KSB 111 Exam 2

Accounting

The process of providing financial information to stakeholders for informed business decisions.

Managerial Accounting

Branch of accounting focused on providing information for internal users, such as managers, to aid in planning and decision-making.

Financial Accounting

Branch of accounting that prepares financial statements for internal and external users, following GAAP.

Generally Accepted Accounting Principles (GAAP)

Standards ensuring accuracy and comparability in financial reporting.

International Financial Reporting Standards (IFRS)

An alternative accounting standard used globally for consistent financial reporting.

Financial Statements

Summaries of a company's financial activities over a specific period.

Income Statement

Reports revenues, expenses, and net income over a specific period.

Balance Sheet

Shows assets, liabilities, and owner's equity at a specific point in time.

Statement of Owner's Equity

Tracks changes in owner's equity over time.

Statement of Cash Flows

Details cash inflows and outflows from operating, investing, and financing activities.

Accounting Equation

Assets = Liabilities + Owner's Equity; shows the relationship between key accounting components.

Breakeven Analysis

Determines the sales level required to cover all costs and avoid losses.

Breakeven Point (in units)

Calculated as Fixed Costs divided by Contribution Margin per Unit.

Accrual Accounting

Recognizes revenue when earned and expenses when incurred, regardless of cash flow.

Inventory

Goods purchased for resale, reported as an asset on the balance sheet.

Cost of Goods Sold

Expense representing the cost of goods sold during a period, appearing on the income statement.

Depreciation

Allocation of the cost of long-term assets over their useful life.

Classified Balance Sheet

Categorizes assets and liabilities into current and long-term.

Current Assets

Assets expected to be converted into cash within one year.

Long-Term Assets

Assets held for more than one year.

Current Liabilities

Liabilities due within one year.

Long-Term Liabilities

Liabilities due in more than one year.

Functions of Money

Includes medium of exchange, measure of value, and store of value.

Medium of Exchange

Facilitates transactions; widely accepted for goods and services.

Measure of Value

Provides a common unit to express prices and compare values.

Store of Value

Allows wealth to be held for future use.

M-1

Includes the most liquid forms of money: cash, checking balances, and traveller's cheques.

M-2

Includes M-1 plus less liquid, near-cash items like savings accounts.

Financial Institutions

Intermediaries that channel funds from savers to borrowers.

Depository Institutions

Accept deposits from customers, like commercial banks and credit unions.

Commercial Banks

Offer various banking services including accounts and loans.

Credit Unions

Member-owned institutions providing banking services with better rates.

Nondepository Institutions

Provide financial services without accepting deposits.

Finance Companies

Make loans to individuals and businesses, often specializing in higher-risk lending.

Insurance Companies

Provide protection against financial losses.

Brokerage Firms

Facilitate the buying and selling of securities.

Pension Funds

Manage retirement savings plans.

Financial Plan

Outlines a company's capital needs and acquisition strategies.

Common Funding Sources

Includes personal assets, loans from family and friends, bank loans, and crowdfunding.

Managing Accounts Payable

Handling payments to suppliers to maintain good relationships and optimize cash flow.

Budgeting

Creating financial plans for specific periods to project revenues, expenses, and cash flow.

Contribution Margin per Unit

Sales Price per Unit minus Variable Cost per Unit.

Statement of Cash Flows

Reports the movement of cash from operating, investing, and financing activities.

Financial Control

Utilizing budgets for decision-making and monitoring financial performance.

Owner's Equity

The residual interest in the assets of the entity after deducting liabilities.

Assets

Economic resources owned by a company that are expected to provide future benefits.

Liabilities

Obligations or debts that a company must settle in the future.

Net Income

The profit or loss remaining after all expenses have been deducted from revenues.

Cash Management Practices

Strategies employed to maintain sufficient cash flow to meet current and future obligations.

Crowdfunding

Raising funds from a large number of individuals, typically via online platforms.

Good Relationships with Suppliers

Maintaining positive engagements to ensure timely deliveries and favorable terms.

Operating Activities

Transactions related to the core business operations that generate revenues.

Investing Activities

Transactions involving the purchase and sale of long-term assets.

Financing Activities

Transactions that result in changes to the size and composition of the owner's equity and borrowings.

Current Ratio

Measures a company's ability to pay short-term obligations; calculated as Current Assets divided by Current Liabilities.

Quick Ratio (Acid-Test Ratio)

Measures a company's ability to meet short-term obligations with its most liquid assets; calculated as (Current Assets - Inventory) divided by Current Liabilities.

Debt to Equity Ratio

Measures a company's financial leverage; calculated as Total Liabilities divided by Shareholder's Equity.

Gross Profit Margin

Indicates the percentage of revenue that exceeds the cost of goods sold; calculated as (Gross Profit / Revenue) x 100.

Net Profit Margin

Indicates how much profit a company makes for every dollar of revenue; calculated as (Net Income / Revenue) x 100.

Return on Assets (ROA)

Measures how efficiently a company uses its assets to generate profit; calculated as (Net Income / Total Assets) x 100.

Return on Equity (ROE)

Measures the profitability of a company relative to shareholder's equity; calculated as (Net Income / Shareholder's Equity) x 100.

Inventory Turnover Ratio

Measures how many times a company's inventory is sold and replaced over a period; calculated as Cost of Goods Sold divided by Average Inventory.

Price to Earnings Ratio (P/E Ratio)

Measures the valuation of a company's current share price compared to its per-share earnings; calculated as Share Price divided by Earnings per Share (EPS).

Operating Margin

Measures the proportion of revenue that remains after paying for variable costs of production; calculated as (Operating Income / Revenue) x 100.

Savings Banks

Financial institutions that accept savings deposits and provide interest on those deposits, typically focusing on personal savings and community service.

Balance of Payments

A record of all economic transactions between residents of a country and the rest of the world over a specific period.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country in a given period.

Inflation Rate

The percentage increase in the price level of goods and services in an economy over a period.

Monetary Policy

The process by which a central bank manages the money supply to target inflation and stabilize the currency.

Fiscal Policy

Government's use of spending and taxation to influence the economy.

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.

Market Capitalization

The total market value of a company's outstanding shares, calculated as share price multiplied by the number of shares.

Debt Financing

Raising funds for business activities through borrowing.

Equity Financing

Raising funds by selling ownership shares in the company.

Asset Allocation

The process of deciding how to distribute an investor's assets among different asset categories.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio.

Credit Score

A numerical expression based on a level analysis of a person's credit files, intended to represent the creditworthiness of that person.

Capital Expenditures (CapEx)

Funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment.

Operating Expenses (OpEx)

The ongoing costs for running a product, business, or system.

Liquidity

The ability of an asset to be converted into cash quickly without a significant loss in value.

Risk Appetite

The amount and type of risk that an organization is willing to take in order to achieve its objectives.

Financial Leverage

The use of borrowed funds to increase the potential return on investment.

Endowment Fund

A donation made to an institution, often in the form of a fund that cannot be spent, but can be invested.

Prime Rate

The interest rate that commercial banks charge their most creditworthy customers, often used as a benchmark for other loans.