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Questions and Answers
Match the following financial statements with their descriptions:
Balance Sheet = snapshot of company's financial position at a specific point in time Income Statement = revenues and expenses over a specific period of time Cash Flow Statement = inflows and outflows of cash over a specific period of time
Match the following accounting principles with their descriptions:
Accrual Accounting = recognize revenues and expenses when earned, regardless of cash flow Cash Accounting = recognize revenues and expenses when cash is received or paid Matching Principle = match revenues with expenses incurred to generate those revenues Materiality = disclose information if it could influence investor decisions
Match the following financial analysis techniques with their descriptions:
Horizontal Analysis = analyze changes in financial statement items over time Vertical Analysis = analyze proportion of each item to a base item (e.g., total revenue) Ratio Analysis = calculate and analyze financial ratios to identify trends and areas for improvement
Match the following types of financial analysis with their descriptions:
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Match the following liquidity ratios with their formulas:
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Match the following profitability ratios with their formulas:
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Match the following efficiency ratios with their formulas:
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Match the following financial statements with their primary purposes:
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Match the following accounting principles with their primary goals:
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Match the following financial analysis techniques with their primary purposes:
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Study Notes
Accounting
Financial Statements
- Balance Sheet: snapshot of company's financial position at a specific point in time
- Income Statement: revenues and expenses over a specific period of time
- Cash Flow Statement: inflows and outflows of cash over a specific period of time
Accounting Principles
- Accrual Accounting: recognize revenues and expenses when earned, regardless of cash flow
- Cash Accounting: recognize revenues and expenses when cash is received or paid
- Matching Principle: match revenues with expenses incurred to generate those revenues
- Materiality: disclose information if it could influence investor decisions
Financial Analysis
Ratio Analysis
- Liquidity Ratios: measure ability to pay short-term debts
- Current Ratio: current assets / current liabilities
- Quick Ratio: (current assets - inventory) / current liabilities
- Profitability Ratios: measure ability to generate earnings
- Gross Margin Ratio: (revenue - cost of goods sold) / revenue
- Return on Equity (ROE): net income / shareholders' equity
- Efficiency Ratios: measure ability to use assets efficiently
- Asset Turnover Ratio: revenue / total assets
- Inventory Turnover Ratio: cost of goods sold / average inventory
Financial Statement Analysis
- Horizontal Analysis: analyze changes in financial statement items over time
- Vertical Analysis: analyze proportion of each item to a base item (e.g., total revenue)
- Ratio Analysis: calculate and analyze financial ratios to identify trends and areas for improvement
Types of Financial Analysis
- Fundamental Analysis: analyze a company's financial statements and other factors to estimate its value
- Technical Analysis: analyze charts and patterns to predict stock prices and market trends
Financial Statements
- A balance sheet provides a snapshot of a company's financial position at a specific point in time.
- An income statement outlines revenues and expenses over a specific period of time.
- A cash flow statement outlines the inflows and outflows of cash over a specific period of time.
Accounting Principles
- Accrual accounting recognizes revenues and expenses when earned, regardless of cash flow.
- Cash accounting recognizes revenues and expenses when cash is received or paid.
- The matching principle matches revenues with expenses incurred to generate those revenues.
- The materiality principle requires disclosing information if it could influence investor decisions.
Financial Analysis
Ratio Analysis
- Liquidity ratios measure a company's ability to pay short-term debts.
- The current ratio is calculated by dividing current assets by current liabilities.
- The quick ratio is calculated by dividing (current assets - inventory) by current liabilities.
- Profitability ratios measure a company's ability to generate earnings.
- The gross margin ratio is calculated by dividing (revenue - cost of goods sold) by revenue.
- The return on equity (ROE) ratio is calculated by dividing net income by shareholders' equity.
- Efficiency ratios measure a company's ability to use assets efficiently.
- The asset turnover ratio is calculated by dividing revenue by total assets.
- The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory.
Financial Statement Analysis
- Horizontal analysis involves analyzing changes in financial statement items over time.
- Vertical analysis involves analyzing the proportion of each item to a base item (e.g., total revenue).
- Ratio analysis involves calculating and analyzing financial ratios to identify trends and areas for improvement.
Types of Financial Analysis
- Fundamental analysis involves analyzing a company's financial statements and other factors to estimate its value.
- Technical analysis involves analyzing charts and patterns to predict stock prices and market trends.
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Description
Test your understanding of basic accounting concepts, including financial statements and accounting principles. Learn about balance sheets, income statements, and cash flow statements, as well as accrual and cash accounting methods.
