Finance Study Questions.docx
Transcript
**Balance Sheet**: The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in time. It follows the accounting equation, where assets are on one side and liabilities and shareholder's equity are on the other side. **Cash Flow**: Cash flow refers to th...
**Balance Sheet**: The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in time. It follows the accounting equation, where assets are on one side and liabilities and shareholder's equity are on the other side. **Cash Flow**: Cash flow refers to the movement of cash in and out of a business. The statement of cash flows shows how the firm's operations have affected its cash position and helps answer questions about cash generation, financing needs, and excess cash flows. **The Three Principal Types of Business Activity**: The three principal types of business activity are operating, investing, and financing activities. Operating activities involve the day-to-day operations of the business, investing activities involve the acquisition and disposal of long-term assets, and financing activities involve obtaining and repaying funds. **Features of the Balance Sheet**: The balance sheet provides a snapshot of a business's financial position at a specific point in time. It includes assets, liabilities, and equity, and follows the accounting equation. It helps assess the company's financial health and solvency. **Need of Balance Sheet**: The balance sheet is needed to provide a summary of a business's financial position, including its assets, liabilities, and equity. It helps stakeholders understand the company's financial health and solvency. **Assets Accounts**: Assets accounts represent the resources owned by a business, such as cash, inventory, property, and equipment. They are recorded on the balance sheet. **Liabilities Accounts**: Liabilities accounts represent the obligations of a business, such as loans, accounts payable, and accrued expenses. They are recorded on the balance sheet. **Equity Accounts**: Equity accounts represent the ownership interest in a business, including common stock and retained earnings. They are recorded on the balance sheet. **Income Statement Terms**: Income statement terms include revenues, expenses, operating income/earnings before interest and taxes (EBIT), and net income. These terms are used to summarize the financial performance of a business over a period of time. **Differences between Cash Basis and Accrual Basis**: The cash basis and accrual basis are two methods of accounting. The cash basis records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of when cash is received or paid. **Classification of Cash Flows**: Cash flows are classified into three categories: operating activities, investing activities, and financing activities. Operating activities include cash flows from day-to-day operations, investing activities include cash flows from buying or selling assets, and financing activities include cash flows from obtaining or repaying funds. **What is Cash**: Cash refers to physical currency, such as coins and banknotes, as well as funds held in bank accounts that are readily available for use. **External Uses of Cash Flow Statement**: The cash flow statement is used by external stakeholders, such as investors and creditors, to assess a company's ability to generate cash and its cash flow management. **Internal Uses of Cash Flow Statement**: The cash flow statement is used by internal stakeholders, such as management, to monitor and analyze the company's cash flow, identify areas of improvement, and make informed financial decisions. **Liquidity Ratio**: Liquidity ratios measure a company's ability to meet its short-term obligations using its current assets. Examples of liquidity ratios include the current ratio and the quick ratio. **Assets Management Ratios**: Assets management ratios measure how efficiently a company manages its assets to generate sales. Examples of assets management ratios include the inventory turnover ratio and the accounts receivable turnover ratio. **Debt Management Ratios**: Debt management ratios measure a company's ability to manage its debt and meet its long-term obligations. Examples of debt management ratios include the debt-to-equity ratio and the interest coverage ratio. **Profitability Ratios**: Profitability ratios measure a company's ability to generate profits from its operations. Examples of profitability ratios include the gross profit margin and the return on equity. **Problems in Financial Statement Analysis**: Financial statement analysis may face challenges such as incomplete or inaccurate data, changes in accounting policies, and subjective judgments made by management. These problems can affect the reliability and comparability of financial statements.
