First Test Flashcards

1
Q

What is the accounting equation?

A

A=L+E

Assets=Liabilities+Equity

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2
Q

Assets

A

Resources controlled by the company

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3
Q

Liabilites

A

Funding from creditors. Represent the obligations of the company

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4
Q

Equity

A

Total of contributed capital and retained earnings

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5
Q

Working Capital

A

difference between current assets and current liabilities

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6
Q

Share Capital

A

common stock and additional paid-in capital

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7
Q

What are the four financial statements?

A

Income statement
Balance Sheet
Shareholder’s Equity
Statement of Cash Flows

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8
Q

Statement of Cash Flows report…

A

…inflows and outflows separately for a company’s operating, investing, and financing activities over time

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9
Q

What SEC filing is an annual report? Quarterly report?

A

Annual report is a 10-K, Quarterly report is a 10-Q

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10
Q

What does GAAP stand for? What is it?

A

Generally Accepted Accounting Principles

It is the rules and regulations for financial accounting

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11
Q

What is the international accounting standard?

A

IFRS

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12
Q

What are the primary desirable qualities of accounting information?

A

Relevance (the capacity of information to affect a decision) and Reliability (must be verifiable [confirm-able], representationally faithful [reflect reality], and neutral [truthful and unbiased])

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13
Q

For something to be reliable, it must be…

A

….verifiable (can you confirm it?), representationally faithful (does it reflect reality?), and neutral (is it truthful and unbiased?)

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14
Q

What are the secondary desirable qualities of accounting information?

A

Comparability (information is measured in a similar way across companies) and consistency (same method used for similar actions across time)

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15
Q

What are the three major limitations of financial statement information?

A

Timeliness
Frequency
Forward-Looking

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16
Q

Accrual Basis

A

revenues are recognized when a company sells good or renders services, regardless of when cash is received

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17
Q

Strict Definition of Accruals

A

Sum of accounting adjustments that make net income different from net cash flow

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18
Q

What two limitations does Accrual Accounting overcome?

A

Timing and Matching

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19
Q

What two pieces are in the accrual process?

A

Revenue Recognition and Expense Matching

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20
Q

Revenue Recognition

A

revenues are recognized when both earned and either realized (Cash is acquired) or realizable (company receives an asset that is convertible to cash)

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21
Q

What are the two types of expense matching?

A

Product costs and period costs

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22
Q

Business Analysis

A

the evaluation of a company’s prospects and risks for the purpose of making business decisions

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23
Q

What is the goal of business analysis?

A

Improve business decisions by evaluating available information about a company’s financial decisions, management, plans, strategies, and environment

24
Q

Financial statement analysis

A

application of analytical tools and techniques to general-purpose financial statements and related data to drive estimates and inferences useful in business analysis

25
Q

What are the six types of business analysis?

A

Credit Analysis, Equity Analysis, Accounting Analysis, Financial Analysis, Prospective Analysis, and Valuation

26
Q

Creditors

A

Lend money to a company in promise of repayment plus interest

27
Q

Trade Creditors

A

deliver goods or services to a company and expect payment soon (30-60 days)

28
Q

Non-Trade Creditors

A

Short or long-term creditors, promise made in writing

29
Q

Creditworthiness

A

ability of a company to honor its credit obligations (bay its bills)

30
Q

Liquidity

A

Ability of a company to to raise cash in short term to meet its obligations

31
Q

Solvency

A

long-run viability and ability to pay long-term obligations

32
Q

Equity investors

A

provide funds in return for the risks and rewards of ownership

33
Q

Accounting analysis

A

evaluating the extent to which a company’s accounting reflects economic reality

34
Q

Financial Analysis

A

the use of financial statements to analyze a company’s financial position and performance, and to asses future financial performance

35
Q

What are the three types of financial analysis?

A

Profitability analysis - evaluation of a company’s ROI
Risk analysis - evaluation of a company’s ability to meet its commitments
Analysis of cash flows - evaluation of a how a company is obtaining and deploying its funds

36
Q

Prospective Analysis

A

forecasting of future payoffs (earnings, cash flows, or both)

37
Q

Valuation

A

Process of converting forecasts of future payoffs to to an estimate of company value

38
Q

What four functions does a company use the financial statements for?

A
  1. Planning
  2. Financing
  3. Investing
  4. Operating
39
Q

What are the two sources of external financing?

A
  1. Equity Investors (owners/shareholders)

2. Creditors (lendors)

40
Q

Earnings distribution

A

payment of dividend to shareholders

41
Q

Dividend Payout

A

proportion of earnings distributed (ratio or %of net earnings)

42
Q

What are the two types of creditors?

A

Debt creditors - lend money directly to the company

Operating creditors -the company owes money to as part of operations

43
Q

Why is creditor financing different than equity financing?

A

Because it has a contract that establishes required payments with interest on a specific date

44
Q

Investing Activities

A

A company’s acquisition and maintenance of investments for the purpose of selling products and providing services, and for the purpose of reinvesting excess cash

45
Q

Operating Activities

A

the “carrying out” of business plan given its financing and investing activities. this is a company’s primary source of earnings!

46
Q

Agency Problem

A

conflict of interest between management and creditors

47
Q

7 users of financial statements, and why they care

A
  1. Creditors: They want their money back
  2. investors: they get residual profit
  3. Government agencies: They want their share. Are the statements accurate?
  4. Competitors: How can they beat you?
  5. Management: keeping your job and making the bosses happy
  6. Employees (and unions): Are they getting paid accordingly?
  7. Vendors/Suppliers: Should they keep doing business with you?
48
Q

What financial statements are “for the period ending…”?

A

Income statement and statement of cash flows

49
Q

What financial statements are “as of…”?

A

Balance sheet

50
Q

What are the three things you can do with leftover income?

A
  1. Keep it in the company (retained earnings)
  2. Reduce Liabilities
  3. By back stock (spend it)
51
Q

Depreciation

A

Realizing the expense over a period of time. Depreciation expense goes on income statement.

52
Q

What are the four types of auditors opinion?

A
  1. Unqualified: you passed
  2. Qualified: These are kind of right, under these qualifications
  3. Adverse Opinion: These are wrong
  4. Disclaimer Opinion: not enough information to determine accuracy
53
Q

What is an SEC 8-K?

A

SEC Filing of notable happenings in a company

54
Q

Full Disclosure

A

Entire transaction is reported, and we record everything

55
Q

Materiality

A

In material, big enough to be reported

56
Q

Economic Income

A

Accounting income + change is business