Q

include net income
for the period and dividends declared or
paid.

A

Retained Earnings

44
Q
  1. Basis of presentation
  2. Accounting policies
  3. Supporting computations for FS
  4. Other mandatory disclosures
A
  1. NOTES TO FINANCIAL STATEMENTS
45
Q
  1. Basis of presentation
  2. Accounting policies
  3. Supporting computations for FS
  4. Other mandatory disclosures
A
46
Q

process of EXAMINING and EVALUATING a company’s financial statements to gain insights into its financial performance, stability, and overall health. It involves analyzing the income statement, balance sheet, and cash flow statement to assess various financial ratios, trends, and patterns. Financial statement analysis helps stakeholders, such as investors, creditors, and managers, make informed decisions about the company.

A

FINANCIAL
ANALYSIS

47
Q

➢ Expresses a line item as a percentage of some priorperiod amount.
➢ Called TREND ANALYSIS
➢ Line items are expressed as a percentage of a base
period amount. line items are expressed as a
percentage of a base period amount.

A

HORIZONTAL ANALYSIS

48
Q

➢Trend percentages are a form of horizontal analysis
➢Trends indicate the direction a business is taking
➢Trend percentages are computed by selecting a base year.
➢Base year amounts are set equal to 100%.
TREND % = Any year peso amount /Base year peso Amount

A

TREND PERCENTAGE

49
Q

➢ concerned with relationships among items within a particular time
period
➢ expresses the line item as a percentage of some other line item for the
same period.
➢ Income statement—each item expressed as percentage of net sales
➢ Balance sheet—each item expressed as percentage of total assets

A

VERTICAL ANALYSIS

50
Q

—each item expressed as percentage of net sales

A

➢ Income statement

51
Q

each item expressed as percentage of total assets

A

➢ Balance sheet—

52
Q

➢ A means of evaluating the relationships between key components of
the financial statements
➢ The information needed can be found in the company’s financial
statements
➢ A few ratios require the amount of the company’s closing market price
➢ Some ratios require knowledge of the number of shares outstanding

A

RATIO ANALYSIS

53
Q

LIQUIDITY
Can the company meet its
short-term obligations using
the resources it currently
has on hand?

ASSET
MANAGEMENT
right amount of assets vs.
sales?

DEBT MANAGEMENT
Right mix of debt and
equity?

PROFITABILITY
Do sales prices exceed unit
costs, and are sales high
enough as reflected in PM,
ROE, and ROA?
21

MARKET
PERFORMANCE
Do investors like what they
see as reflected in P/E and
M/B ratios?

A

FIVE MAJOR CATEGORIES OF RATIOS

54
Q

Current Ratio
Quick Ratio
Working Capital

A

LIQUIDITY RATIO

55
Q

is used to evaluate a company’s ability to pay current liabilities.
The 2020 WC for XYZ Co.:
Working Capital = Current Asset – Current Liabilities
= 393, 000 – 213,000
= 180, 000

A

WORKING CAPITAL

56
Q

➢ the current ratio measures the ability to pay current liabilities
with current assets.
➢ Higher than one (1) indicates that company has sufficient current
assets to cover current liabilities
The 2020 Current Ratio for XYZ Co.:
The ratio of 1.85:1 means that for every peso of current liabilities, the company has
P1.85 of current assets.
Formula Current Ratio 2020
Current Ratio =
Current Asset 393,000
= 1.85 : 1
Current Liabilities 213,

A

CURRENT RATIO

57
Q

➢ measures immediate liquidity.
➢ Quick assets—cash, short-term investments, net current
receivables .
➢ One (1) or higher indicates that the company can meet its short
term liabilities without relying on inventory.
The ratio of 1.01 : 1 means that for every peso of current liabilities, the company has
P1.01 of quick assets.

A

ACID TEST RATIO (QUICK RATIO)

58
Q

—cash, short-term investments, net current
receivables .

