Exam One Flashcards
what is the purpose of accounting?
being able to measure profit
profit estimates what?
firm performance
what is the most important measure of firms?
profitability
why do you measure profit?
in order to make decisions
examples of internal decisions
Board of Directors, expansion, management, use of resources
examples of external decisions
banks, creditors, investors, consumers, politicians, shareholders, regulators
what do internal and external decisions do
increase long-run profitability
when is revenue recognized in cash accounting?
as soon as cash comes in
when is expense recognized in cash accounting?
as soon as cash leaves the door
what type of firms use cash accounting?
small private firms
when is revenue recognized in accrual accounting?
once it is earned (good delivered or service provided)
what is it called when revenue is only brought in once its earned?
revenue recognition
when firms report an expense in the same period the revenue for it is earned
expense matching
what are the two keys to accrual accounting?
revenue recognition and expense matching
what type of firms use accrual accounting?
all public firms, mid to large private firms
expenses that cannot be matched to a specific sale
period expenses
what expenses always must be period expenses?
advertising, legal, R&D
a written contract that requires firms to pay back the amount with interest
debt
money that does not need to be paid back, no written contract
equity
what do firms give up for equity money?
share of ownership/profit
why is debt risky?
cash flow risky, sales must be greater than interest
why is equity risky?
control risky
what is the funding from liabilities and equity used for?
buying assets
what does EBIT stand for?
earnings before interest and tax
