Accounting Basics Quiz

Accounting principles used outside of the US.

Accounting principles used in the US.

A financial statement reflecting revenue and expenses over a period of time.

Costs directly associated with producing goods or services.

All costs incurred but not directly related to producing goods or services, such as marketing, administration, and research & development.

The difference between revenue and COGS; a measure of profitability.

A company's profit before interest and taxes.

Recognizing revenue when goods or services are delivered, regardless of cash payment.

A practice where companies artificially inflate their earnings by aggressively pushing products to distributors, leading to inflated accounts receivable and inventory.

Resources owned by a business that are expected to provide future economic benefits. These resources must have been acquired through past transactions or exchanges and have a quantifiable value.

Claims on a company's assets by creditors (those who are not owners). They represent an obligation to make a future payment for goods or services received. This obligation is based on benefits or services received in the present or past, and the amount and timing of the payment should be reasonable.

A financial metric that measures a company's profitability before interest, taxes, depreciation, and amortization. It can be misleading as it excludes expenses like depreciation, potentially overstating a company's true profitability.

A measure of a company's profitability that excludes expenses like depreciation and amortization. It reflects the company's underlying earnings power and sustainability.

Claims on a company's assets by the owners of the business. It includes the retained earnings (profits not distributed) and contributed capital (money invested by owners).

Represents the accumulated net income (profits) of a business that has not been distributed to owners as dividends. It grows over time as the company earns profits and is used to fund future investments and operations.

A type of lease where the lessee records both interest expense and depreciation on the lease, with interest expense equal to the discount rate multiplied by the lease liability. The lease principal repayment is calculated as the cash lease expense minus the interest expense.

A type of lease where the lessee records a simple rental expense on the income statement, but still calculates hidden interest expense, depreciation, and lease principal repayment.

Funds contributed by owners to the company in exchange for ownership shares. It is typically calculated as the par value of the stock multiplied by the number of shares issued.

A type of stock that provides its holders with preferential rights, such as priority in receiving dividends and asset distribution in case of liquidation. It is generally considered less risky than common stock.

An asset that arises when a company has paid more taxes than reported on its income statement. These assets can be used to offset future tax liabilities.

A type of stock representing ownership in a company. Common stockholders typically have voting rights but may not receive dividends until preferred stockholders are paid.

A liability that arises when a company has paid less taxes than reported on its income statement. These liabilities will be paid in the future.

A type of stock that is bought back by a company from the open market or from current investors. This reduces the number of outstanding shares and can increase the value of the remaining shares.

A tax deduction that arises when a company incurs a loss. The loss can be carried forward to offset future profits, reducing future tax liabilities.

The cost of capital for a business, representing the return investors expect on their investments.

The inherent risk associated with a particular investment, calculated as the difference between the expected return of the market and the risk-free rate.

The rate of return required by equity investors, reflecting the risk of investing in a company's stock.

A model used to calculate the cost of equity, taking into account the risk-free rate, beta, and the market risk premium.

The expected rate of return for debt holders, taking into account factors like credit risk and market interest rates.

The annualized rate of return on a bond based on its current market price, interest payments, and face value.

The difference between a company's debt yields and the risk-free rate, reflecting the creditworthiness and associated risk.

A metric used to evaluate the profitability of an investment, representing the discount rate that sets the Net Present Value (NPV) equal to zero.

A deferred tax liability (DTL) arises when a company pays less tax in cash than it reports as income tax expense on its income statement. This difference typically occurs due to temporary differences between tax and accounting rules, leading to a future tax liability.

A deferred tax asset (DTA) represents a future tax benefit that a company expects to receive. It arises when a company pays more tax in cash than it records as income tax expense on its income statement. This difference usually results from temporary differences between tax and accounting rules.

The Leverage Ratio measures a company's financial risk by comparing its total debt to its earnings before interest, taxes, depreciation, and amortization (EBITDA). A higher ratio suggests greater debt and higher financial risk.

The Interest Coverage Ratio evaluates a company's ability to meet its interest expenses on its debt. It is calculated by dividing EBITDA by interest expense. A higher ratio indicates a more comfortable ability to cover interest payments.

Return on equity (ROE) is a profitability metric that measures the return generated for common shareholders for every dollar invested in equity. It is calculated as net income to common shareholders divided by average common shareholder equity.

Return on assets (ROA) is a profitability metric that measures how effectively a company uses its assets to generate income. It is calculated by dividing net income to common shareholders by average total assets.

The cash conversion cycle (CCC) is a metric that measures the time it takes a company to convert its investments in inventory and accounts receivables into cash. It's calculated by adding the days sales outstanding (DSO) and days inventory outstanding (DIO) and subtracting the days payable outstanding (DPO).

The present value of a stream of future cash flows discounted to the present, assuming that the cash flows continue forever and grow at a constant rate.

The amount of cash a company generates from its operations after deducting capital expenditures (CAPEX). This represents the cash flow available to investors.

Free cash flow calculated before interest payments and debt financing. It represents the cash flow generated by the core business operations, excluding the impact of debt.

A valuation method that estimates the intrinsic value of a company by projecting its future free cash flows and discounting them back to the present value.

The rate at which future cash flows are discounted to their present value. A higher discount rate reflects a higher level of risk.

The rate at which a company's earnings, dividends, or cash flows are expected to grow in the future. This is often used in present value calculations for perpetuities.

The cost of investments that are needed to maintain and grow a company's operations.

The change in a company's current assets and liabilities over a given period. It reflects short-term cash flows.