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Questions and Answers
What is the primary classification of assets based on their expected conversion to cash?
What is the primary classification of assets based on their expected conversion to cash?
- Current assets and non-monetary assets
- Tangible assets and intangible assets
- Current assets and non-current assets (correct)
- Liquid assets and illiquid assets
What is the accounting equation that represents the relationship between a company's assets, liabilities, and equity?
What is the accounting equation that represents the relationship between a company's assets, liabilities, and equity?
- Assets = Liabilities - Equity
- Assets = Liabilities + Equity (correct)
- Equity = Assets - Liabilities
- Assets - Liabilities = Equity
Which type of ratio measures a company's ability to pay short-term debts?
Which type of ratio measures a company's ability to pay short-term debts?
- Liquidity ratio (correct)
- Profitability ratio
- Efficiency ratio
- Solvency ratio
What is the classification of liabilities based on their expected payment period?
What is the classification of liabilities based on their expected payment period?
What is the component of the accounting equation that represents the ownership interest in the business?
What is the component of the accounting equation that represents the ownership interest in the business?
Which type of asset is not expected to be converted to cash within one year or within the company's normal operating cycle?
Which type of asset is not expected to be converted to cash within one year or within the company's normal operating cycle?
What does depreciation represent?
What does depreciation represent?
What is the formula for calculating Operating Income?
What is the formula for calculating Operating Income?
What is Non-Operating Income also known as?
What is Non-Operating Income also known as?
Which method of depreciation charges an equal amount of depreciation each year over the asset's useful life?
Which method of depreciation charges an equal amount of depreciation each year over the asset's useful life?
What is the term for the income generated from the sale of goods or services?
What is the term for the income generated from the sale of goods or services?
What is the term for the cost of producing and selling goods or services?
What is the term for the cost of producing and selling goods or services?
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Study Notes
Assets
- Resources owned or controlled by the business
- Classified into:
- Current assets (expected to be converted to cash within one year or within the company's normal operating cycle):
- Cash
- Accounts receivable
- Inventory
- Prepaid expenses
- Non-current assets (not expected to be converted to cash within one year or within the company's normal operating cycle):
- Property, plant, and equipment
- Investments
- Intangible assets
- Current assets (expected to be converted to cash within one year or within the company's normal operating cycle):
Liabilities
- Debts or obligations that the business needs to settle
- Classified into:
- Current liabilities (expected to be paid within one year or within the company's normal operating cycle):
- Accounts payable
- Short-term loans
- Accrued expenses
- Non-current liabilities (not expected to be paid within one year or within the company's normal operating cycle):
- Long-term loans
- Bonds payable
- Current liabilities (expected to be paid within one year or within the company's normal operating cycle):
Accounting Equation
- Assets = Liabilities + Equity
- Represents the relationship between a company's assets, liabilities, and equity
- The equation is balanced because the total value of assets is equal to the total value of liabilities and equity
Financial Analysis
- Balance sheet analysis:
- Liquidity ratios (e.g. current ratio, quick ratio) measure a company's ability to pay short-term debts
- Solvency ratios (e.g. debt-to-equity ratio) measure a company's ability to pay long-term debts
- Profitability ratios (e.g. return on equity) measure a company's ability to generate earnings
- Trend analysis: comparison of balance sheet items over time to identify trends and patterns
- Industry comparison: comparison of balance sheet items with industry averages to identify strengths and weaknesses
Equity
- Represents the residual interest in the assets of the business after deducting liabilities
- Also known as net worth or shareholders' equity
- Classified into:
- Common stock
- Retained earnings
- Treasury stock
- Represents the ownership interest in the business
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