Week 2 Ch. 15: Economics, Accounting and Organizations

Question 1

Assets

Answer 1

any things of value owned or leased by a business

Question 2

Liabilities

Answer 2

claims against a firm’s assets by creditors

Question 3

Owners’ equity

Answer 3

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

Question 4

Accounting equation

Answer 4

Assets - Liabilities = Owners’ equity

Question 5

Double-entry bookkeeping

Answer 5

a method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance

Question 6

Matching principle

Answer 6

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

Question 7

Accrual basis

Answer 7

• a documentation of transaction even tho the money has not been received yet
• an accounting method in which revenue is recorded when a sale is made and an expense is recorded when it is incurred

Question 8

Cash basis

Answer 8

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

Question 9

Depreciation

Answer 9

• an accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life
• a way to write off large purchases over time (years)

ex. factory that would last 20 years

Question 10

Balance sheet

Answer 10

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

Question 11

Fiscal year

Answer 11

any 12 consecutive months used as an accounting period

Question 12

The Accounting Cycle

Answer 12

1. Perform transactions
2. Analyze and record transactions in a journal
3. Post journal entries to the ledger
4. Prepare a trial balance
5. Make adjusting entries, as needed
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Close the books for the accounting period

Question 13

Current assets

Answer 13

cash and items that can be turned into cash within one year

Question 14

Fixed assets

Answer 14

assets retained for long-term use, such as land, buildings, machinery, and equipment (also referred to as property, plant, and equipment)

Question 15

Current liabilities

Answer 15

obligations that must be met within a year

Question 16

Long-term liabilities

Answer 16

obligations that fall due more than a year from the date of the balance sheet

Question 17

Retained earnings

Answer 17

the portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends

Question 18

Using Financial Statements: Income and Cash Flow Statements

Answer 18

• Income statement
• Expenses
• Net income
• Cost of goods sold
• Gross profit
• Operating expenses
• EBITDA

Question 19

Income statement

Answer 19

• a financial record of a company’s revenues, expenses, and profits over a given period of time
• also known as a profit and loss statement

Question 20

Expenses

Answer 20

costs created in the process of generating revenues

Question 21

Net income

Answer 21

• profit earned or loss incurred by a firm, determined by subtracting expenses from revenues
• a.k.a. the bottom line
• net income ≠ cash flow (bc of accrual bases)

Question 22

Cost of goods sold

Answer 22

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

Question 23

Gross profit

Answer 23

• the amount remaining when the cost of goods sold is deducted from net sales
• also known as gross margin

Question 24

Operating expenses

Answer 24

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

Question 25

EBITDA

Answer 25

earnings before interest, taxes, depreciation, and amortization

Question 26

Statement of cash flows

Answer 26

a statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash

Question 27

Profitability Ratios

Answer 27

• Return on sales • Return on equity • Earnings per share

Question 28

Return on sales

Answer 28

• the ratio between net income after taxes and net sales • also known as the profit margin

Question 29

Return on equity

Answer 29

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

Answer 30

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

Question 31

Liquidity Ratios

Answer 31

• Working capital • Current ratio • Quick ratio

Question 32

Working capital

Answer 32

current assets minus current liabilities

Question 33

Current ratio

Answer 33

a measure of a firm’s short-term liquidity, calculated by dividing current assets by current liabilities

Question 34

Quick ratio

Answer 34

a measure of a firm’s short-term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities

Question 35

Activity Ratios

Answer 35

• Inventory turnover ratio • Accounts receivable turnover ratio

Question 36

Inventory turnover ratio

Answer 36

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

Question 37

Accounts receivable turnover ratio

Answer 37

a measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period

Question 38

Debt-to-equity ratio

Answer 38

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

Question 39

Debt-to-assets ratio

Answer 39

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