Comprehensive Mastery Test #2 Review

LAPs: FI-579, FI-085, FI-354

What are the 4 characteristics of useful financial information?

Understandable, relevant, reliable, comparable

Why must financial information by understandable?

So it can be used by anyone who needs it.

Describe what makes financial information relevant?

Appropriate to the situation at hand

Describe what makes financial information reliable?

Information is accurate

Why must financial information be comparable?

For consistency

The overall purpose of accounting is to…

keep financial records

Match the groups that use a business’s accounting information with the ways these groups use the information.

A3, B1, C4, D2

Distinguish between managerial accounting and financial accounting.

Managerial: preparing and reporting for internal users

Financial: preparing and reporting for external users

What are the five characteristics that are common to all effective accounting systems?

easy to use, processes data quickly, expandable, affordable to operate, protects the business.

What are the six steps in the accounting cycle?

Analyzing financial transactions,

journalizing transactions,

posting to ledgers, balancing the books, preparing financial statements, closing the books

What type of businesses often use the accrual accounting method?

Large businesses

Explain the three important categories of financial information presented in a balance sheet.

Assets: anything of value, liabilities: debts, owner’s equity: assets minus liabilities

What does an income statement show?

How much a business made or lost

What does a cash flow statement contain?

A summary of when, where, and how much money will flow in and out of a business during a specific amount of time

What is finance?

The function that involves all money and money management matters

Explain the difference between finance and accounting?

Finance: all money and money management

Accounting: keeping and interpreting financial information

Describe two main finance activities.

Administration of assets (decisions about investments) and acquisition of funds (decisions about financing)

Discuss five ways that the finance function contributes to a business organization.

Goals for the future, planning and controlling company spending, ensuring sufficient funding, accounts receivable payed, investing wisely

Explain the differences between capital investment decisions and working capital management.

CID: determines investments, how investments will be financed, and whether to pay dividends to shareholders

WCM: focuses on current balance of assets and liabilities

What is capital budgeting?

A process in which a firm's financial managers determine which projects it should invest in

Describe capital structure.

“Optimal mix” of financing

What is the difference between debt and equity funding?

Loan from bank vs raising funds through selling shares of the company

What dividend-related decisions must financial managers make?

Decide whether or not to pay shareholders dividends

What is the role of the cash conversion cycle in managing working capital?

It estimates days taken to produce sellable products from raw materials which then tells whether the company has good working capital or not

What is the role of return on capital in managing working capital?

It measure how well a business is generating cash in relation to capital which expresses the company’s value