Understanding
Balance Sheet
Balance Sheet
What is the balance sheet equation?
What is Asset = Liabilities + Shareholders' Equity
What is the purpose of financial ratios in assessing a company's performance?
What financial ratios help analyze a company’s financial health, efficiency, profitability, and liquidity.
What are the three key components of an income statement?
What is Revenue, Expenses, and Profit Net Income
What is the primary purpose of a cash flow statement?
The cash flow statement summarizes cash inflows and outflows, providing insights into a company’s liquidity and cash management.
What do efficiency ratios measure?
Efficiency ratios measure how effectively a company utilizes its resources, such as inventory and assets, to generate sales.
Define assets and give an example
What is something that has value to a person or organization and can be turned into cash to cover liabilities
If a company's debt-to-equity ratio is 1.5, what does this indicate about its financial structure?
What a debt-to-equity ratio of 1.5 indicates that the company has $1.50 in debt for every $1.00 in equity, suggesting higher financial risk.
If a company has $2,500,000 in revenue and $1,750,000 in expenses, what is its net income?
Net Income = Revenue - Expenses = $2,500,000 - $1,750,000 = $750,000.
Identify the three sections of a cash flow statement.
Operating Activities, Investing Activities, and Financing Activities.
Calculate the inventory turnover if a company has COGS of $300,000 and average inventory of $60,000.
Inventory Turnover = COGS / Average Inventory = $300,000 / $60,000 = 5
If a company has $350,000 in assets and $190,000 in liabilities, what is the equity?
How do liquidity ratios differ from leverage ratios?
What liquidity ratios measure a company's ability to meet short-term obligations, while leverage ratios assess the extent of a company's debt relative to its equity
Explain the significance of the profit margin.
The profit margin measures how much of every dollar of revenue becomes profit, indicating the company's profitability.
Explain how cash flow data supports profitability ratios such as ROA and ROE.
Cash flow data helps assess the quality of earnings and indicates whether profits are supported by cash generated from operations.
What does an asset turnover ratio of 2 indicate about a company?
It indicates that the company generates $2 in sales for every $1 of assets.
Explain how the balance sheet helps in calculating the current ratio.
What the balance sheet provides current assets and current liabilities needed to calculate the current ratio, which indicates liquidity.
Calculate the current ratio if a business has $80,000 in current assets and $40,000 in current liabilities.
Current Ratio = Current Assets / Current Liabilities = $80,000 / $40,000 = 2.
If a business has total revenue of $500,000 and total expenses of $400,000, what is the operating expense ratio?
Operating Expense Ratio = Total Expenses / Total Revenue = $400,000 / $500,000 = 0.8 or 80%.
What is the difference between cash flows from operating activities and investing activities?
Cash flows from operating activities relate to core business functions, while investing activities involve cash used for buying or selling long-term assets.
How do liquidity ratios assess a company's ability to cover short-term liabilities?
Liquidity ratios compare current assets to current liabilities, indicating whether a company can meet its short-term obligations.
Why is it important for a company to balance its assets and liabilities?
What is balancing assets and liabilities is crucial for financial stability, ensuring the company can meet its obligations and maintain operational health.
Discuss the importance of profitability ratios for investors.
Profitability ratios provide insights into a company's ability to generate profit, helping investors make informed decisions about investment opportunities.
Describe how income statements help business owners make financial decisions.
Income statements provide insights into profitability and expense management, guiding owners in budgeting, strategy adjustments, and performance forecasting.
Why is the cash flow statement essential for businesses using the accrual accounting method?
It provides a clear view of actual cash movements, which is critical for managing liquidity, especially when profits do not equate to cash availability.
Discuss the importance of the interest coverage ratio in evaluating a company's financial health.
The interest coverage ratio assesses a company's ability to pay interest on its debts, indicating financial stability and risk of default.