Untitled Flashcards Set

What is an income statement?

A summary of a business’s transactions showing net profit before and after taxes by analyzing sales, purchases, costs of goods sold, and operating expenses over a specific time period.

What are other names for an income statement?

Earnings statement, operating statement, profit-and-loss statement.

What does revenue represent on an income statement?

All of the money earned by a business from all sources.

What is cost of goods sold?

All direct costs required to obtain and/or produce the goods or services that a business sells.

How is gross profit calculated?

Gross profit is calculated by subtracting the cost of goods sold from revenue.

What are operating expenses?

All expenses related to the business’s ongoing operations, excluding non-operating expenses like taxes and interest.

What are operating earnings?

Operating earnings, also called operating income or operating profit, are determined by subtracting operating expenses from gross profit.

What does interest expense represent?

Interest paid to investors.

What is net income?

The money remaining after all operating expenses, interest expense, and taxes are subtracted from gross profit.

Why are income statements considered cumulative?

They represent total figures for a specific time period, usually one year.

How can a business use its income statement?

To analyze performance, compare financial ratios, and assess weaknesses or strengths.

What does cash flow represent?

The movement of funds into and out of a business.

Why is adequate cash flow important?

It is essential to business success; low cash flow can lead to insolvency or failure.

What are some sources of cash flowing into a business?

Start-up money, sale of products, loans, interest, and sale of assets.

What are some sources of cash flowing out of a business?

Operating expenses, cost of goods, assets, loan payments, taxes, and miscellaneous expenses.

What does a cash flow statement estimate?

When, where, and how much money will flow into and out of a business.

What are the components of a cash flow statement?

Beginning cash balance, cash receipts, total cash available, cash payments, and ending cash balance.

What types of assets are included in a balance sheet?

Assets are categorized as current or fixed.

What are current assets?

Assets that will become cash or be used within 12 months.

What are fixed assets?

Property permanently owned by the company, also known as capital assets.

What is depreciation?

The reduction in the value of fixed assets over time.

What is amortization?

The gradual write-off of the value of intangible assets over a set period.

What are current liabilities?

Debts that must be paid within one year.

What are long-term liabilities?

Debts that will take longer than one year to pay.

What does owners' equity represent?

The value left in a business after subtracting liabilities from assets.

How do you calculate working capital?

Working capital is calculated as Current Assets - Current Liabilities.

What does a balance sheet show?

What a business owns (assets) and what it owes (liabilities), indicating its financial strengths and weaknesses.

What is the basic accounting equation?

Assets = Liabilities + Owner's Equity.

What is the debt-leverage ratio?

Total liabilities divided by total assets; it indicates the proportion of debts owed to creditors compared to owners' equity.

What does a low debt-leverage ratio indicate?

It indicates that the business has little debt when compared to its owner’s equity.

Why are cash flow statements critical for businesses?

They help businesses plan for cash shortages and understand their financial stability.

What is gross profit?

The profit made before all other remaining expenses have been deducted.

What does the cash receipts section in a cash flow statement include?

Sources of income like sales of goods, loans, and interest income.

How is ending cash balance calculated in a cash flow statement?

Ending cash balance is calculated by subtracting total cash paid out from total cash available.

Why might even profitable businesses face cash flow issues?

Some cash sources may be less reliable and steadier than others.

What factors do established businesses consider for estimating cash flow?

Information from past financial statements and industry trends.

How often should businesses prepare balance sheets?

Regularly, to gauge financial health.

What is the purpose of comparing a business's total assets and total liabilities?

To assess what percentage of debts are owed to creditors and the owner(s).

What do accumulated depreciation values indicate?

The total loss in a fixed asset's value over time.

How might creditors and investors use balance sheets?

To evaluate a business’s ability to satisfy creditors and manage inventory.

What do intangible assets include?

Items like patents, copyrights, and goodwill that have value but cannot be physically touched.

What should assets on a balance sheet be ordered by?

Assets should be listed in descending order based on how liquid they are.

How can businesses use cash flow analysis?

To identify high and low points of cash flow, helping in future financial planning.

What happens to fixed assets' value over time?

Fixed assets typically decrease in value, requiring depreciation accounting.

What is owner's equity sometimes referred to in public companies?

Stockholders' equity.

How does cash flow analysis reflect business success?

A positive cash flow indicates solvency and sufficient funds for obligations.

What is an operating statement?

Another name for an income statement.

What is included in the 'cost of goods' category?

All costs associated with buying goods for resale.

What is a snapshot in financial terms?

A balance sheet provides a snapshot of a business's financial condition at a specific moment.

How does the design of a balance sheet reflect the accounting equation?

It shows that assets should equal the sum of liabilities and owner's equity.

What is a financial position statement?

Another term for a balance sheet.

What does accumulated depreciation reveal about fixed assets?

It shows the total decrease in value of fixed assets over time.

What are the implications of a high debt-leverage ratio?

It indicates higher financial risk for lenders considering providing funds.

How do businesses express their financial obligations?

Through liabilities categorized as current and long-term.

What is a common goal of businesses regarding cash flow?

To maintain sufficient cash flow to support operations and avoid insolvency.