Accounting and Finance Cards

Accounting

a comprehensive system for collecting, analyzing and communicatiing financial information

Bookkeeping

recording accounting transactions

Income Statement

Measures a company’s financial performance (summery of business rev and incurred expenses) over a period of time

Audit

an accountant’s examination of a company’s financial records (to determine if it used proper procedures to prepare financial reports)

Accounting Cycle

1. analyze transaction documents

2. record transactions in journal

3. transfer entries from journal to a ledger (a book)

4. trial balance

What is the accounting equation and how is it used

Assets = Liabilities + Owner’s equity
Used to balance data for firm after each transaction (i.e. payment to suppliers, sales to customers) the equation must be in balance

What is a liability? What is an asset

Liability: The debt that the firm owes to an outside party

Asset: economic resource expected to benefit the firm owning it

Owners’ equity

Owners’ equity = Assets - Liability
Definition: amount of money that owners would receive if they sold all assets and paid all liabilities.

If assets exceed liabilities: equity is positive (owners receive money after selling/paying liabilities)

If liabilities exceed assets, equity is negative (owners will not receive money if business goes under, and some creditors will not be paid)

What two sources of capital does owners equity consist of?

1. amount the owners originally invested

2. profits earned by and reinvested in the company

Liquidity and liquity ratio

Current Ratio = Current Assets/ Current Liabilities

• The ease and speed at which an asset can be converted to cash, cash is perfectly liquid

• measures ability of firm to cover obligations

Income Statement and profit formula

Profit (or loss) = Revenues - Expenses

• a financial statement describing a firm’s rev and expenses, indicating whether the firm has earned a profit or suffered a loss in a given period

Short Term solvency and long term solvency Ratios

Short term : Current assets/Current liabilities

Long term: Debt/Owners’ equity

• rations that estimate financial risk evident in a company

Profitability ratios

Return on equity: Net income/shareholders equity

• profit a company generates with shareholder money

Earnings per share = N.I/ # of shares outstanding

• assists with buying/selling of shares

Profit Margin = Net income/ Sales

Operating Ratios

AVG collection period = accts recievvable / avg daily sales

inventory turnover = cost of goods sold/avg inventory

Key difference between mutual fund and exchange traded fund

Idea of active management: a human is looking at the mutual fund and making decisions, while this is not the case with an exchange traded fund

Hedge fund and stocks

hedge fund: Private pools of money that try to give return regardless of market performance

Stocks: owning company;s stock available on markets

Savings Account

Guaranteed Investment Certificate

low-risk investment that guaranteed a rate of return over a period

Return on investment

Indebtedness Ratio

Debt to total assets = total liabilities / total assets

Rule of 72

Formula calculating the length of time it take of a sum to double in value
72/r(interest rate%) = time

Compound growth

the compounding of interest paid over a time period

Mutual funds

Company that poo;s the resources of many investors and uses the funds to purchse various types of financial securities, depending on fund’s financial goals

Exchange traded Funds

a bundle of stocks that is in an index that tracks the overall market movement

Four financial pillers

Chartered banks, alternate banks, finance companies, venture capital firms, mutual funds, pension funds, investment dealers

Venture capital firm

provides funds for new or expanding firms though tot have significant potential

Short Term expenditures (operating) vs Long term expenditures (capital)

Short term: everyday business expenditures

Long term: fixed assets - not normally converted to cash, require large investment, binding