Unit 1 Financial Accounting Test Notes

Profit Margin %

How much profit per dollar of sales

Profit Margin Equation

Net Income / Revenue

Debt Ratio

What portion of the company is financed by debt

Debt Ratio Equation

Total Liabilities / Total Assets

Return on Assets

How profitable a company is relative to the size of their total assets

Return on Assets Equation

Net Income / Total Assets

External Users

Lenders, Shareholders, Governments, Customers

Internal Users

Managers, Officers, Internal Auditors

External Accounting

Financial Accounting

Internal Accounting

Managerial Accounting

What is required by law

Both Financial and Managerial Accounting

Measurement Principle / Cost Principle

Accounting information is based on the actual cost

Revenue Recognition Principle

Provides Guidance on when a company should recognize revenue (when the service is preformed / object is used)

Matching Principle

Expense Recognition Principle, prescribes that a company must record its expenses incurred to generate revenue

Full Disclosure Principle

Requires companies to report the details behind financial statements that would impact users descisions

Going Concern Assumption

Accounting information reflects a presumption that the business will continue operating

Time Period Assumption

Presumes that the life of a company can be divided into time periods, such as months and years.

Business Entity Assumption

Means that a business is accounted for separately from its owner or other business entities.