Unit 2

Question 1

Income statement

Answer 1

One of the three major financial statements that reports a company’s financial performance over a specific accounting period

Question 2

Net income

Answer 2

Measure of profitability over a period of time

Question 3

Revenue

Answer 3

The amount of money a business takes in during a reporting period.
The real dollar amount a company keeps from its sales.

Question 4

Expenses

Answer 4

The amount of money a business spends during a reporting period.

Question 5

Cost of goods sold (COGS)

Answer 5

The cost of producing or purchasing the goods that are delivered to customers. It’s considered an expense.

Question 6

Margin

Answer 6

A measure of how much money a company is making on its products or services after subtracting all of the direct and indirect costs involved, and expressed as a percentage.

Question 7

Gross profit

Answer 7

The profit a company makes after deducting the costs associated with producing and selling its products or the cost associated with its services

Question 8

EBITDA

Answer 8

Earnings before interests, taxes, depreciation and amortisation.
Represents the cash profit generated by the company’s operations

Question 9

Operating income

Answer 9

Measures the amount of profit realised from a business’ operations after deducting operating expenses such as wages, depreciation and COGS

Question 10

Depreciation

Answer 10

The reduction of value/wear out of a tangible asset over a period of time and accounting for that in a way that reflects the true cost of using them

Question 11

Amortisation

Answer 11

The reduction of value/wear out of intangible assets over its useful life and accounting for that in a way that reflects the true cost of using them

Question 12

Impairment

Answer 12

A permanent reduction in the value of a company’s assets. It may be a fixed asset or an intangible asset. Permanent decrease in value.

Question 13

Fair value

Answer 13

An alternative approach to measurement that seeks to capture changes in asset and liability values over time

Question 14

Earnings per share (EPS)

Answer 14

Diving the total money the company made among each share

Question 15

Gross margin

Answer 15

The ability of a company to sell products for more than the sum of the direct costs of making it (if it’s good at making profit)

Question 16

Operating margin

Answer 16

How much a company earns from each dollar of sales

Question 17

Net profit margin

Answer 17

The fraction of each dollar in revenues that is available to equity holders after the firm pays its expenses, interest and taxes

Question 18

Return on Equity (ROE)

Answer 18

Measures a corporation’s profitability by revealing how much profit a company generated with the money shareholders have invested

Question 19

Return on Assets (ROA)

Answer 19

The profitability of the company relative to the total amount of assets the owners have invested in the business

Question 20

Accounts receivable days

Answer 20

How many days the firm takes to collect payments from their customers

Question 21

Inventory turnover

Answer 21

How efficiently companies turn their inventory into sales

Question 22

Asset turnover ratio

Answer 22

Measures the value of a company’s sales or revenues relative to the value of its assets

Question 23

Interest coverage ratio

Answer 23

How easily a company can pay interest on its outstanding debt. It’s a leverage ratio (to what extent a company uses liabilities as a source of financing)

Question 24

Price to earnings ratio (P/E)

Answer 24

The ratio of the value of equity (market value) to the firm’s earnings, either total basis or per share basis

Question 25

The business or economic entity assumption

Answer 25

Requires companies to keep all of their business transactions separate from personal transactions

Question 26

Monetary assumption

Answer 26

Requires businesses to record and present all transactions in monetary units

Question 27

Time period assumption

Answer 27

Assumes all transactions can be separated in time periods such as months, quarters and years

Question 28

Going concern assumption

Answer 28

Assumes that businesses will continue operating and not be closed in a foreseeable future

Question 29

The historical cost principle

Answer 29

States that businesses are required to record most of their assets at their original cost with no adjustments for increases in market value

Question 30

The revenue recognition principle

Answer 30

The basis of accrual accounting. It requires businesses to record revenue when the goods have been sold or the service has been provided

Question 31

The matching principle

Answer 31

Requires businesses to match expenses with revenues, which is double entry bookkeeping. It uses accrual basis accounting.

Question 32

The disclosure principle

Answer 32

To disclose all pertinent information about the business in an understandable form

Question 33

Historical cost

Answer 33

A measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company

Question 34

Revenue recognition principle

Answer 34

Requires that revenues are recognised when realised and earned, not when cash is received