12 Questions
What is the primary classification of assets based on their expected conversion to cash?
Current assets and non-current assets
What is the accounting equation that represents the relationship between a company's assets, liabilities, and equity?
Assets = Liabilities + Equity
Which type of ratio measures a company's ability to pay short-term debts?
Liquidity ratio
What is the classification of liabilities based on their expected payment period?
Current liabilities and non-current liabilities
What is the component of the accounting equation that represents the ownership interest in the business?
Equity
Which type of asset is not expected to be converted to cash within one year or within the company's normal operating cycle?
Property, plant, and equipment
What does depreciation represent?
The allocation of the cost of a tangible asset over its useful life
What is the formula for calculating Operating Income?
Revenue - Cost of Goods Sold - Operating Expenses
What is Non-Operating Income also known as?
Non-Operating Revenue
Which method of depreciation charges an equal amount of depreciation each year over the asset's useful life?
Straight-Line Method
What is the term for the income generated from the sale of goods or services?
Revenue
What is the term for the cost of producing and selling goods or services?
Cost of Goods Sold
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
Test your understanding of financial accounting concepts, including assets, liabilities, equity, and financial analysis. Learn how to classify and analyze financial statements to make informed business decisions.
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