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Introduction to Business > Topic 7 : Accounting > Flashcards

Topic 7 : Accounting Flashcards

1
Q

What is accounting?

A

The recording, measurement and interpretation of financial information

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2
Q

What is the internal use of accounting?

A

Planning and controlling business activities

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3
Q

What is the external use of accounting

A

Taxes, reporting to stakeholders and relationships with financial institutions

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4
Q

What is the the Accounting Equation?

A

Assets = Liabilities + Owner’s equity

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5
Q

What is called the system of recording and classifying business transactions to maintain balance of the accounting equation?

A

Double-entry bookkeeping

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6
Q

Explain what an asset is. Give some examples

A

Assets are resources or items owned by a firm that possess some degree of future economic value. It has monetary value.

Ex:
- Cash, Investments, accounts receivable, inventory, supplies, land, buildings and equipment.

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7
Q

Explain what are Liabilities. Give some examples.

A

Liabilities are obligations payable to another entity. In other words, depts that the firm OWES.

ex :
- Accounts payable, accrued expenses, wages payable, taxes.

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8
Q

Explain what is the Owner’s equity. Give some examples.

A

It represents the capital theoretically available for distribution.

OE = Total Assets - Total liabilities

Ex :
- Common stock, additional paid-in capital, retained earnings.

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9
Q

Name 4 financial statements.

A

Income statement
Balance sheet
Statement of cash flow
Statement of stockholder’s equity

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10
Q

What is the use of an income statement?

A

It shows the organization’s profitability (income) over a specified period of time.

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11
Q

Name and explain the components of an income statement.

A

The revenues… which is total amount of money received from the sale of goods or services, and other related business activities

The cost of Goods sold… all the expenses related to the production (i.e., labor, capital, raw materials,
intermediate goods, inventory)

Gross income (or Profit)… Revenues minus the Cost of Goods Sold

The Expenses… related to day-to-day operations. it includes selling, general, and administrative costs. It also include depreciation, Research, development, and engineering expenses, Interest expenses.

Net income… which is the result of the opereration : Gross income - (expenses) - (taxes) = Net income.

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12
Q

Explain what is depreciation. In which component of the income statement is it included?

A

process of spreading the costs of long-lived assets (i.e., building, equipment, cars) over the total number of accounting periods in which they are expected to be used. It is an expense

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13
Q

Net income is closed out into “retained earnings” meaning that it is part of the assets, the liabilities or the owner’s equity?

A

Owner’s equity

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14
Q

What is the goal of a BALANCE SHEET?

A

Show the financial position and the health of the company

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15
Q

What is a balance sheet?

A

a “snapshot” of an organization’s financial position at a given moment

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16
Q

What is Liquidity?

A

The ability of the firm to convert assets into cash.

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17
Q

What are the 3 main components of a balance sheet?

A

Assets, liabilities and Owner’s equity

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18
Q

True or false : The balance sheet has no link to te accounting equation

A

False. It is based on the accounting equation.

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19
Q

Explain what are current assets vs fixed assets

A

Current assets are used or converted into cash within the course of a calendar year like cash and temporary investments while Fixed assets are long-term investments, plants and equipment, and intangible assets (ex : reputation, patents and trademarks)

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20
Q

for each element, say what it is (asset, liability) and then say if it’s current or fixed/long-term.

  1. Bank loans repaid within a year
  2. Patents
  3. Equipment
  4. Cash
  5. Balance of mortgage
  6. Accounts payable this year
A
  1. Current liability
  2. Fixed asset
  3. Fixed asset
  4. Current asset
  5. LT liability
  6. Current liability
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21
Q

for each element, say what it is (asset, liability) and then say if it’s current or fixed/long-term.

  1. Long-term investments
  2. Short-term investments
  3. Wages
  4. accrued expenses
  5. deferred tax
    6.inventory
  6. Long-term creditor
A
  1. Fixed asset
  2. current asset
  3. Curret liability
  4. current asset
  5. current liability
  6. current asset
  7. Long-term liability
22
Q

Name elements of the Owner’s equity included in the balance sheet

A

Owner’s contributions, shareholder payment of stock above book value, income earned since its inception.

23
Q

What is a statement of clash flows and what is its goal?

A

Statement that records the firm’s cash use during the accounting period. It shows how cash flows into and out of the firm. It shows The cash movement from Operating, investing and financing.

