Pareto MBA - Module 1

Does expense reflect the purchase or the use of a resource?

An expense reflects the use of a resource. A company could spend X on purchasing input goods, but only use X/3 during the time period the income statement covers. In that case, only X/3 would be reported as an expense (and the rest would be booked as an asset).

Which financial statement reports the assets, liabilities, and shareholders'/owners' equity at a specific date?

Balance Sheet

When a company pays a bill, the account Cash will be __________.

Credited

Are entries to revenue accounts usually debits or credits?

Credits

Are entries to expense accounts such as travel expenses usually on the debit or credit side of a T account?

Debit

Do asset accounts usually grow on the debit or credit side?

Debit

When cash is received, the account Cash will be __________.

Debited

A company repays a bank loan using the company's cash. Will Liabilities increase or decrease?

Decrease (as will assets, since cash decreases and cash is an asset).

The basic accounting equation is Assets = Liabilities + _________.

Equity

A profitable company can never go bankrupt. True or false?

False.

Net Sales minus the Cost of Goods Sold is __________.

Gross Profit

Which financial statement reports the revenues and expenses for a period of time such as a year or a quarter?

Income Statement

The company purchases a significant amount of supplies (assets) on credit. Will Liabilities increase or decrease?

Increase

The owner invests personal cash in the business. Will Assets increase or decrease?

Increase

The owner invests personal cash in the business. What happens on the right hand side of the Balance Sheet?

It depends - if the owner puts money in as a loan to the business, then Liabilities increase. If the owner injects the money as equity, then Equity increases (and Liabilities do not). In both cases, the right hand side of the Balance Sheet increases by the amount of the money that the owner invests (which is also equal to the amount by which Cash increases on the left hand side of the Balance Sheet).

Is debit associated with left or right in terms of bookkeeping?

Left

What profit measure does the term "bottom line" usually refer to?

Net income, ie. the post-tax profit of a company (also called net profit or net earnings).

A company receives cash from a bank loan. Will Equity increase, decrease or is there no effect?

No Effect

The company purchases equipment with its cash. Will Equity increase or decrease?

No Effect

Do revenues have to be matched by payments from customers in order to be recognized in the income statement?

No. A company can sell something to a customer and record the sale as revenue without having received any money from that customer (in which case the revenue would be matched by an increase in Accounts Receivable instead of cash on the left hand side of the balance sheet).

Is profit the same as cash flow?

No. Profit, or net profit, is an accounting term that you find in the income statement, which fundamentally shows the net of revenues and expenses, which may or may not correspond to actual cash flows.

Gross Profit minus Operating Expenses is often referred to as __________.

Operating Income

Is credit associated with left or right in terms of bookkeeping?

Right

A company repays a bank loan using the company's cash. Will Equity increase or decrease?

There's no direct effect on equity (although paying off a loan might mean that interest expense goes down, which in turn might result in a higher net profit, which would then be added to equity over time - but whether paying off a loan is a good idea or not is not as simple as that; it also depends on eg. the opportunity cost of that cash).

The company purchases equipment with its cash. Will Liabilities increase or decrease?

There's no effect on Liabilities. What happens is that one type of asset (cash) is replaced by another type of asset (equipment).

Which country invented double-entry bookkeeping?

This is a trick question. We know double-entry bookkeeping goes back to at least the late 13th century in what is now Italy, but Italy didn't exist back then. Double-entry bookkeeping probably goes back further than that though, possibly with traces from or similarities to old Greek, Roman, Indian, Arab and/or Korean systems.

Accounting entries involve a minimum of how many accounts?

Two

A company has total assets of a 100 of which 80 is a toothpaste factory. Liabilities are 50 and equity is 50. The factory is destroyed in a flood and there is no insurance. What happens to the company's shareholders in economic terms?

Typically they would be wiped out, meaning their equity would be worth zero, since assets go down from 100 to 20 while liabilities remain at 50 (assuming they can't be renegotiated/written down). Since equity = assets - liabilities, we have that equity = -30, meaning the company goes into bankruptcy. On the other hand, if this is a limited liability company, shareholders also don't owe any money even though (theoretically) equity is negative, since their liability is limited to the amount of money they invested in the business.