What is earnings per share?
Answer: (Net income − preferred dividends) / weighted average common shares outstanding.
Explanation
A key profitability measure for investors.
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Accounting Fundamentals: Financial Statements (University)
Income statementConceptsRatiosCash flowsBalance sheetBasicsAdjustingDebits/credits
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Income statement
What is net income?
Answer: Revenue minus all expenses, including interest and taxes.
Explanation
Flows into retained earnings.
What is operating income?
Answer: Gross profit minus operating expenses (selling, general, administrative).
Explanation
Excludes interest and taxes; EBIT.
What is gross profit?
Answer: Sales revenue minus cost of goods sold.
Explanation
Gross margin = gross profit / sales.
Concepts
What is materiality?
Answer: Information is material if omitting or misstating it could influence users' decisions.
Explanation
Guides how strictly rules are applied.
What is the difference between GAAP and IFRS?
Answer: GAAP is the US standard (FASB), more rules-based; IFRS is used in most other countries (IASB), more principles-based.
Explanation
Differences include LIFO and revaluation of assets.
Ratios
What is the price-to-earnings ratio?
Answer: Market price per share / earnings per share.
Explanation
Indicates how much investors pay per dollar of earnings.
What is inventory turnover?
Answer: Cost of goods sold / average inventory; how many times inventory sells in a period.
Explanation
Days in inventory = 365 / turnover.
What is return on equity (ROE)?
Answer: Net income / average stockholders' equity.
Explanation
DuPont: ROE = margin × turnover × leverage.
What is the debt-to-equity ratio?
Answer: Total liabilities / total equity; measures leverage.
Explanation
Higher means more financial risk.
What is the current ratio and what does it measure?
Answer: Current assets / current liabilities; short-term liquidity.
Explanation
The quick ratio excludes inventory.
Cash flows
Why is depreciation added back under the indirect method?
Answer: It was subtracted to compute net income but used no cash.
Explanation
Gains on sales are subtracted; losses added.
Direct vs indirect method for operating cash flows?
Answer: Direct lists cash receipts and payments; indirect starts with net income and adjusts for non-cash items and working capital changes.
Explanation
Most companies use the indirect method.
What are the three sections of the statement of cash flows?
Answer: Operating, investing, and financing activities.
Explanation
The sum equals the change in cash for the period.
Balance sheet
What is retained earnings?
Answer: Cumulative net income minus dividends since the company began.
Explanation
Part of stockholders' equity.
What is the allowance for doubtful accounts?
Answer: A contra-asset estimating receivables that will not be collected.
Explanation
Bad debt expense is recorded in the same period as the sale.
What are the common inventory cost flow methods?
Answer: FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted average.
Explanation
In rising prices, LIFO gives lower income and taxes; LIFO is not allowed under IFRS.
What makes an asset 'current'?
Answer: It is cash or expected to be converted to cash or used within one year (or the operating cycle).
Explanation
Cash, receivables, inventory, prepaid expenses.
Basics
What is the accounting equation?
Answer: Assets = Liabilities + Equity
Explanation
Every transaction keeps this balanced.
What is the matching principle?
Answer: Expenses are recorded in the same period as the revenues they help generate.
Explanation
Explains depreciation and accrued expenses.
What is the revenue recognition principle?
Answer: Revenue is recorded when it is earned (goods delivered or services performed), not when cash is received.
Explanation
Under ASC 606, when performance obligations are satisfied.
Cash basis vs accrual basis accounting?
Answer: Cash basis records transactions when cash changes hands; accrual records revenue when earned and expenses when incurred.
Explanation
GAAP requires accrual accounting.
What are the four main financial statements?
Answer: Income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.
Explanation
Prepared in that order because each feeds the next.
Adjusting
What are closing entries?
Answer: Entries that transfer revenue, expense, and dividend balances to Retained Earnings, zeroing temporary accounts.
Explanation
Balance sheet accounts are permanent and not closed.
What is depreciation and the straight-line formula?
Answer: Allocating a long-lived asset's cost over its useful life; (cost − salvage value) / useful life per year.
Explanation
Accumulated Depreciation is a contra-asset.
What are the four types of adjusting entries?
Answer: Prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.
Explanation
Made at period end before financial statements.
Debits/credits
What is a trial balance?
Answer: A list of all accounts with their debit or credit balances to check that total debits equal total credits.
Explanation
Equality does not guarantee no errors.
What is the entry to record a sale on account?
Answer: Debit Accounts Receivable, credit Sales Revenue (and debit Cost of Goods Sold, credit Inventory under perpetual).
Explanation
Cash is recorded later when collected.
What is a journal entry for buying equipment with cash?
Answer: Debit Equipment, credit Cash.
Explanation
One asset up, another down; total assets unchanged.
Which accounts increase with a debit?
Answer: Assets, expenses, and dividends (DEA).
Explanation
Liabilities, equity, and revenue increase with credits (LER).
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