Financial Information and Accounting Concepts

Question 1

What is accounting?

Answer 1

Measuring, interpreting, and communicating financial information to support internal and external decision-making.

Question 2

Bookkeeping

Answer 2

Repetitive, mechanical process of recording financial transactions and keeping financial records

Question 3

Accounting

Answer 3

Goals include the analysis, interpretation, and use of information

Includes design of an information system to meet users’ needs

Bookkeeping is a small part of accounting

Question 4

GAAP (Generally Accepted Accounting Principles)

Answer 4

Standards and practices used by public corporations in the US when preparing financial statements

• Overseen in the US by the Financial Accounting Standards Board (FASB)
• Publicly traded companies in the US must follow GAAP
• Privately held companies may choose to not implement GAAP

Question 5

International Financial Reporting Standards (IFRS)

Answer 5

Accounting standards and practices used in many countries outside the US

Question 6

External Auditors

Answer 6

Independent accounting firms that provide auditing services to evaluate if financial statements were prepared according to GAAP

Question 7

Sarbanes-Oxley

Answer 7

The informal name of comprehensive legislation designed to improve integrity and accountability of financial information

Question 8

Financial Statements (and their accompanying notes) can …

Answer 8

explain a company’s past performance and current conditions. They also provide us with a glimpse into the company’s possible future performance.

Question 9

Financial Statements such as the Balance Sheet, Income Statement, and Statement of Cash Flows tell us…

Answer 9

a story about an organization

Question 10

Assets

Answer 10

Any thing (tangible or intangible) of material value owned or leased by a business

Question 11

Liabilities

Answer 11

Claims against a firm’s assets by creditors/lenders

Question 12

Owners’ Equity

Answer 12

The portion of a company’s assets that belongs to the owners after obligations to all creditors have been met

Question 13

The Accounting Equation (the basis for the Balance sheet)

Answer 13

Assets = Liabilities + Stockholders Equity

Question 14

Balance Sheet

Answer 14

A statement of a firm’s financial position on a particular date; also known as a statement of financial position

Made up of assets, liabilities and owner’s equity

Question 15

Fiscal Year

Answer 15

Any 12 consecutive months used as an accounting period

Question 16

What does the Balance Sheet provide?

Answer 16

it provides a snapshot of the firm’s financial position at a specific point in time.

It also describes the company’s resources and claims against those resources through the: Fundamental Accounting Equation

Question 17

Current Assets

Answer 17

Cash and items that can be turned into cash at or near current values within one year

Question 18

Fixed Assets

Answer 18

Assets retained for long-term use, such as land, buildings, machinery, and equipment

Also referred to as property, plant, and equipment

Question 19

Current Liabilities

Answer 19

Obligations that must be met within one year

Question 20

Long-Term Liabilities

Answer 20

Long-Term Liabilities

Obligations that fall due more than one year from the date of the balance sheet

Question 21

Retained Earnings

Answer 21

profits that your firm has reinvested back into itself (earnings not distributed to shareholders in the form of dividends).

Question 22

The Matching Principle

Answer 22

The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period.

Question 23

Accrual Basis (US GAAP)

Answer 23

An accounting method in which revenue is recorded when a sale is made, and an expense is recorded when it is incurred

Question 24

Cash Basis

Answer 24

An accounting method in which revenue is recorded when payment is received, and an expense is recorded when cash is paid

Question 25

Depreciation

Answer 25

An accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life (represents the allocation of the cost of a tangible long-term asset over a time period)`

Question 26

What is the significance of the Income Statement?

Answer 26

It measures the amount of profits generated by the firm over a given period of time.

Question 27

Net Income/Net Earnings equation

Answer 27

Net income = Revenues Income/Loss - Expenses

Question 28

Cost of Goods Sold

Answer 28

The cost of producing or acquiring a company’s products for sale during a given period

Question 29

Gross Profit (or Gross Margin)

Answer 29

The amount remaining when the cost of goods sold is deducted from sales

in MB Gross Margin in is how much your firm earned this year by making bikes and selling them. It excludes all other costs of operating your firm, except the manufacturing costs of the bikes you sold, e.g. it does not include advertising.

Question 30

Operating Expenses

Answer 30

All costs of operation that are not included under cost of goods sold

Question 31

What is EBITDA and what does it stand for?

Answer 31

This is another measure of profitability and it stands for: Earnings before interest, taxes, depreciation, and amortization

Question 32

Expenses

Answer 32

Costs created in the process of generating revenues

Question 33

Net Income

Answer 33

Profit earned or loss incurred by a firm, determined by subtracting expenses from revenues

Referred to as the bottom line

Question 34

Statement of Cash Flows

Answer 34

Provides a summary of money coming into and money going out of a firm in a given time period.

Question 35

Earnings Per Share (EPS)

Answer 35

A measure of a firm’s profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding

Average # of shares

Question 36

Debt-to-Equity Ratio

Answer 36

A measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity

Total Equity

Question 37

Profit Margin

Answer 37

The ratio between net income after taxes and net sales

Net Sales

Question 38

Return on Equity

Answer 38

The ratio between net income after taxes and total owners’ equity

Total Owners’ Equity

Question 39

Profit Margins and Returns on Equity are both Profitability ratios that show…

Answer 39

the state of the company’s financial performance or how well it generates profits

Question 40

Current Ratio

Answer 40

A measure of a firm’s short-term liquidity, calculated by dividing current assets (CA) by current liabilities (CL)

CL

Question 41

Quick Ratio

Answer 41

A measure of a firm’s short-term liquidity,
Also known as the acid-test ratio

(Cash + Marketable Securities + Receivables)
——————————————————————————–Current Liabilities

Question 42

Current Ratios and Quick Ratios are both liquidity ratios that measure…

Answer 42

a firm’s ability to pay its short-term obligations

Question 43

Inventory Turnover Ratio

Answer 43

A measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold (COGS) by the average value of inventory for a period

      COGS -------------------------- Average inventory

Question 44

Inventory Turnover Ratio is an Activity Ratio which analyzes…

Answer 44

how well a company is managing and making use if its assets.

Question 45

Debt-to-Assets Ratio

Answer 45

A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets

Total Assets