Goal : Demonstrating the liquidity of the company

24
Q

Name the 3 components of the statement of clash flows and activities related to them.

A

Operating : sales of goods and services, salary payments, tax payments, payments of other operating expenses

Investing : purchase of assets, selling of assets, buying securities of other companies

Financing : receipt of cash from investors, borrowing money from banks, payment of dividends, repayment of loans

25
Q

What is the use of the ratios in a firm?

A

We use ratios to measure a firm’s financial health.

26
Q

Explain what are probability ratios

A

Probability ratios measure the amount of operating income or net income that a firm is able to generate relative to its assets, owners’ equity, and sales.

27
Q

What is the ratio function of profit margin?

A

net income/sales

28
Q

What is the ratio function of the ROA? (return of assets)

A

Net income/total assets

29
Q

What is the ratio function of return on equity (ROE)?

A

Net income/owner’s equity

30
Q

Explain what are Liquidity ratios

A

Liquidity ratios measure the speed (rate) at which firms may turn assets into cash in order to meet short-term needs

31
Q

What is the function of the current ratio.

A

Current assets/current liabilities

32
Q

What is an acid test?

A

(Current assets - Inventory)/ Current liabilities

To see if the firm can pay off the current liabilities with “real cash” and not sleeping cash” (inventory)

33
Q

What is the dept utilization ratio and how to you calculate it

A

Measures how much dept that the firm is relying on :

Total liab./Total assets

34
Q

True or False : If i have a Current ratio over 1, i have sufficient money to pay off my liabilities. therefore i am liquid.

A

True

35
Q

True or False : It is desirable to have a dept utilization ratio over 1.

A

False, it needs to be below 1, or else you have too much liabilities for your assets.

36
Q

Explain the concept of Finance.

A

the field that studies how people (equivalently firms) make decisions regarding the allocation of resources over time and handling of risk. It involves savings and investment decision, interest rate.

37
Q

Fill the voids :

Because _______(1) can earn _______(2), a sum of money _______(3) is more _________(4) than the same sum of money in the _________(5).

A
  1. Savings
  2. Interest
  3. today
  4. valuable
  5. future
38
Q

What is the Present Value

A

Amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money

39
Q

What do you have to do in order to compare values at different points in time?

A

Compare their present values.

40
Q

Which is preferred : Receiving a given sum of money in the present or Receiving the same sum in the future?

A

Receiving a given sum of money in the present

41
Q

What is the formula to find the Present Value. Present every value. (letters)

A

Formula : PV : x/(1+r)^n

x = Future value, the amount to be received
r = interest rate
n = time in years (number of years)

42
Q

What is the formula for the Future Value of a sum of money?

A

FV = PV((1+r)^n)

43
Q

Give the definition of a Risk averse.

A

Someone who dislike uncertainty

44
Q

How can risk averse people can reduce risk? Explain the methods

A
  • Insurance : when a person facing risk pays a fee to an insurance company that agrees to accept all or part of the risk

-Diversification : reduction of risk by replacing a single risk with a large number of smaller unrelated risk

-Choosing a portfolio with lower risk and lower returns : avoiding uncertainty by ensuring that the investment is less likely to devalue in the future

45
Q

What is a financial system?

A

A financial system consists of group of financial institutions that help to match a person’s savings with another person’s investment. It moves the economy’s scarce resources from savers to borrowers.

46
Q

Financial system moves the economy’s scarce resources from savers to borrowers. Who are those savers? Explain them.

A

Financial markets : savers can directly provide funds to borrowers (e.g., stock and bond market)

Financial intermediaries : savers can indirectly provide funds to borrowers. (e.g., banks and mutual funds)

47
Q

What is a stock?

A

A stock represents a claim to partial ownership in a firm. It is a claim to the profits of a firm.

48
Q

Explain the concept of equity financing.

A

Its the sale of stock to raise money

49
Q

Explain what a bond is (bond market)

A

A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond.

50
Q

What are the characteristics of a bond?

A

There is a Term : lenght of time until the bond matures

Credit risk : Probability that the borrower will fail to pay all or some of the interest

Tax treatment : the way in which the tax laws treat the interest of the bond

51
Q

True or false : Compared to the stocks, the bonds offer higher risk and potentially higher returns.

A

False. Its the other way around.

52
Q

What does Financial management involves?

A

It involves…

  • the management of current assets and liabilities
  • managing fixed assets
  • financing with long-term liabilities

Introduction to Business (9 decks)

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