ACCT 3309, Exam I
Understand what a general ledger is and how it is used in the accounting process.
The database of accounting information. A company's main accounting records. A general ledger is a complete record of financial transactions over the life of a company. The ledger holds account information that is needed to prepare financial statements, and includes accounts for assets, liabilities, owners' equity, revenues and expenses.
What are the three primary financial statements discussed in class?
Bank statement, income statement, cash flow statement
What does the balance sheet represent? Understand the structure of a balance sheet. Understand who owns a business based upon the financing method of choice by the company. What can be learned from a balance sheet?
The balance sheet represents the accounting equation for a company: Assets = Liabilities + Owners' Equity. It expresses the relationship that is basic to the double entry accounting system.
The balance sheet tells us who owns the business, how lean and mean the organization is running, how liquid the organization is.
When you have a debt, the lenders own the business, when you have stock, the stockholders own the business when you have retained earnings, the business owns the business
Working capital…what is it and why is it important?
Working capital= current assets- current liabilities
Working capital is the resources you have tied up in your business that are working for you. Working capital is the money you have tied up in your product or service. Working capital is a common measure of a company's liquidity, efficiency, and overall health
Balance of working capital should be as small as possible. A small working capital balance indicates good management of resources.
How can a company’s liquidity be observed on a balance sheet?
Account receivable: low
Account payable: high
Net working capital, on the other hand, shows the liquidity of a firm
Understand the two basic means of providing long-term operating capital for a business.
What does the income statement represent?
Present profitability, and growth
Understand the various types of cost….fixed, variable, direct, indirect, etc.
Gross profit, profit margin, EBIT, & EBITDA?
Gross profit: is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).
Profit margin: usually refers to the percentage of revenue remaining after all costs, depreciation, interest, taxes, and other expenses have been deducted. The formula is:
(Total Sales - Total Expenses)/Total Sales = Profit Margin
EBIT: net income+ interest+ taxes
EBITDA: net income+ interest+ taxes+ depreciation+ amortization
What is the purpose of the statement of cash flows?
Tells us how much cash you had at the beginning of the month and how much cash you had at the end of the month. Summarize how much cash you collected and how much cash you paid out
Know and be able to discuss the four primary goals of a business: liquidity, profitability, growth, and financing.
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with an “income statement”
Understand the difference between cash basis accounting and accrual accounting.
The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned and