Accounting Fundamentals Quiz

Topic 8: The Role of Accountants and Accounting Information & Managing Business Finances

• Accounting is a comprehensive system for collecting, analyzing, and communicating financial information.
• Business managers use accounting information to set goals, develop plans, create budgets, and evaluate future prospects.
• Employees and unions use accounting information to plan compensation and benefits.
• Investors and creditors use accounting information to estimate returns, assess growth prospects, and evaluate credit risk.
• Tax authorities utilize accounting information to assess tax liabilities and ensure accurate tax payments.
• Government regulatory agencies rely on accounting to fulfill their public duties.

Learning Objectives

• Explain the role of accountants and differentiate between financial and managerial accounting.
• Explain how the accounting equation is used.
• Describe the three basic financial statements and illustrate how they reflect a business's activity and financial condition.
• Explain the time value of money and compound growth and discuss the characteristics of common stock.
• Describe the role of securities markets and identify major stock exchanges and stock markets.

What Is Accounting?

• Accounting is a comprehensive system used for collecting, analyzing, and communicating financial information.

Who Uses Accounting Information?

• Business managers use financial information to develop goals and plans, set budgets, and evaluate future prospects.
• Employees and unions use it to plan for and receive compensation benefits.
• Investors and creditors decide whether a firm is a good credit risk based on accounting information.
• Tax authorities use it to assess tax liabilities and ensure that correct tax amounts are paid on time.
• Government regulatory agencies use accounting information to fulfill their responsibilities to the public.

Financial versus Managerial Accounting

• Financial Accounting: concerned with external users of a company's financial information.
• Managerial Accounting: concerned with internal users of the company's financial information.

The Accounting Equation

• Assets = Liabilities + Owners' Equity
• Accountants use this equation to balance financial transaction data throughout the year.

The Accounting Equation Elements

• Assets: economic resources expected to benefit a firm or an individual who owns it.
• Liabilities: debt owed by a firm to an outside organization or individual.
• Owners' Equity: the amount of money owners would receive if they sold assets and paid off all liabilities.

Financial Statements

• Financial statements summarize a company's financial status to stakeholders, assisting in managerial decision-making.
• Types of financial statements: balance sheet, income statement, statement of cash flows.

Balance Sheets

• A balance sheet is a financial statement providing details on a firm's assets, liabilities, and owners' equity.

Google's Balance Sheet (Example)

• Include data from the Google's Balance Sheet presented in the document.

• The company's total assets equal its total liabilities and owners' equity.

Balance Sheet Elements: Current Asset, Fixed Asset

• Current Asset: asset that can or will be converted into cash within a year
• Fixed Asset: an asset with long-term use or value (land, buildings, equipment).

Balance Sheet Element: Depreciation

• An accounting method for distributing the cost of an asset over its useful life.

Balance Sheet Element: Intangible Asset

• Non-physical assets (patents, trademarks) that have future economic value.
• Goodwill: the amount overpaid for an existing business compared to the value of its tangible assets.

Balance Sheet Elements: Current Liability, Long-Term Liability

• Current Liability: debt that must be paid within one year
• Accounts Payable (Payables): current liability that includes bills owed to suppliers.
• Long-Term Liability: debt not due within one year.

Balance Sheet Element: Owners' Equity (Shareholders' Equity)

• Owners' equity (shareholders' equity) is broken down into paid-in capital and retained earnings.
  • Paid-in capital: money invested by owners.
  • Retained earnings: net profits kept by the firm instead of distributed as dividends.

Income Statements

• Income statements list a firm's annual revenues and expenses, resulting in a profit or loss.
• Elements of income statement: revenues, cost of revenues, operating expenses, and net income.
• Profit (or Loss) = Revenues - Expenses.

Key elements of the Income Statement

 - **Revenues/Gross Sales:** Funds generated from selling goods/services.
 - **Cost of Goods Sold:** cost of materials used to create items sold.
 - **Gross Profit:** Preliminary profit calculation (Revenue - Cost of Goods Sold)
 - **Operating Expenses:** running costs beyond the cost of goods sold.
 - **Operating Income:** Gross profit minus operating expenses.
 - **Net Income:** Operating income minus income taxes.

Google's Income Statement (Example)

• Includes data from Google's Income Statement presented in the document.

Statements of Cash Flows

• Statements of cash flow describe a firm's yearly cash receipts and cash payments.
• Show the effects of operating activities, investing activities, and financing activities on cash.

Google's Statement of Cash Flows (Example)

• Includes data from Google's Statement of Cash Flows presented in the document.

The Budget: An Internal Financial Statement

• A Budget is a detailed summary of estimated receipts and expenditures for a future period of time.

Time Value of Money

• The principle that invested money grows over time by earning interest or a return.

Compound Growth

• The compounding of interest over time—with each additional period, the returns accumulate.

Common Stock Investments

• Common stock represents the most basic Ownership of a corporation and gives voting rights on corporate issues.

Stock Values

• Market Value: the current price of a stock in the market.
• Book Value: the value of a firm's owners' equity, divided by the number of common shares.

Dividends

• Payments to stockholders based on a per-share basis that comes out of a companys earnings.
• Dividend payments are not mandatory and vary as the decision is taken by the corporations board of directors based on company, future prospects, and stock holders needs.

The Business of Trading Securities

• Securities: stocks, bonds, and mutual funds representing claims against issuers.
• Securities Markets: where stocks and bonds are sold.

Stocks vs Bonds

• Stocks represent ownership stake, return is dividends
• Bonds represent debt obligation, return is interest

The Business of Trading Securities (Elements)

 - **Primary Market:** New stocks and bonds are sold by firms and governments.
 - **Secondary Market:** Existing stocks and bonds are sold to the public.
 - **Initial Public Offering (IPO):** a company's stock is first sold to the general public.

Tracking Market Using Stock Indexes

• Market Index: a statistical measure designed to track the performance of a group of stocks or price changes of a stock market.

Risk-Return Relationship

• The principle that safer investments provide lower returns, and riskier investments have higher return potential.

Angel Investors and Venture Capital

• Angel Investors: external investors that provide capital to firms to get equity ownership in return.
• Venture Capital: private funds that provide capital to new growth companies.

Sale of Corporate Bonds and Characteristics

• Corporate Bonds: formal pledges for the issuer company to pay interest and repay the principal at maturity.
• Bond Indenture: contains detailed information about a bond issue, including payment dates and terms.
• Maturity Date (Due Date): Date at which the issuer repays the principal of a bond.

Test your knowledge on accounting principles and concepts, including the differences between financial and managerial accounting, the accounting equation, and the role of accountants. This quiz covers crucial aspects that aid in understanding the financial position of a business.