Chapter 1 Reading Notes

Question 1

what are the purpose of ratios?

Answer 1

companies & investors use ratios to make decisions

ratios are a significant part of financial analysis

Question 2

what are the 5 ratio categories?

Answer 2

liquidity (solvency) ratios
financial leverage ratios
efficiency (turnover) ratios
profitability ratios
market value ratios

Question 3

liquidity (solvency) ratios = ?

Answer 3

ability to pay short-term obligations

Question 4

financial leverage ratios = ?

Answer 4

ability to pay long-term obligations

Question 5

efficiency (turnover ratios) = ?

Answer 5

measures how efficiently companies use their assets

Question 6

profitability ratios = ?

Answer 6

measure how profitable the company is

Question 7

market value ratios = ?

Answer 7

relate financial information to the actual market price on the open market

Question 8

do some ratios have thresholds?

Answer 8

yes

Question 9

what are three characteristics of ratios?

Answer 9

some ratios have thresholds

ratios can be analysed using benchmarks

ratios can be compared to prior periods to notice trends

Question 10

what are common concerns of customers?

Answer 10

whether to trade with the company

Question 11

what are common concerns of competitors?

Answer 11

how to outcompete the company

Question 12

what are common concerns of employees?

Answer 12

whether to keep working at the company

Question 13

what are common concerns of the government?

Answer 13

whether the company is complying with tax laws

Question 14

what are common concerns of community representatives?

Answer 14

whether to provide economic support to the company

Question 15

what are common concerns of lenders?

Answer 15

whether to lend to the company

Question 16

what are common concerns of investment analysts?

Answer 16

whether to advise clients to invest

Question 17

what are common concerns of suppliers?

Answer 17

whether to supply goods to the company

Question 18

what are common concerns of managers?

Answer 18

whether performance needs to improve

Question 19

what are common concerns of owners?

Answer 19

whether to invest more or sell/liquidate

Question 20

accounting information can be used to monitor …

Answer 20

whether users are being treated fairly and remunerated fairly

Question 21

what outlets may investment analysts use as a source of information about a company?

Answer 21

• meetings w/ managers
• business public announcements
• newspaper articles
• radio & TV reports
• economy-wide reports
• websites

Question 22

accounting information can be used to dictate…

Answer 22

the prices at which shares can be traded

the volume of shares that are traded

Question 23

shares = ?

Answer 23

portions of ownership within a company

Question 24

what are the 2 fundamental qualitative characteristics of accounting information?

Answer 24

faithful representation

relevant

Question 25

relevance = ?

Answer 25

to be relevant, accounting information must cross a threshold of materiality

Question 26

materiality = ?

Answer 26

the quality of accounting information

Question 27

faithful representation = ?

Answer 27

accounting information must portray what it’s supposed to portray

Question 28

what qualities enhance accounting information usefulness?

Answer 28

• comparability
• timeliness
• verifiability
• understandability

Question 29

comparability = ?

Answer 29

users may want to make comparisons between other periods & competitors

Question 30

verifiability = ?

Answer 30

providing assurance of faithfulness

Question 31

timeliness = ?

Answer 31

lack of timeliness undermines usefulness

Question 32

understandability = ?

Answer 32

clear & concise

Question 33

what are the 2 distinct strands of acconting?

Answer 33

financial accounting & management accounting

Question 34

financial accounting = ?

Answer 34

seeks to meet the needs of owners, lenders and other users

looks at past financial events

external

Question 35

management accounting = ?

Answer 35

seeks to meet the accounting needs of managers

makes future projections

internal

Question 36

what is sole proprietorship?

Answer 36

where an individual is the sole owner of a business

often a small business

business isn’t separate from the owner

owner has autonomy

Question 37

what is a partnership?

Answer 37

where two or more individuals go into business together

often quite small in size

partners often have unlimited liability (unless it’s an LLP)

Question 38

what are the pros & cons of a partnership?

Answer 38

pros - sharing the burden, opportunity to specialise, ability to raise capital

cons - risk of sharing w/ unsuitable individuals, limitations of authority

Question 39

what is a limited company?

Answer 39

company with separate legal existence from that of its owners

can be very large businesses

subject to audits

owner’s debt is only limited to the magnitude of their share in the company

Question 40

do limited companies require audits?

Answer 40

yes

Question 41

do sole proprietorships and partnerships require audits?

Answer 41

no

Question 42

what is an LLP?

Answer 42

limited liability partnership

partnership where each partner’s liability obligation is limited to the magnitude of their share in the business

Question 43

what is the departmental structure of a business?

Answer 43

board of directors at the top

4 departments below
- finance
- HR
- marketing
- operations

Question 44

what is the finance department?

Answer 44

responsible for managing cash flows, costing business activities, wages, billings etc.

Question 45

what is the HR department?

Answer 45

responsible for people, communication, schedules etc.

Question 46

what is the marketing department?

Answer 46

deals with advertising, maintaining relationships, customers etc.

Question 47

what is the operations department?

Answer 47

deals with repairs, maintenance, functions etc.