What is the accounting equation?
Asset = Liabilities + Equity
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| Term | Definition |
|---|---|
| What is the accounting equation? | Asset = Liabilities + Equity |
| What is asset? | Asset is the total things/value the company has |
| What is liability? | Liability is the total debt the company has |
| What is equity? | Equity is the residual claim or amount of shares the owner/shareholders get if after the company pays debt/or sell everything |
| Why is the accounting equation true? | The accounting equation is true because the equity is a residual claim, and is simply derived from the accounting equation. |
| What is the summary of chapter 1 of this book? | asset is the total things/value the company have liabilities is the total debt the company owes equity is the residual claim or the amount of shares the owner have after paying debt asset = liabilities + equity is true because equity is the residual claim(asset - liabilities) and its simply derived from this asset formula itself. |
| What are the example kind of assets? | Cash and Cash equivalents Account receivable Property, plant, and equipment |
| What is cash and cash equivalent? | The balance or values of checking, saving accounts and investments |
| What is account receivable? | The amount of debt the customers has to pay after the service or product is delivered |
| What is property, plant, and equipment? | Property plant and equipment is a asset that cant exactly be turned to cash |
| What are the example kind of liabilities? | Account payable Notes payable |
| What is account payable? | the company's debt it has to pay after receiving a good or service |
| What is note payable? | company's contract debts |
| What are the example kind of owner's equity? | Common stocks Retained earnings |
| Is common stocks the amount invested by the owners of the company? If so, why? | Because the investment can be classified as asset because its not really like a liability but something that produces value itself for the company itself |
| What is retained earning? | Retained earnings is the sum of all undistributed profits of the company |
| What does a balance sheet tell? | Balance sheet tells the financial position or financial status of a company on a given time |
| What does the balance sheet present? | Balance sheet is a presentation of the accounting equation(asset, liability, and equity) |
| What is current and long term for asset and liability? | Current for asset is an asset that is expected to be converted to cash in a short time. Long term for asset is more so, an asset that provides value or cash for more than a year. Current for liability is a liability that is expected to be paid in a short time Long term for liability is a accumulated debts that hasnt be paid for a long time |
| What is the summary of chapter 2? | Balance sheet tells the financial position or financial status of a company on a given time Balance sheet is a presentation of the accounting equation(asset, liability, and equity) There are current and long term for asset and liability: Current asset - asset that is expected to be converted to cash Long term asset - asset that provides value or cash more than a year(e.g investment, or equipment that solves long term problem) Current liability - debt expected to be paid soon Long term liability - accumulated debts that haven't paid for a long time |
| What does gross profit tell us? | it tells us if the product or service is profitable. |
| How is gross profit calculated? | Gross Profit = Revenue - Cost of Goods Sold (COGS) |
| What is cost of goods sold? | Its a cost of making a product that were sold |
| What does operating expense tell us? | Operating expense tell us the amount of money needed to run the business. |
| What is non-operating expense? | Non-operating expense is a expense outside of running the business, like lawsuit |
| How often would operating expense be paid? | from time to time |
| Would non-operating expense be paid from time to time? if not why? | Non-operating expense would only be paid once. Because it's outside of operating cost |
| What does income statement tell us? | The income statement helps to show the financial performance of a company over time; how it's doing |
| What does operating income tell us? | it tells us the business health, if they can still maintain the cost of running their business |
| What does net income tell us? | Tells us where the business state has ended up after taking into account the taxes + interest + expenses that comes at play or affects it. |
| What is the summary of chapter 3? | The income statement helps to show the financial performance of a company over time; how it's doing Gross profit - tells if the product or service is profitable Cost of goods sold - the cost of making the product or service that the company sold Operating expense - the cost of running the company, likely to be paid again and again Non-operating expense - the cost outside of running the company such as lawsuit, likely to be paid only once. Operating income - (the total revenue - operating expense), it tells us the business health, if they can still maintain the cost of running their business Net income - the (gross income - (expense + tax + interest)), it helps to see where the business state has ended up after taking into account the taxes + interest + expenses that comes at play or affects it. |
| What is undistributed profit? | its the profit that hasn't been distributed yet(in the form of dividends for example) to shareholders and the owner |