A

Quick assets

59
Q

ASSET MANAGEMENT
Inventory Management
Average Sale Period
Accounts Receivable Turnover
Average Collection Period
Operating Cycle
Total Asset Turnover

A
60
Q

➢ how many times a year the company sells its average level of
inventory
➢ A higher inventory turnover ratio indicates that a company is
selling its inventory more quickly and efficiently
*Average Turn over = (Beginning Inventory + Ending Inventory) / 2

A

INVENTORY TURN OVER

61
Q

AVERAGE SALE PERIOD
28
➢ is an efficiency ratio that measures the average number of days
the company holds its inventory before selling it.
➢ The ratio measures the number of days funds are tied up in
inventory.

A
61
Q

➢ measures the number of times, on average, the company
collects receivables during the period.
➢ higher accounts receivable turnover ratio indicates that a
company is collecting its receivables more quickly, which is
generally favorable
Average net Accounts Receivable = Beg.
Receivables + Ending Receivables ) / 2

A

ACCOUNTS RECEIVABLE TURNOVER

62
Q

➢ determine the average number of days required to collect an
account.
Formula Ave, Sale Period 2020
Average Collection =
Period
365 Days 365 days
= 42.34 days
Acc. Recl Turnover 8.62 times
This means that receivables are
collected on average every 42.34
days.

A

AVERAGE COLLECTION PERIOD

63
Q

➢ measures the elapsed time from when inventory is received from
suppliers to when cash is received from customers.
A manager’s goal is to reduce the operating cycle because it puts cash
receipts in the company’s possession sooner

A

OPERATING CYCLE

64
Q

➢ measures how efficiently a company’s assets are being used to
generate sales.
A company’s goal is to increase its total asset turnover

A

TOTAL ASSET TURNOVER

65
Q

➢ Times Interest
Earned Ratio
➢ Debt – to –
Equity Ratio

A

DEBT
MANAGEMENT

66
Q

➢ Measures the company’s ability to make interest payments.
➢ A higher TIE ratio indicates a greater ability to meet interest
obligations and suggests that the company is financially stable

A

Times Interest Earned Ratio (TIER)

67
Q

➢ is one type of leverage ratio that indicates the relative
proportions of debt and equity at one point in time on a
company’s balance sheet.
➢ As the debt-to-equity ratio increases, it indicates that a company
is increasing its financial leverage.

A

DEBT-TO-EQUITY RATIO

68
Q

Measures the income or
operating success of a
company for a given period
of time.

A

PROFITABILITY

69
Q

➢ measures the percentage of each peso of sales that results in
gross margin.
Formula

A

GROSS MARGIN RATIO

70
Q

➢ measures the percentage of each peso of sales that results in
net income.

A

NET PROFIT MARGIN RATIO

71
Q

➢ is a measure of operating performance. It measures the
profitability of total assets, without considering how the assets
are finance.
➢ A higher ROA indicates better asset utilization and greater
profitability, as it means the company is generating more income
per unit of assets

A

Return on Total Assets

72
Q

➢ measures profitability of owners’ investment. It shows how many
peso of net income the company earned for each peso invested
by the owner.

A

RETURN ON EQUITY

73
Q

Earnings per share
Price – earning ratio
Dividend payout ratio
Dividend Yield Ratio
Book Value per share

A

MARKET
PERFORMANCE

74
Q

➢ A measure of the net income earned on each share of common
stock
➢ A higher EPS indicates higher earnings potential and may make a
company’s stock more attractive to investors.

A

Earnings per Share of Common Stock

75
Q

➢ An index of whether a stock is relatively cheap or relatively
expensive in relation to current earnings.
➢ A higher P/E ratio suggests that investors have high expectations
for future earnings growth, while a lower P/E ratio may indicate
lower growth expectations or undervaluation

A

Price Earnings Ratio

76
Q

➢ measures the amount that would be distributed to holders of
each share of common stock if all assets were sold at their
balance sheet carrying amounts (i.e., book values) and if all
creditors were paid off

A

Book Value per Share

76
Q

➢ An index showing whether a company pays out most of its
earnings in dividends or reinvests the earnings internally.
➢ A higher dividend payout ratio indicates that a larger portion of
earnings is being distributed to shareholders as dividends,
leaving less money for reinvestment in the company

A

Dividend Payout

77
Q

➢ measures the rate of return (in the form of cash dividends only)
that would be earned by an investor who buys common stock at
the current market price.
➢ A higher dividend yield indicates a higher return from dividend
income, making the stock potentially more attractive to incomefocused investors.

