Accounting Fundamentals

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is Accounts Receivable in the context of economic activity?

Money spent on business operations

Money owed to the business (correct)

Money saved for future investments

Money invested in the business

What is a major disadvantage of a Sole Proprietorship?

Complex decision-making process

High taxes on business profits

Unlimited liabilities of the owner (correct)

Difficulty in expanding the business

Who makes strategic decisions in a Partnership?

Investors

General partners (correct)

Employees

Limited partners

What is the formula for calculating Accounts Receivable?

(Average Credit Sales / Day) * Average Collection Period Signup and view all the answers

What happens to a Sole Proprietorship if the owner dies?

The business is dissolved Signup and view all the answers

What is a characteristic of a General Partner in a Partnership?

Unlimited liability Signup and view all the answers

What is the main difference between Taxation I and Taxation II?

Individual vs Corporate Signup and view all the answers

What is the purpose of International Accounting?

To adhere to each country's policies Signup and view all the answers

What is the formula for the Current Ratio?

Current Assets / Current Liabilities Signup and view all the answers

What is the purpose of the Allowance for Doubtful Accounts?

To subtract from receivables for unpaid invoices Signup and view all the answers

What does a high Assets Turnover ratio indicate?

Efficient use of assets Signup and view all the answers

What is the purpose of the Acid Test Ratio?

To measure a company's liquidity Signup and view all the answers

What does a high Debt Ratio indicate?

High levels of debt Signup and view all the answers

What is the purpose of the Days Sales Outstanding (DSO) calculation?

To measure the average time to collect accounts receivable Signup and view all the answers

What is the main characteristic of a business cycle?

Fluctuations in economic activity Signup and view all the answers

What is the purpose of the Inventory Turnover ratio?

To measure the efficiency of inventory management Signup and view all the answers

What is the impact on current assets when a company undergoes an Initial Public Offering (IPO)?

Current assets increase Signup and view all the answers

What is the effect on net profit when a company sells a current asset below its book value?

Net profit decreases Signup and view all the answers

What is the impact on current ratio when a company declares and pays cash dividends?

Current ratio decreases Signup and view all the answers

What is the primary focus of Fiscal Policy?

Government spending and taxation Signup and view all the answers

Which of the following is an example of Cash from Financing?

Issuance of bonds Signup and view all the answers

What is the impact on net income when a company declares but does not pay cash dividends?

Net income remains unchanged Signup and view all the answers

Which of the following is a part of the Federal Reserve System?

Central Bank Signup and view all the answers

What is the impact on current assets when a company sells a current asset at its book value?

Current assets decrease Signup and view all the answers

Study Notes

Accounting Classes

Building inspector: class is inspected, class represents building, building represents institution
Taxation I & II:
- I: individual
- II: corporate
International Accounting: usually for corporations that have operations in multiple countries, adhering to each country's policies
Advanced Accounting: long employee contracts, pay packages (usually for athletes)

Balance Sheets

Accounting provides information on how much money you have, but finance details how to manage it
Economies of scale: the more you buy, the cheaper something is
Balance Sheet:
- Total liabilities should equal total assets + stakeholder's equity
- Current Assets: cash, A/R, supplies, prepaid insurance
- Current Liabilities: A/P, unearned subscription revenue, salaries payable
- Fixed Assets: office equipment, building, land
- Long-term Liabilities: mortgage payable, bonds payable

Financial Ratios

Current Ratio: Current Assets / Current Liabilities
Working Capital: Current Assets - Current Liabilities
Acid Ratio (Quick Ratio): (Current Assets - Inventory) / Current Liabilities
Assets Turnover: (Sales / Assets)
Fixed Assets Turnover: (Sales / Fixed Assets)
Inventory Turnover: (Sales / Inventory)
A/R Turnover: (Sales / A/R)
Debt Ratio: (Total Liabilities / Total Assets)

Forms of Business

Sole Proprietorship:
- One individual owns the business
- Pros: easy to form, decision-making process is easy, owner pays one type of taxes
- Cons: unlimited liabilities, no separation between personal and business assets
Partnership:
- General partners: perform strategic decisions, unlimited liabilities
- Limited partners: perform regular decisions, limited liabilities
Corporation:
- Stock or shares (capital)

Statement of Cash Flow

Cash from operation: current assets & current liabilities
Cash from investing: fixed assets
Cash from financing: IPO, issuance of bonds, declare and pay cash dividend, short-term borrowing from a bank

Policies & Investments

Fiscal Policy: government spending, president and congress are in charge, treasury department allocates taxes
Monetary Policy: deals with money supply and interest rates, the federal reserve system for banks