Accounting
The Accounting equation
Assets = Liabilities + Owner's Equity
The total value of goods and services produced in a nation annually; in other words, the industrial output of a nation.
What is GDP?
How might knowledge of economic situations help a business perform well in an economy?
What is risk and how is it managed?
Risk is anything that can cause financial or reputational damage to a company. Businesses predominantly manage risk in two ways: risk transfer or risk avoidance. Risk transfer, also known as insurance, is an instrument businesses use to remove/lower risk for some financial resources. Risk avoidance involves removing risk entirely.
Who does a board of directors represent?
The Shareholders of the company
What are Accounts Receivable and Accounts Payable?
Accounts Receivable: Money owed to a company
Accounts Payable: Money owed by the company
What is the effect of high or low interest rates on the economy?
Lower interest rates encourage borrowing to spend, therefore causing an increase in consumer spending, which causes a hike in inflation.
Higher interest rates discourages the same, causing a decrease to consumer spending, which decreases inflation.
Describe the different between a Market, Mixed and Command Economy.
Market economy (aka Laissez-Faire)
Very low government meddling
Supply and demand rules!
Usually, a central bank controls fiscal/monetary policy
The government regulates
Minimum wage, Consumer protection laws, Worker safety, Subsidized healthcare, Public systems
Mixed economy
Controlled to some degree by the government, but includes a private sector
Growth is driven by supply and demand
The government steps in to stimulate or slow down growth using fiscal/monetary policies
Price fixing, quotas, subsidies, government monopoly over public goods
E.g. UK
Command economy
Any and all economic activities are planned and put into action by the government
Lack of competition
Lack of some products and abundance of others
Rise of a black market (“Shadow Economy”) to satisfy needs
E.g. North Korea, Iran, Libya, Cuba
What is the importance of liquidity in a company?
Liquidity allows the company to deal with unexpected costs and deliver on their short term obligations.
The Entrepreneurial process
What is the difference between Accrual and Cash Accounting?
Cash - Revenue is recorded when the transaction takes place
Accrual - Revenue is recorded when the transaction is earned (for example, a delivery)
Define leading, coincident and lagging economic indicators and provide an example of each.
Leading indicators are those that can predict the future of the economy. An example is the stock market.
A coincident indicator is an indicator that shows the economy as it is, right now. An example is real GDP growth.
A lagging economic indicator is a statistic that lags behind the economy. An example is unemployment rate.
There are three types of currency: Pegged, Free-Floating and Decentralized. Explain each and provide an example.
Pegged currency, where currency is fixed, or pegged to the value of another currency, or a precious metal, meaning that the exchange rate is constant
Free floating currency is a type of currency where the value of a currency is determined by the supply and demand of the currency in foreign exchange markets.
Decentralized currency is a type of currency with no central authority. This is usually cryptocurrency.
What is an acceptable Current Assets to Current Liabilities Ratio?
Name someone who: is an entity that acts on behalf of someone else and is legally responsible to act in their client’s best interests.
A fiduciary
Name 3 of the most industry-relevant financial statements and (briefly) describe what they each show.
Balance Sheet - Current and Non-current Assets and Liabilities
Income Statement - Net income, expenses
Cash Flow Statement - Tracks Operating, Investing and Financing activities in the business
What is the formula for calculating GDP?
GDP = Consumer spending + Investment spending + Government Spending + Exports - Imports
Describe what might happen during the contraction stage of the business cycle.
Economic growth slows, consumer spending weak, unemployment goes high.
Small businesses can close while healthcare, utilities and other necessities outperform the economy.
What is Benford's law and how can it be used to detect fraud?
Benford’s law states that in any genuine given data set, the numbers appearing in the leading place value will have a similar ratio.
Any legal method of reducing taxable income for a person or corporation. Examples include retirement plans, municipal bonds and health-savings accounts.
Revenue is made through the sale of products or earning interest on a loan.
Gains is money made from the sale of long-term assets
Define the law of diminishing returns
Marginal product is expressed as the change in output as the units of production increase. As more units are added, the marginal product usually trends downwards, and if too many units are added, your marginal product can be negative.
Marginal revenue is the change in total revenue as a higher quantity of units are sold. As the quantity of units goes up, Marginal revenue decreases.
Marginal cost is the change in expenses as a higher quantity of units are produced. This usually is a curve, and the point where marginal revenue and marginal cost meet is called the profit maximizing point.
The concepts of marginal revenue and marginal cost go hand-in-hand and are usually represented on the same graph, along with demand. The law of diminishing returns exemplifies this relationship. It states that increasing employees to increase production results also in higher costs due to reduced output per employee.
There are 4 important types of securities: Equity, Debt, Hybrid and Derivative. Explain them and provide an example.
Equity securities
Known as stocks or shares, representing ownership in a company. You own a portion of the company’s assets and can make a profit/loss based on the value of the company’s assets. You have a potential for high returns, but also incur a relatively high risk
Debt securities
Represent loans made by investors. Debt securities include bonds, debentures and notes. These are lower risk, backed by the issuer’s reliability.
Hybrid securities
Combine features of equity and debt securities. Convertible bonds allow their investors to convert their bonds to a number of company shares, providing both lower and higher risk options for the investor.
Derivative securities
These securities “derive” their value from another asset, such as a stock, bond, currency or commodity. A great example of this is a bond on oil or gold, which can be used to make money in times of economic turmoil.
Describe the effects a stock buyback might have on a company's share price
Buybacks are companies' way of investing in themselves to prevent a controlling share from being bought. When a stock buyback occurs, the price of the stock usually trends upwards.
What are Internal Control Systems?
Internal systems that ensure the accuracy of financial and accounting information, and their compliance with laws and regulations.