Financial Accounting Terminology and Statements Part#1
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Questions and Answers

What is the total amount of current assets listed in the balance sheet?

  • $6,000
  • $7,000
  • $6,500 (correct)
  • $5,000

Which asset is considered the most liquid?

  • Office Supplies
  • Cash (correct)
  • Accounts Receivable
  • Buildings

What should the total liabilities be in the balance sheet?

  • $48,800 (correct)
  • $50,000
  • $45,000
  • $40,000

What is the correct order of listing assets based on liquidity?

<p>Cash, Accounts Receivable, Office Supplies (A)</p> Signup and view all the answers

What is the formula used to calculate the current ratio?

<p>Current Assets / Current Liabilities (D)</p> Signup and view all the answers

Which account is NOT a component of shareholders equity?

<p>Accounts Payable (C)</p> Signup and view all the answers

What total amount is represented as total assets on the balance sheet?

<p>$136,500 (A)</p> Signup and view all the answers

Which financial ratio indicates the ability to cover short-term liabilities?

<p>Current Ratio (C)</p> Signup and view all the answers

What is the correct way to calculate the debt ratio?

<p>Total Liabilities / Total Assets (D)</p> Signup and view all the answers

What is the amount of retained earnings listed for equity?

<p>$277 (D)</p> Signup and view all the answers

Which liability would typically be considered a current liability?

<p>Wages Payable (A)</p> Signup and view all the answers

What is the total shareholders equity calculated?

<p>$87,700 (C)</p> Signup and view all the answers

At what ratios is a company considered to be at risk of not being able to pay its bills?

<p>Below 1.0 (C)</p> Signup and view all the answers

What is the total balance of long-term assets derived from the balance sheet?

<p>$130,000 (D)</p> Signup and view all the answers

What percentage of the total assets would go to shareholders after all debts are paid in the given scenario?

<p>64.2% (B)</p> Signup and view all the answers

What does a higher debt ratio indicate in terms of financial risk?

<p>Riskier situation for the company (D)</p> Signup and view all the answers

What critical relationship does the balance sheet illustrate?

<p>Assets equal liabilities plus shareholders' equity (A)</p> Signup and view all the answers

If the debt ratio is 35%, what does it imply about the equity ratio?

<p>The equity ratio is 65% (C)</p> Signup and view all the answers

How should a student respond if their balance sheet does not balance during an exam?

<p>Move on without getting hung up (C)</p> Signup and view all the answers

What is the suggested right approach when failure occurs in a test?

<p>Understand that failure can lead to future successes (B)</p> Signup and view all the answers

What percentage of total assets was accounted for as total shareholders' equity in the example given?

<p>87% (D)</p> Signup and view all the answers

Which of the following represents an appropriate viewpoint on borrowing and risk?

<p>Lower debt ratios are seen as less risky (C)</p> Signup and view all the answers

What is the consequence of not properly balancing the balance sheet during an exam?

<p>A minor part of overall scoring (D)</p> Signup and view all the answers

What figure does the term 'total shareholders equity' refer to in general?

<p>The owner's share in the assets after debts are paid (B)</p> Signup and view all the answers

Which statement reflects an ideal mindset for students facing challenges in accounting?

<p>Persistence can help overcome academic challenges. (D)</p> Signup and view all the answers

Which term best describes the act of using borrowed funds to invest in company assets?

<p>Debt leverage (B)</p> Signup and view all the answers

Upon selling a company and paying off its debts, what percentage is indicated as payable to debt holders?

<p>35.75% (D)</p> Signup and view all the answers

What are assets primarily defined as in financial accounting?

<p>Things of value that a company can own or control (B)</p> Signup and view all the answers

Which of the following is NOT considered a liability?

<p>Bank savings account (C)</p> Signup and view all the answers

What is the primary distinction of shareholders' equity?

<p>It is the amount remaining after all debts are paid (C)</p> Signup and view all the answers

Which term refers to the income generated by a company from its primary business activities?

<p>Revenues (C)</p> Signup and view all the answers

Why are high school diplomas and beauty not counted as assets on a balance sheet?

<p>Their value cannot be reliably measured in monetary terms (A)</p> Signup and view all the answers

What formula represents the accounting equation?

<p>assets = liabilities + shareholders equity (D)</p> Signup and view all the answers

What are dividends in financial accounting?

<p>Profits withdrawn by shareholders from the company (C)</p> Signup and view all the answers

Which account would be categorized under liabilities?

<p>Notes payable (A)</p> Signup and view all the answers

What does retained earnings represent?

<p>Accumulated profits that are kept in the company (B)</p> Signup and view all the answers

What kind of assets are typically recognized on a balance sheet?

<p>Tangible items with measurable value (C)</p> Signup and view all the answers

Which of the following represents the costs associated with running a business?

<p>Expenses (B)</p> Signup and view all the answers

In the context of accounting, what does 'earning' refer to?

<p>The profits derived from operations (C)</p> Signup and view all the answers

How is shareholders' equity calculated?

<p>Total assets minus total liabilities (C)</p> Signup and view all the answers

If a company’s revenues exceed its expenses, what is the result?

<p>Profit (B)</p> Signup and view all the answers

Flashcards

Current Ratio

A ratio that shows a company's ability to pay short-term debts with its short-term assets.

Current Ratio Formula

Current Assets divided by Current Liabilities.

