Module 1

Question 1

What is the Accounting Equation?

Answer 1

Assets = Liability + Owners Equity
(Investing = Non Owner Financing + Owner Financing)

Question 2

How do you compute dividends?

Answer 2

Beginning retained earnings
+ Net income
- Cash dividends
= Ending retained earning

Therefore, to solve for dividends, subtract the beginning retained earnings and net income from the ending retained earnings.

Question 3

Which organizations contribute to the formation of GAAP?

Answer 3

FASB (Financial Accounting Standards Goard)
AICPA (American Institute of Certified Public Accountants)
SEC (Security and Exchange Commission)

Question 4

How do you compute ROE (Return On Equity)?

Answer 4

ROE = Net Income - Preferred Dividends / Average stockholder’s equity*

*Where ASE = (Beg. Equity + End Equity) /2

Question 5

How do you compute ROA (Return on Assets)?

Answer 5

ROA = Net Income / Total assets

Question 6

Who are the users of Financial Accounting Information?

Answer 6

Managers & Employees
Creditors
Investment analysts & information intermediaries
Shareholders & directors
Customers & strategic partners
Regulators & tax agencies
Voters & their representatives

Question 7

Equity is made up of …

Answer 7

Contributed Capital + Retained Earnings

Question 8

Shareholder equity is made up of …

Answer 8

Shareholders investment (Shareholder investment)
plus Retained Earnings (Revenues)
Minus Dividends & Expenses

Question 9

What is the difference between ROA and ROE

Answer 9

ROA reflects the return to the entire company where as ROE reflects the return to the shareholders.

Question 10

Name the 4 financial statements

Answer 10

1. Balance Sheet
2. Income Statement
3. Statement of Equity
4. Statement of Cash Flows

Question 11

Define the purpose of the Income Statement

Answer 11

An income statement reports on operating activies

It lists amounds for sales (and revenues) less all expenses (and costs) over a period of time

Sales less expenses yield the “bottom-line” net income amount.

Question 12

Define the purpose of the Statement of Equity

Answer 12

The Statement of Equity reports on changes in the accounts that make up equity:

1. Contributed capital
2. Earned capital (retained earnings and comprehensive income)
3. Other (typically accumulated other comprehensive income and minority or non-controlling interest)

Question 13

Define the Statement of Cash Flows

Answer 13

The statement of cash flows reports on cash flows for operating, investing, and financing activties over a period of time.

Question 14

How are the financial statements linked?

Answer 14

1. The income statement and the balance sheet are linked via retained earnings.
2. Retained earnings, contributed capital, and other equity balances appear both on the equity statement and the balance sheet.
3. The statement of cash flows is linked to the income statement as net income is a component of operating cash flows.

Question 15

List the 5 forces of competitive advantage

Answer 15

1. Industry competition
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Threat of substitution
5. Threat of entry

Question 16

List the 9 areas of focus used to assess the business enviornment of a company.

Answer 16

1. Life cycle (What stage is the company in?)
2. Outputs (What does the company produce?)
3. Buyers (Who are the customers?)
4. Inputs (Who are the suppliers?)
5. Competition (How competitive is the morket in which the company competes?)
6. Financing (What are its financing sources?)
7. Labor (How strong is its labor force?)
8. Governance (How effective is its corporate governance?)
9. Risk (What risks does the company face?)