| Why does retained earnings become a bridge between income statement and balance sheet? | Retained earnings becomes a bridge because it takes information from income statement, and provides information to balance sheet. |
| Why is dividend not a liability? | Dividend is not an expense/liability because its a distribution of profit, the context is important. |
| Why is retained earnings not the same as cash? | Retained earnings is not the same as cash because retained earning represent values that has been reinvested into all kinds of assets, whereas cash doesn't change; it's a standstill asset. Retained earning also gets used, this indicates allocation. |
| What is the summary of chapter 4? | Retained earnings tells us the changes of retained earnings of a company over a period of time. Retained earnings acts a bridge between income statement and balance sheet because retained earnings takes information from income statement, and provides information to balance sheet. Dividend is not an expense because its a distribution of profit, the context is important. Retained earnings is not the same as cash because retained earning represent values that has been reinvested into all kinds of assets, whereas cash doesn't change; it's a standstill asset. Retained earning also gets used, this indicates allocation. |
| What does cash flow tell us? | Cash flow tell us where the money is coming from on the company, the cash inflows and out flows. |
| What is the difference between cash flow and income statement? | The difference between a cash flow and income statement is due to the timing, if a cash is not to be received; it gets signed off as an account receivable in the income statement but this wont be written in the cash flow statement ITSELF. |
| What is cashflow from operating activities? | Cashflow operating activities is the cashflow of the business operation |
| What are the example of cashflow from operating activities? | Receipts from the sale of goods or services, Payments made to suppliers, Payments made to employees, and Tax payments. |
| What is cashflow from investing activities? | Cashflow investing activities is the cashflow of the company investment or assets bought |
| What are the example of cashflow from investing activities? | Purchase or sale of property, plant, or equipment, Purchase or sale of stocks or bonds, and Interest or dividends received from investments. |
| What is cashflow from financial activities? | Cashflows financial activities is the cashflow of a company's transaction, income, and more related to finances |
| What are the example of cashflow from financial activities? | Dividends paid to shareholders, Cash flow related to taking out—or paying back—a loan, and Cash received from investors when new shares of stock are issued. |
| What is the summary of chapter 5? | Cash flow statement tracks the money that goes in and out, where it comes from and when Cash flow statement differs from income statement due to the time, and classifications Cash flow statement have three things: - cash flow operating activities - cash flow financial activities - cash flow investing activities Cash flow operating activities - cash flow related to business operation Cash flow financial activities - cash flow related to business finances such as transaction Cash flow investing activities - cash flow related to business buyings; and investment |
| What is liquidity ratio? | Liquidity ratio shows easily a company will be able to pay off its debt |
| What are the examples shown in the book on liquidity ratio? | Current ratio, and quick ratio |
| What does current ratio serves us? | Current ratio serves to provide an assessment of how easily a company can pay off its current debt |
| What does the quick ratio assess? | Quick ratio seeks to assess the company's ability to pay off it's current liabilities |
| What is the difference between current ratio and quick ratio? | The difference between current ratio and quick ratio is that quick ratio takes into account inventory for worst case scenario assessment: how well will the company be able to fulfill the current liabilities if sales are slow(if inventory is not to be turned into cash) |
| What is the profitability ratio? | The profitability ratio is a ratio that tells us how profitable a company is |
| What is return on asset? | Return on asset shows us the profitability of the company in comparison to it's size |
| What does return on asset answer? | it answers "how efficiently is the company using its asset to generate profit?" |
| What does return on equity answer? | It answers "how efficiently is the company using the investor's money to generate profit?" |
| What does gross profit margin shows us? | shows what percentage of sales(profit) remains after covering the cost of the sold inventory(cost of goods sold) |
| What does financial leverage ratio tells us? | Financial leverage ratios tells us the extent of how much a company has used debt to finance its operations. |
| What does debt ratio show us? | shows what portion of a company's asset has been financed with debt |
| What does debt to equity ratio tells us? | Tells the ratio of a company's financing using its debt to finance things via capital from investors(their own money) |
| What is asset turnover ratios? | Asset turnover ratios helps us to see how efficiently a company uses it's assets. |
| What does inventory turnover show us? | shows how many times a company inventory is sold and replaced; how fast and efficiently they sell their inventory and replaces them again |
| What does average inventory entails? | Shows how long on average is the inventory on hand before it is sold It helps to tell on how long is the inventory there(to indicate if their sells are slow) |