Debt Ratio

Represents the proportion of a company's assets financed by debt.

Debt Ratio Formula

Total Liabilities divided by Total Assets.

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Liquidity

How easily assets can be converted into cash.

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Order of Liquidity

Listing assets from most easily converted to cash to least readily converted.

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Asset

Something a company owns that has value.

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Liability

Something a company owes to others.

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Equity

The owners' stake in the company.

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Balance Sheet

A financial statement that reports a company's assets, liabilities, and equity at a specific point in time.

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Current Assets

Assets that can be converted to cash within one year.

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Current Liabilities

Debts that must be paid within one year.

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Total Assets

The sum of all current and long-term assets.

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Total Liabilities

The sum of all current and long-term liabilities.

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Shareholders Equity

The portion of the company's assets that belongs to the owners.

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Ratio Analysis

Using ratios to assess and compare companies' financial performance.

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Revenue

Money earned by a company from its core business activities.

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Expense

Costs incurred in running the business.

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Dividend

Distributions of profits to shareholders.

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Long-term Asset

Assets expected to be used or held for more than a year.

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Long-term Liability

Liabilities expected to be paid in more than a year.

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Income Statement

A financial statement showing a company's revenues and expenses for a period.

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Statement of Changes in Equity

A financial statement showing how owners' equity changed during a period.

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Cash Flow Statement

A financial statement showing the movement of cash both inflows and outflows during a period.

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Equity Ratio

The proportion of a company's assets that are financed by shareholders' equity. It's calculated by dividing total shareholders' equity by total assets.

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Risk & Debt Ratio

A higher debt ratio generally indicates more financial risk. It suggests a company is more reliant on borrowed funds, potentially leading to difficulties meeting debt obligations.

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Financial Statements

Formal records that report the financial activities and position of a business.

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Balance Sheet Balancing

Assets are always equal to the sum of liabilities and equity, a fundamental accounting principle.

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Importance of Financial Statement Balancing

Critically important for accuracy and trust in financial reporting. An unbalanced balance sheet indicates potential errors.

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Test Failure Strategy

Move efficiently on to other sections of a test if an answer is not immediately forthcoming; don't get stuck.

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Importance of Accounting

Accounting is a crucial skill for financial decision-making and understanding company performance in business & finance.

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Leverage in Business

The strategic use of borrowed funds to increase returns. It involves a calculated risk, not a simple, good idea.

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Personal Goals

It's healthy to have a well-defined focus and commitment to achieving personal objectives, and having an established plan.

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Study Notes

Financial Accounting Terminology

  • Assets: Anything of value owned or controlled by a company, arising from a past transaction, and providing a future economic benefit. Essentially, anything the company owns and can reliably measure. Examples include cash, accounts receivable, inventory, property, plant, and equipment. Assets that aren't easily measured (e.g., youth, a high school diploma) are not typically listed on financial statements.

Financial Statements

  • Income Statement: Summarizes a company's revenues and expenses over a period (e.g., a year). Key calculation: Revenues - Expenses = Net Income (Profit or Loss). Shows company profitability. Also called the Statement of Operations or P&L (Profit and Loss) Statement.

  • Statement of Changes in Equity: Tracks changes in shareholders' equity accounts, particularly common shares and retained earnings. Shows beginning balance, changes during the period, and ending balance. Shows how equity accounts (ownership stake) changed during the year.

  • Balance Sheet: Lists a company's assets, liabilities, and equity at a specific point in time. Key equation: Assets = Liabilities + Equity. Gives a snapshot view of a company's financial position. Shows what the company owns (assets), what it owes (liabilities), and the difference between those (equity).

  • Statement of Cash Flows: Tracks the company's cash inflows and outflows over a period (not discussed in detail here; covered later in the course). Shows how money comes in or goes out of the company. Shows cash movement.

Accounting Equation

  • Assets = Liabilities + Equity A fundamental equation showing the relationship between a company's assets, what it owes (liabilities), and the owner's share (equity) in the company.

Account Types

  • Assets: Items a company owns or controls (e.g., cash, equipment, accounts receivable). Can be current (expected to be used or converted to cash within a year) or long-term (used for more than a year).

  • Liabilities: Obligations a company owes to others (e.g., accounts payable, bank loans, mortgages). Can be current or long-term.

  • Shareholders' Equity: The owners' stake in the company; what's left over if all assets are sold, and all liabilities are paid. Typical components include common shares and retained earnings.

  • Revenues: Inflows of resources generated from the company's core business activities (e.g., sales revenue, consulting revenue).

  • Expenses: Outflows of resources used in the course of generating revenues (e.g., wages expense).

  • Dividends: Distributions of profits to shareholders (take profits out of the business).

Ratio Analysis

  • Current Ratio: Current Assets / Current Liabilities. Indicates a company's ability to pay short-term obligations with short-term assets. A ratio greater than 1.5 is generally considered better than one below 1.5.

  • Debt Ratio: Total Liabilities / Total Assets. Reflects the proportion of a company's assets that are financed by debt. Lower is more desirable than higher (in this context).

  • Equity Ratio: Total Equity / Total Assets. Represents the portion of assets financed by equity. Higher ratio is better.

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Description

This quiz explores key concepts in financial accounting, including definitions of assets and various financial statements like the income statement and statement of changes in equity. Test your knowledge on terminology that is essential for understanding company finances and profitability.

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