Accounting Basics and Financial Accounting
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Questions and Answers

What is the primary purpose of financial accounting?

  • To prepare tax returns
  • To manage daily operations of a business
  • To provide information to external stakeholders (correct)
  • To provide information to internal stakeholders

According to the accounting equation, which of the following represents liabilities?

  • Stuff a business owes (correct)
  • Stuff a business owns
  • Profits retained in the business
  • Owner's claim on the business

What is the formula for calculating Earnings Per Share (EPS)?

  • Net Profit - Common Shares Outstanding
  • (Net Profit - Preferred Dividends) / Common Shares Outstanding (correct)
  • Net Profit / Common Shares Outstanding
  • Net Profit - Preferred Dividends / Common Shares Outstanding

Which of the following statements is true regarding accrual accounting?

<p>Expenses are recorded as they are incurred (A)</p> Signup and view all the answers

Which ratio measures the relationship between dividends per share and share price?

<p>Dividends Yield Ratio (C)</p> Signup and view all the answers

Which formula calculates the Operating Profit Margin (OPM)?

<p>Operating Profit / Revenue (A)</p> Signup and view all the answers

Which of the following is NOT one of the three main types of financial statements?

<p>Expense Statement (C)</p> Signup and view all the answers

What is the purpose of a trial balance?

<p>To prepare financial statements (D)</p> Signup and view all the answers

What does the Cash Ratio measure?

<p>Cash / Current Liabilities (D)</p> Signup and view all the answers

Which principle dictates that information in financial statements must be reliable?

<p>GAAP (C)</p> Signup and view all the answers

The formula for calculating the Days Sales Outstanding (DSO) is which of the following?

<p>Accounts Receivable / Revenue x 365 (A)</p> Signup and view all the answers

In the context of journal entries in double-entry accounting, what must always be true?

<p>Total debits must equal total credits (C)</p> Signup and view all the answers

Which of the following definitions best describes equity in accounting?

<p>Owners' claims on the business (D)</p> Signup and view all the answers

What is the primary purpose of posting adjusting entries?

<p>To correct errors and update future reports (B)</p> Signup and view all the answers

Which financial ratio indicates how well a business can cover its short-term obligations?

<p>Liquidity Ratio (C)</p> Signup and view all the answers

Which of the following is NOT one of the five main types of financial ratios?

<p>Productivity (C)</p> Signup and view all the answers

The Debt to Equity (DTE) ratio is calculated using which of the following formulas?

<p>Total Liabilities / Total Equity (C)</p> Signup and view all the answers

What does the Cash Conversion Cycle measure?

<p>The efficiency of inventory selling and cash collection (D)</p> Signup and view all the answers

Which type of financial ratio assesses a company's profitability based on its revenue?

<p>Margin Ratios (D)</p> Signup and view all the answers

Which of the following ratios is classified as an income statement ratio?

<p>Interest Coverage (C)</p> Signup and view all the answers

What is the main purpose of creating financial statements?

<p>To provide data for investment decisions and comparisons (C)</p> Signup and view all the answers

Flashcards

Financial Accounting

The process of recording and reporting a company's financial transactions to external stakeholders like investors and creditors.

Managerial Accounting

The process of providing financial information inside a company to help managers make decisions.

Accounting Equation

Assets = Liabilities + Equity. A fundamental equation showing the relationship between a company's resources, obligations, and ownership.

Assets

A company's resources (e.g., cash, equipment, buildings).

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Liabilities

A company's obligations to others (e.g., loans, accounts payable).

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Equity

The owners' claim on the company's assets.

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Debit

An accounting entry that increases assets and expenses, and decreases liabilities, equity, and revenues.

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Credit

An accounting entry that increases liabilities, equity, and revenues, and decreases assets and expenses.

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IFRS

International Financial Reporting Standards, a common accounting framework for many businesses.

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GAAP

Generally Accepted Accounting Principles, a common accounting framework within the US.

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Accrual Method

Recognizes revenue when earned and expenses when incurred, not necessarily when cash changes hands.

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Balance Sheet

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.

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Income Statement

A financial statement that shows a company's revenues and expenses over a period of time.

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Cash Flow Statement

Shows movement of cash in and out of the business over a period of time.

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Journal Entries

Detailed records of financial transactions, adhering to the debit = credit rule.

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General Ledger

An accounting database containing all accounts and transaction details.

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Unadjusted Trial Balance

A list of all the accounts and their balances before any adjustments are made.

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Post Adjusting Entries

Recording adjustments necessary for the financial statements at the end of an accounting period.

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Post Adjusted Trial Balance

A revised trial balance after adjustments are made according to accrual accounting.