| What does receivable turnover tells us? | Receivable turnover shows how quickly is the company collecting the accounts receivable(if there's delay) |
| What is average collection period? | Average collection period is the average of receivable turnover |
| What is the summary of chapter 6? | Liquidity ratio - shows easily the company will be able to pay off its debt Turnover ratio - shows how easily the company efficiently use its asset(how quickly do they sell them, receive account receivable, and replace them) Profitability ratio - how profitable the company is Financial leverage ratios tells us the extent of how much a company has used debt to finance its operations |
| In GAAP, why is the main standard of bookkeeping double entry bookkeeping? | In GAAP it uses double entry bookkeeping because that way, we can keep track and seperate concerns with income statement and balance sheet in order to adhere to the accounting equation whereas one entry bookkeeping doesnt do this |
| What is debit and credit? | Debits are what you have or use; credits are where it came from or who you owe. |
| In T account of debit and credit, how does debit and credit function? | debits increase accounts on the left side of the accounting equation, and credits increase accounts on the right side. |
| What is T account? | T accounts is a separation of concerns with the left(<) being debit, and with the right(>) being credit |
| What is the summary of chapter 7? | Generally Accepted Accounting Principles (GAAP) is the framework of accounting rules and guidelines used in the preparation of financial statements. The Securities and Exchange Commission requires that all publicly traded companies adhere by GAAP when preparing their financial statement |
| What is the summary of chapter 8? | For every financials, a journal entry must be recorded that includes debit and a credit(separation of concerns) Debits is a thing you receive; Credit on the other hand is what you give Just a key remainder that: If credit receives, debit gives. There will always be a trade off in order for the accounting equation to be true. The general ledger is a document where the financials of a company is recorded; its where the financial statements are made. A t-account is a visualization of separation of concerns for debit and credit where left is debit, and right being credit Trial balance shows the balance in each account at a given point in time where it's already calculated(total debits equal total credits) |
| What is the accrual method? | The accrual records income or revenue after the service/goods is delivered REGARDLESS if the cash wasn't paid yet |
| What is the cash method? | The cash method records income or revenue after the cash is paid and when the service/goods is delivered |
| Why is it under GAAP, we use accrual method? | The reason for this is because in order to eliminate the time lags + accounting distortions not to mix things up. |
| What is the summary of chapter 9? | My own summary: The cash method records income or revenue after the cash is paid and when the service/goods is delivered The accrual method on the other hand, records income or revenue after the service/goods is delivered REGARDLESS if the cash wasn't paid yet The reason for this is because in order to eliminate the time lags + accounting distortions not to mix things up. |
| Under GAAP, is the asset recorded at their historical cost? if so why? | Yes market value itself or current value can be fuzzy and can change so historical value provides reliability. Hence we stick to historical cost for reliability |
| What is materiality? | Materiality is a rule that helps focus on what matters the most to a financial statement, and skip the insignificant details. |
| Under GAAP what is considered materiality? | if a financial misstatement or omission is important enough to influence the decisions of someone relying on those statements, this is classified as a materiality. |
| What is the summary of chapter 10? | Under GAAP, materiality suggest that if the recorded financial statement is proper and could change the decision of the viewer or reader, that is classified as materiality. An asset under GAAP is recorded with the historical cost, for reliability and not current cost due to fluctuations. Money unit assumption under GAAP uses dollar(prob because americans LOL) Entity assumption under GAAP suggest that the company is a seperate entity from the owner itself under GAAP, the matching principle suggest that expense must be matched to the revenues that they help generate and also recorded in the same period or time in which the revenues are recorded. |
| What is depreciation? | A process of spreadingly recording the expense(cost of an asset that last longer than one year) over periods of time. |
| What are the two types of depreciation? | Straight line and accumulated |
| What is straight line depreciation? | a method of recording the expense spreadingly over period of time |
| What is accumulated depreciation? | Accumulated depreciation is the total depreciations recorded summed up. |
| What is the salvage value? | A value that the asset is expected to have after planned years. |
| What is the summary of chapter 11? | Depreciation is when an expense is spreadly recorded across periods. 2 types of depreciation: straight line depreciation - method you use each year to calculate an expense. accumulated depreciation - the total depreciation recorded summed. Salvage value - value that the asset is expected to have after planned years. if the amount of cash is greater than the asset net value; it is recorded as gains, if the asset is sold less than its recorded net value; it is recorded as a loss. |