Section 1: Accounting

Question 1

What is accounting in business transactions

Answer 1

Records, analyzes and reports transactions. Used to estimate future costs

Question 2

Who uses financial accounting?

Answer 2

Managers, Investors, Creditors, the government

Question 3

What are the three types of business ownership

Answer 3

Sole Proprietorship, Partnership, corporation

Question 4

What are the characteristics of a sole proprietorship?

Answer 4

One owner, unlimited liabilities

Question 5

What are the characterisitics of a partnership?

Answer 5

Multiple owners, unlimited liabilities

Question 6

What are the characteristics of a corporation?

Answer 6

Owned by shareholders. Limited liability

Question 7

How does a company become publically traded?

Answer 7

IPO

Question 8

What are the consequences of being a publically traded company?

Answer 8

Need to disclose financial statements

Question 9

What are the four types of financial statements?

Answer 9

Balance sheets, Income statements, cash flow statements, statement of shareholder’s equity

Question 10

What is a balance sheet?

Answer 10

summary of a firms finances. Shows assets and liabilites. Provides a picture of financial health

Question 11

What is an income statement?

Answer 11

Summary of a firms operating result

Question 12

What is a cash flow statement?

Answer 12

Cash recieved & spent by the firm

Question 13

What is a statement of shareholders’ equity?

Answer 13

Firms activity in stocks, retained earnings and changes to the owners’ equity.

Question 14

What is an asset?

Answer 14

Something that a company owns. Current assets( cash, accounts receivables), fixed assets (property, equipment)

Question 15

What is a liability?

Answer 15

What the firm owes. Current expenses ( expenses, notes) and long term liabilities (loans & bonds)

Question 16

What is owner’s equity?

Answer 16

Stock shares, retained earnings

Question 17

How do you calculate the assets of a firm?

Answer 17

Assets = Liabilities + Owner’s Equity

Question 18

What are the common components of an income statement?

Answer 18

Operating income, non operating income, operating expenses, net income before tax, net income after tax, earnings per share

Question 19

What is operating income?

Answer 19

Sales revenues, returns & allowances

Question 20

What is non operating income?

Answer 20

Rents, Interest

Question 21

What are operating expenses

Answer 21

Cost to do business, cost of goods, promotion, depreciation and general expenses

Question 22

How do you calculate net income before tax?

Answer 22

Net income = Revenue - Expenses

Question 23

How do you calculate Net income after tax

Answer 23

Net Income after tax = Net income before tax - taxes

Question 24

How do you calculate Earnings per share

Answer 24

EPS = net income after tax / number of shares

Question 25

What is financial ratio analysis?

Answer 25

using the balance sheet and income statement to derive info? (Update)

Question 26

What is trend analysis?

Answer 26

Evaluates the financial performance over time

Question 27

What is industry analysis

Answer 27

compares a firm to the other firms in the industry

Question 28

What is a liquidity ratio?

Answer 28

Liquidity Ratio = Current Assets/ Current Liabilities

Question 29

What does the liquidity ratio indicate?

Answer 29

The ability of the firm to pay back short term debts

Question 30

What the Quick (Acid-test) Ratio?

Answer 30

Quick Ratio = Quick Assets/Current Liabilities

Question 31

What does the quick ratio indicate?

Answer 31

The ability of a firm to instantly pay off debt (doesnt include inventory)

Question 32

What are the three profitability ratios?

Answer 32

Gross profit margin, net profit ratio, return on asset

Question 33

How do you calculate Gross profit margin?

Answer 33

Gross Profit / Total Sales

Question 34

How do you calculate Net Profit Ratio?

Answer 34

Net Income/Total Sales

Question 35

How do you calculate Return on asset?

Answer 35

Net Income/Total Assets

Question 36

What does gross profit margin indicate?

Answer 36

Use of expenses to generate gross profits

Question 37

What does net profit ratio indicate?

Answer 37

The profit margin - the cost efficiency of operations

Question 38

What does return on asset indicate?

Answer 38

The effectiveness of using the companies assets to generate profits