A

Dividend Yield

78
Q
  1. Ratios that reveal large deviations from the norm merely indicate the
    possibility of a problem.
  2. A single ratio does not generally provide sufficient information from which
    to judge the overall performance of the firm.
  3. The ratios being compared should be calculated using financial statements
    dated at the same point in time during the year.
  4. It is preferable to use audited financial statements.
  5. The financial data being compared should have been developed in the
    same way.
  6. Results can be distorted by inflation.
A

Using Financial Ratios: Cautions about Using
Ratio Analysis

79
Q

Financial statement analysis helps stakeholders evaluate a
company’s financial position, profitability, liquidity, solvency, and
operational efficiency. It provides valuable insights for making
investment decisions, extending credit, evaluating business
performance, and identifying areas for improvement.

A
80
Q

Employees are interested in information about the liquidity of the company.

True
False

A

True

81
Q

High financial leverage means the company has higher debts compared to equity but fails to maximize using it to earn higher profits

False
True

A

False

82
Q

Normally, the analyst singles out the accounting value being analyzed and performs the analysis on the account per se in order to become objective in evaluation.

True
False

A

False

83
Q

Financial statement analysis is the ultimate source of Information in determining the probable tendencies of a business.

True
False

A

False

84
Q

Under horizontal analysis, the percentage of change in total assets is the sum of the percentage of current assets and non-current assets.

False
True

A

False

85
Q

Vertical analysis is also called as common-sized analysis. *

False
True

A

True

86
Q

High financial leverage means the company has higher debts compared to equity but fails to maximize using it to earn higher profits.

True
False

A

False

87
Q

Employees are interested in information about the liquidity of the company.

False
True

A

True

88
Q

Normally, the analyst singles out the accounting value being analyzed and performs the analysis on the account per se in order to become objective in evaluation. *

False
True

A

False

89
Q

A horizontal analysis is conducted when the company compares its present performance with the amounts of two previous years.

False
True

A

False

90
Q

The business activity performance of the company can be seen in this component of financial statements.

Statement of Financial Performance.

Statement of Changes in Equity.

Statement of Financial Position.

Statement of Cash Flows.

A

Statement of Financial Performance.

91
Q

Which is FALSE about the statement of cash flows? *

It is the most liquid asset and thereby necessary to present a statement intended for cash.

It is an integral component of financial statements.

It shows the financial capital structure of the business.

It shows the ability of the company to obtain cash during a specified time frame.

A

It shows the financial capital structure of the business.

92
Q

Which of the following is not correct about real accounts? *

The best example of a real account is cash.

Real accounts are presented with cumulative balances.

Real accounts are presented in the Statement of Financial Performance.

Asset is a real account.

A

Real accounts are presented in the Statement of Financial Performance.

93
Q

This ratio is used to measure the company’s ability to manage its obligations.

Basic earnings per share.

Inventory turnover.

Acid test ratio.

Debt to asset ratio.

A

Debt to asset ratio.

94
Q

This ratio is used to measure the company’s ability to manage its obligations.

Basic earnings per share.

Inventory turnover.

Acid test ratio.

Debt to asset ratio.

A

Debt to asset ratio.

95
Q

Quick assets include:*

Marketable securities, receivables, and inventories.

Cash, marketable securities, and receivables.

Cash, inventories, and receivables.

Cash, marketable securities, and inventories.

A

Cash, marketable securities, and receivables.

96
Q
A
97
Q
A
98
Q
A

AGRI FIN (1 decks)

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