ADMN 201 — Ch11: Understanding Accounting
Accounting converts financial transactions into information for decision-making. Chapter 11 covers who does accounting, the foundational equation, the three financial statements, ratio analysis, ethics, and the evolving role of the CPA.
mindmap root((Ch11 Accounting)) The Accounting Equation Assets = Liabilities + Equity Balance sheet insolvency Three Financial Statements Balance Sheet - snapshot Income Statement - period Cash Flow Statement - period Cash does not equal Income Financial Ratios Solvency - risk Profitability - earnings Activity - efficiency Who Does Accounting CPA - CA CMA CGA unified Auditing Tax Services Management Consulting Standards and Ethics IFRS - public companies ASPE - private companies Ethics - foundation of trust
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Core Wiki Pages
- AccountingEquation-FinancialStatements — The equation, all three statements, Cash ≠ Income — primary exam focus
- FinancialRatios — Complete ratio reference: solvency, profitability, activity, valuation
- Accounting — Who does accounting; CPA; auditing; IFRS/ASPE; ethics
Quick Reference: Income Cascade
Revenue → − COGS → Gross Profit → − Operating Expenses → Operating Income → − Taxes → Net Income
Quick Reference: Three Statements at a Glance
| Statement | Metaphor | Time Frame | Core Formula |
|---|---|---|---|
| Balance Sheet | Photograph | Point in time | Assets = Liabilities + Equity |
| Income Statement | Scoreboard | Period | Revenue − Expenses = Net Income |
| Cash Flow Statement | Checkbook | Period | Starting Cash + Inflows − Outflows = Ending Cash |
Quick Reference: Key Ratio Formulas
| Ratio | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | (Current Assets − Inventory) / Current Liabilities |
| Debt-to-Equity | Total Liabilities / Owners’ Equity |
| Debt Ratio | Total Liabilities / Total Assets |
| Times Interest Earned | Operating Income / Net Interest Expense |
| Gross Profit Margin | Gross Profit / Sales |
| Net Profit Margin | Net Income / Sales |
| ROE | Net Income / Owners’ Equity |
| EPS | Net Income / Shares Outstanding |
| P/E Ratio | Stock Price / EPS |
| Inventory Turnover | COGS / Average Inventory |
| Avg Collection Period | Accounts Receivable / (Net Sales / 365) |
Key Distinctions Worth Noting
- Balance sheet insolvency (assets < liabilities) ≠ cash flow insolvency (liquidity crisis) ≠ bankruptcy (legal term)
- Accrual accounting books revenue when deal is made, not when cash is received → a company can look profitable while running out of cash
- IFRS (public companies, 140+ countries) vs. ASPE (private Canadian companies)
- CA + CMA + CGA → unified CPA designation
- Dividends are not an expense — they are a redistribution of earnings