Final Review

REQUIRED: Test your understanding of the concepts covered in this class by writing down
the definition of each:

1. What is financial accounting?

 Process of capturing, analyzing and reporting transaction information to financial statement

users

2. What are the two main types of an organization, depending on whether a company’s stock is

publicly traded or not?

 Private & public

3. What are the three main business activities within a company?

 Financing, investing, operating

4. What are the main financial statements?

 Statement of income; statement of changes in equity; statement of financial position;

statement of cash flows

5. What is an asset?

 Resource currently held by the entity (present); the company expects future economic

benefits from the use or the sale of the resource (future); The event that gave the company the

ownership or right has already happened (past)

6. What is a liability?

 It is a present obligation of the entity (present); The company expects to settle it through an

outflow of resources that represent future economic benefits (future); The obligation results

from an event that has already happened (past)

7. What is share capital?

 Represents the shares that have been issued by the company

8. What are retained earnings?

 Keeps track of the company’s earnings less any amounts that the company pays to the

shareholders in dividends
9. What does liquidity mean?

 how quickly the company can turn the asset into cash

10. What is the accounting equation?

 Assets = Liabilities + Shareholders’ Equity

11. What is depreciation?

 When an asset is used up over time, some of the cost of the asset should be shown as an

expense in each period in which it is used

12. What is a prepaid expense?

 An amount paid in advance of the coverage period is recorded as an asset

13. What is the normal balance of an asset?

 Debit

14. What is the normal balance of a liability?

 Credit

15. What is the normal balance of revenue accounts?

 credit

16. What is the normal balance of expense accounts?

 debit

17. What is an accrual entry?

 Accrual Entries – are required when a revenue or expense needs to be recognized before the

cash is received or paid

18. What is a deferral entry?

 Deferral Entries – are required when a revenue or expense needs to be recorded after it has

been received or paid

19. What is a closing entry?

 Closing entries are required to transfer the balance in temporary accounts to retained

earnings. Temporary accounts include: revenues, expenses and Dividends Declared.

20. What is a consignment sale?

 involves the consignor transferring their goods to a consignee who sells them to the customer
21. What is a third party sales arrangement?

 Companies acting as agents only include their commission or fees when determining

transaction price

 Agents receive commission or fee for arranging a sale

22. What is comprehensive income?

 Defined as the total change in shareholders equity as a result of non-owner sources. Includes:

 Gains and losses from the revaluation of financial statement items to fair value

 Gains and losses from changes in foreign exchange rates

23. What are cash equivalents?

 Cash Equivalents = include short term, highly liquid investments (Money market funds, short

term deposits, treasury bills)

 Cash equivalents must be convertible into known amounts of cash and be maturing within

next 3 months (money market funds, short term deposits, treasury bills)

24. What are some common cash flow challenges?

 significant increase in sales volume

 lengthy cash to cash cycle

 undercapitalization

25. What is a system of internal controls?

 The set of policies and procedures established by an enterprise to safeguard its assets and

ensure the integrity of its accounting system

26. What does factoring mean?

 Selling accounts receivable, also called factoring

27. What is inventory?

 Any item purchased by a company for:

 Resale to customers, or

 Use in the manufacture of a product to be sold to customers

28. What does FOB shipping point mean?

29. What does FOB destination point mean?

 buyer owns the inventory when it arrives at the buyer’s premises

30. What is the difference between a period and a perpetual inventory system?

 Period = inventory levels get updated “once in a while”; perpetual = inventory levels get

updated “all the time”

31. What are the three main types of cost formulas for the pricing of inventory?

 1. Specific Identification

 Specific costs are allocated to the cost of goods sold

 2. Weighted average

 The cost of the items is determined using a weighted average of the cost of the items

purchased

 3. First-in, first-out (FIFO)

 The first item purchased is the first item sold

32. What is the difference between the cost model and revaluation model for long-term assets?

 Cost model = Long-Term Assets are reflected at their carrying amount on the statement of

financial position

 Revaluation model = Under this model, PP&E assets are carried at fair value less any

subsequent accumulated depreciation and subsequent impairment losses

33. What are the three main types of depreciation methods?

 Straight line; units of production; diminishing balance

34. What is impairment?

 The characteristic of an asset whose expected future economic benefits are estimated to be

less than its carrying amount as a result of a change in circumstance. This results in its

carrying amount being reduced accordingly.

 Basically put, impairment is a reduction in the overall quality, durability, value of an asset (ie.

When a car gets rust, this is an example of impairment)

35. What is an intangible asset?

 Examples: copyright, patents, trademarks, licenses, customer lists, franchise rights

36. What is goodwill?

 Goodwill is a long term asset that arises when two businesses are combined

 It is the premium or excess paid by one business when it is acquiring another

37. What is unearned revenue?

 The company has received a cash payment in advance of providing the goods or services but has

not yet earned the revenue from rendering the goods or services

38. What is an assurance type of warranty?

 provides assurance that the product will perform as expected

39. What is a service type of warranty?

 Provides assurance beyond basic product performance

40. What is a bond?

 formal agreement between a borrower (company issuing the bond) and the lenders (investors

who buy the bonds) that specifies how the borrower is to pay back the lenders

41. What is a contingent liability?

 liability that is recorded in the financial statement ONLY when a future event occurs (ie. It is

contingent on the occurrence of this event)

 basically put, a contingent liability is a liability of either:

a. 1. uncertain timing

b. 2. uncertain amount

42. What are the components of shareholder’s equity?

 Share capital; retained earnings; accumulated other comprehensive income; contributed surplus

43. What are common shares?

 basic voting ownership rights of the company

44. What are preferred shares?

 Have preference over common shares in one or more areas:

 Receiving dividends
 Receiving a return on their share capital in the event of company liquidation, giving up right to

vote

45. What are cumulative preferred shares?

 If a dividend is not declared in one year, the dividends carry over to the next year

46. What are non- cumulative preferred shares?

 Non-cumulative preferred shares lose any dividends that have not been declared in the current

period

47. What are Redeemable preferred shares?

 Can be bought back by the company (retired)

 Price and time is specified

48. What are Retractable preferred shares

 Can be sold back to the company (retired) at the option of the shareholder

49. What are convertible preferred shares?

 Convertible at the option of the shareholder

 Can be converted into other types of preferred shares based on a preset ratio

50. What is financial statement analysis?

 The process of evaluating a company’s performance based on an analysis of the financial

statements

 It provides signals about financial health, cash flows and operating efficiency

51. What is the difference between retrospective and prospective financial statement analysis?

 Prospective = Make a prospective analysis (future-looking); Lender might make a forecast of

future cash flows prior to approving a loan;

 Retrospective = Do a retrospective (past) analysis to try and determine future trends:

a. Two major types:

i. 1. trend analysis

ii. 2. cross-sectional analysis

52. What is common size analysis?

amount

 All line items are expressed as percentages of total revenues