Module 2

Question 1

Describe the Revenue Recognition Principle vs the Matching Principle in accrual accounting

Answer 1

Rev Rec - recognize revenues when they’re earned

Matching - recognize expenses when they are incurred

Question 2

What is the working capital equation?

Answer 2

WC = Current Assets - Current Liabilities

Question 3

What is the Current Ratio equation?

Answer 3

Current Ratio = Current Assets / Current Liabilities

Measures the ability of the company to pay current debts as they come due

Question 4

What is the Cash Ratio equation?

Answer 4

CR = Cash + Cash Equivalents / Current Liabilities

Measures the adequacy of available cash

Question 5

What is the Quick Ratio equation?

Answer 5

QR = Quick Assets / Current Liabilities

Quick Assets = cash &cash equiv + net receivables + short term investments

This ratio is like the current ratio, but measures the company’s immediate ability to pay debts

Question 6

What is the Operating Cash Flow to Current Liabilities Ratio?

Answer 6

Cash Flow From Operations / Current Liabilities

Question 7

What is Free Cash Flow?

Answer 7

FCF = cash flow from operations - capital expenditures

Indicates how much cash flow is available beyond that necessary to grow at the current rate

Useful for valuation purposes

Question 8

What is Quality of Sales?

Answer 8

Q of S = Cash From Sales / Net Sales

Should approach 1.0

Reveals the extent to which sales revenue is converted to cash

Question 9

What links a balance sheet and an income statement?

Answer 9

Retained Earnings

Question 10

What is Quality of Income?

Answer 10

Q of I = Cash Flow From Operations / Net Income

Indicates the proportion of income that has been realized in cash.