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Financial Statements

Documents summarizing a company's financial performance and position. Used for investors and analysis.

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Post Closing Entries

Entries to transfer temporary account balances to permanent accounts to prepare for the next accounting period.

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Ratio Analysis

Comparing financial ratios across time and different businesses to analyze financial health.

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Financial Ratios

A comparison between two values from financial statements, often expressed as a percentage.

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Profitability Ratios

Ratios measuring how effectively a company generates profit. Includes margin and return ratios.

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Liquidity Ratios

Measure a company's ability to cover short-term debts with assets.

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Efficiency Ratios

Ratios assessing a company's efficiency in selling inventory, collecting cash, and paying creditors.

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Leverage Ratios

Evaluate how much debt a company uses to support operations. Includes debt to assets, equity, and interest coverage.

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Price Ratios

Used to evaluate the share price of a business based on its financial metrics for potential investment.

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EPS

Earnings Per Share. Shows how much profit each outstanding share produced.

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P/E Ratio

Price-to-Earnings Ratio. Compares the price of a stock to the company's earnings.

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PEG Ratio

P/E to Growth ratio. Compares the P/E ratio to the company's earnings growth.

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DPS

Dividends Per Share. Amount of dividends distributed to each outstanding share.

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Dividend Yield

Dividends Per Share divided by the share price.

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Dividend Payout Ratio

Ratio of dividends paid to net profit.

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Gross Profit Margin

Gross Profit/Revenue. Shows the percentage of revenue left after deducting cost of goods sold.

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Operating Profit Margin

Operating Profit/Revenue. Shows the percentage of revenue left after considering all operating costs.

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Net Profit Margin

Net Profit/Revenue. Percentage of revenue that ultimately resulted in profit.

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ROA

Return on Assets. Ratio of Net Profit to Total Assets.

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ROE

Return on Equity. Ratio of Net Profit to Shareholders' Equity.

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ROCE

Return on Capital Employed. Shows how well a company utilizes capital to generate profit.

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Cash Ratio

Measures a company's ability to cover short-term obligations with cash.

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Quick Ratio

Liquidity ratio showing a company's ability to pay off short-term obligations using readily available assets.

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Current Ratio

Liquidity ratio comparing total current assets to total current liabilities.

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Inventory Turnover

Cost of Goods Sold/Inventory. Measures how efficiently a company sells its inventory.

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Receivables Turnover

Revenue/Accounts Receivable. Number of times per year a company collects its outstanding accounts.

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Asset Turnover

Revenue/Total Assets. Measures how effectively a firm uses its assets to generate sales.

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Payables Turnover

Cost of Goods Sold / Accounts Payable. Shows how many times a company pays its suppliers in a year.

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DSI

Days Sales of Inventory. Measures the average number of days inventory is held.

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DSO

Days Sales Outstanding. The average number of days it takes to collect outstanding invoices.

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DPO

Days Payable Outstanding. Average number of days a business takes to pay suppliers.

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Study Notes

Accounting Basics

  • Accounting is the process of identifying, recording, and analyzing a business's financial transactions. Financial statements summarize these transactions.
  • The accounting equation is Assets = Liabilities + Equity.
  • Accounting rules (e.g., IFRS, GAAP) vary depending on the business location.
  • Accrual accounting recognizes revenue when earned and expenses when incurred – this provides a more accurate picture compared to cash-basis accounting.
  • Financial statements (balance sheets, income statements, and cash flow statements) summarize a company's financial activities over a period of time.

Financial Accounting

  • There's a process for identifying, recording, summarizing and analyzing financial transactions for a business. Then the results are reported.
  • The core principle is that assets should always equal the sum of liabilities and equity.
  • Different rules apply globally, an example of this is IFRS versus GAAP.
  • The accrual method of accounting is a way to track accounts based on when they are recorded compared to when they are physically received or paid (cash-based accounting). Revenue is recognized when it's earned, and expenses are recognized when they are incurred

Financial Ratios

  • Financial ratios compare different elements of a company's financial statements (balance sheet and income statements).
  • Profitability ratios evaluate a company's ability to generate profit.
  • Liquidity ratios evaluate a company's ability to meet short-term obligations.
  • Leverage ratios evaluate a company's use of debt.
  • Efficiency ratios evaluate how well a business uses its assets.
  • Price ratios evaluate share price and potential investment value.

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ACCOUNTING BASICS PDF

Description

This quiz covers the fundamentals of accounting, including the accounting equation, different accounting rules like IFRS and GAAP, and the distinction between accrual and cash-basis accounting. Additionally, it explores financial statements such as balance sheets and income statements and their roles in summarizing financial activities. Test your knowledge and understanding of these essential accounting concepts!

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