Chapter 5

Question 1

the process of collecting, recording, classifying, summarizing, reporting, and analyzing
financial activities

Answer 1

Accounting

Question 2

accounting that focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a
business

Answer 2

Financial accounting

Question 3

accounting that provides financial information that managers can use to evaluate and make decisions about current and future operations

Answer 3

Managerial accounting

Question 4

the financial accounting standards followed by accountants in
the United States when preparing financial statements

Answer 4

GAAP
Generally accepted accounting principles

Question 5

GAAP are set and enforced by

Answer 5

financial accounting standards board (FASB) and the securities exchange
commission (SEC)

Question 6

the concept that all transactions are recorded in the period in which they occur, instead of when the cash flow occurred

Answer 6

Accrual principle

Question 7

the concept that accounting methods used by a company will be used consistently throughout the financial accounting process

Answer 7

Consistency pricipal

Question 8

the concept that companies should record investments, assets, and liabilities at the original
purchase cost

Answer 8

Cost principal

Question 9

the concept that the transactions of an organization will be separate from those of any other company or of the company’s ownership

Answer 9

Economic entity principles

Question 10

accountants should disclose all details about business operations and financial recordings, including information that might not be flattering

Answer 10

Full disclosure principles

Question 11

Accounting equation

Answer 11

Assets = Liabilities + Owners’ Equity

Question 12

is a document that describes a firm’s financial status and usually discusses the firm’s activities during the past year and its prospects for the future

Answer 12

Annual report

Question 13

An annual report includes:

Answer 13

a. Executive summary
b. Discussion and analysis
c. Future Goals
d. Management
e. Financials
It is a comprehensive summary of the firm’s financial health, its strategic vision, the extent to which it is/is not
meeting its goals, and what the plan is for the firm going forward

Question 14

standard documents that summarize the financial health of a business

Answer 14

Financial statements

Question 15

a financial statement that summarizes a firm’s financial position at a specific point in time

Answer 15

balance sheet

Question 16

Assets that can or will be converted into cash within the next year

Answer 16

Current assets

Question 17

long-term assets used for more than a year

Answer 17

Fixed assets

Question 18

long-term assets with no physical existence

Answer 18

Intangible assets

Question 19

the speed with which an asset can be converted to cash

Answer 19

liquidity

Question 20

a financial statement that summarizes a firm’s revenues and expenses and shows its total profit or loss over a period of time

Answer 20

Income statement

Question 21

the total expense of buying or producing a firm’s good or service

Answer 21

cost of goods sold

Question 22

any expenses related to running the business not directly related to
producing or buying its products or services

Answer 22

operating expenses

Question 23

the amount a company earns after paying to produce or buy its products but before deducting operating expenses

Answer 23

Gross profit
Gross Profit = Net Sales - Costs of Goods Sold
Source of funds that cover all the firm’s other expenses

Question 24

the amount obtained by subtracting all of a firm’s expenses from its revenues, when the revenues are more than the expenses

Answer 24

Net profit/net loss
To calculate net profit/loss, subtract all expenses from all revenues

Question 25

a financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year

Answer 25

Statement of cash flow

Question 26

Statement of cash flow includes cash flow from these three activities

Answer 26

* Cash flow from operating activities: related to production of goods and services * Cash flow from investment activities: related to purchase and sale of fixed assets * Cash flow from financing activities: related to debt and equity financing

Question 27

is the calculation and interpretation of financial ratios using data taken from the firm’s financial statements in order to assess its condition and performance

Answer 27

Ratio analysis-Comparing current numbers to previous numbers or numbers of other companies in the same industry

Question 28

ratios that measure a firm’s ability to pay its short-term debts as they come due

Answer 28

Liquidity ratios

Question 29

the ratio of total current assets to total current liabilities; used to measure a firm’s liquidity

Answer 29

Current ratio= Total Current Assets / Total Current Liabilities

Question 30

the ratio of total current assets excluding inventory to total current liabilities; used to measure a firm’s liquidity

Answer 30

Acid test/ quick ratio Quick Ratio = (Total Current Assets - Inventory) / Total Current Liabilities

Question 31

the amount obtained by subtracting total current liabilities from total current assets; used to measure a firm’s liquidity

Answer 31

Net Working Capital = Total Current Assets - Total Current Liabilities

Question 32

ratios that measure how well a firm is using resources to generate profit and how efficiently the firm is being managed

Answer 32

Profitability ratios

Question 33

the ratio of net profit to net sales

Answer 33

Net Profit Margin = (Net Profit / Net Sales) × 100

Question 34

the ratio of net profit to total owners’ equity

Answer 34

Net Profit / Total Owners’ Equity × 100

Question 35

the ratio of net profit to the number of shares of common stock outstanding

Answer 35

Earnings Per Share = (Net Income - Preferred Dividends) / Average Outstanding Common Shares

Question 36

ratios that measure how well a firm uses its assets

Answer 36

Activity ratios Function: captures the speed with which resources are converted into cash or sales

Question 37

the ratio of goods sold to average inventory; it measures the speed with which inventory moves through the firm and is turned into sales

Answer 37

Inventory Turnover ratio = Cost of Goods Sold / Average Inventory

Question 38

ratios that measure the degree and effect of the firm’s use of borrowed funds to finance operations

Answer 38

debt ratio

Question 39

the ratio of total liabilities to owner’s equity; measures the relationship between the amount of debt financing and the amount of equity financing

Answer 39

Debt-to-Equity = Total Liabilities / Total Owners’ Equity

Question 40

The total amount of investment in a business after subtracting any liabilities

Answer 40

owners' equity/net worth

Question 41

The total dollar amount of a company's sales

Answer 41

gross sales

Question 42

The amount of a company's sales left after deducting discounts, returns, and allowances from gross sales

Answer 42

net sales

Question 43

The cost of generating revenues

Answer 43

expenses