Ch11-Accounting

Ch11 — Accounting & Finance — Lesson & Tracker

Progress Tracker

Concept	Attempts	Correct	Last Tested	Status
CurrentRatio	1	1	2026-04-19	🟢
QuickRatio	1	1	2026-04-19	🟢
IncomeStatement	1	1	2026-04-19	🟢
ReturnOnEquity	1	1	2026-04-19	🟢

---

Your Weak Points

Gap	History	Status
No gaps identified yet	—	—

Error Notes

(none yet)

---

Concept Map — Weak → Strong Connections

graph TD
    AIS["Accounting Information System<br/>Collects, analyzes, communicates financial data"]
    AIS --> FA["Financial Accounting<br/>External users<br/>Shareholders · Creditors · Regulators"]
    AIS --> MA["Managerial Accounting<br/>Internal users<br/>Managers · Departments"]
    FA --> FS["Three Financial Statements"]
    FS --> BS["Balance Sheet<br/>Assets = Liabilities + Equity<br/>Snapshot in time"]
    FS --> IS["Income Statement<br/>Revenue − Expenses = Net Income<br/>Period of time"]
    FS --> CF["Cash Flow Statement<br/>Operating + Investing + Financing<br/>Period of time"]
    BS --> RAT["Financial Ratios<br/>Solvency · Profitability · Activity"]
    IS --> RAT

---

Accounting Overview — Lesson

Source: Accounting

Financial vs. Managerial Accounting

	Financial Accounting	Managerial Accounting
Users	External (shareholders, creditors, regulators, public)	Internal (managers, employees, departments)
Focus	Company as a whole	Departments, divisions, specific projects
Reports	Balance sheet, income statement, cash flows	Budgets, cost analyses, projections
Standards	IFRS or ASPE (regulated)	No external standard required

CPA Designation

Three legacy designations (CA, CMA, CGA) unified into a single CPA (Chartered Professional Accountant) designation in Canada.

Accounting Standards

Standard	Applies to
IFRS	Publicly traded companies and government enterprises — Canada adopted 2011
ASPE	Private businesses in Canada — simpler than IFRS

Forensic accounting = tracking hidden funds and financial fraud. One of the fastest-growing areas in accounting — called upon by law enforcement and courts.

---

Financial Statements — Lesson

Source: AccountingEquation-FinancialStatements

The Accounting Equation

Assets = Liabilities + Owners’ Equity

Every transaction must keep this equation balanced. If assets exceed liabilities, equity is positive. If liabilities exceed assets → balance sheet insolvency (an accounting term, not the same as bankruptcy).

1. Balance Sheet — The Snapshot

Point-in-time photograph of financial position.

Assets (listed most liquid first):

• Current Assets (convertible to cash within 1 year): Cash → Accounts Receivable → Inventory → Prepaid Expenses
• Fixed Assets: Land, buildings, equipment — subject to depreciation (cost spread over useful life)
• Intangible Assets: Patents, trademarks, copyrights, Goodwill (excess paid above net asset value)

Liabilities (listed by when due):

• Current Liabilities (due within 1 year): Accounts Payable, wages payable
• Long-Term Liabilities: Bonds, loans

Owners’ Equity: Paid-in Capital + Retained Earnings

2. Income Statement — The Scoreboard

Records revenue and expenses over a period of time.

Line	Formula
Revenue (Net Sales)	Top line — all money from selling
− Cost of Goods Sold (COGS)	Direct costs of production
= Gross Profit	Revenue − COGS
− Operating Expenses	Overhead: salaries, R&D, advertising
= Operating Income	Gross Profit − Operating Expenses
− Income Taxes
= Net Income	The bottom line

Net income feeds into Retained Earnings on the Balance Sheet. These statements are linked.

3. Statement of Cash Flows

Tracks actual cash moving in and out over a period of time.

Activity	What It Covers
Operating	Day-to-day: cash from sales, paid to employees/suppliers
Investing	Buying or selling long-term assets
Financing	Loans, issuing stock, paying dividends

Critical: Cash does not equal Net Income. Accrual accounting records revenue when a deal is made, not when cash arrives. A company can be profitable and still go bankrupt for lack of cash.

Statement	Time Frame	Metaphor
Balance Sheet	Point in time	Photograph
Income Statement	Period of time	Scoreboard
Cash Flow Statement	Period of time	Checkbook

---

Financial Ratios — Lesson

Source: FinancialRatios

Three Categories

Category 1 — Solvency (Estimating Financial Risk)

Ratio	Formula	Measures
Current Ratio	Current Assets ÷ Current Liabilities	Can the firm pay short-term debts?
Quick Ratio	(Current Assets − Inventory) ÷ Current Liabilities	Same, but excludes inventory (least liquid)
Debt-to-Equity	Total Liabilities ÷ Owners’ Equity	How much debt vs. equity financing
Debt Ratio	Total Liabilities ÷ Total Assets	% of assets financed by debt
Times Interest Earned	Operating Income ÷ Net Interest Expense	Can operating profit cover interest payments?

Why Quick excludes inventory: Inventory is the least liquid current asset — it may take months to sell. The Quick Ratio is the conservative test of liquidity.

Category 2 — Profitability (Measuring Earnings Potential)

Ratio	Formula
Gross Profit Margin	Gross Profit ÷ Sales
Net Profit Margin	Net Income ÷ Sales
Return on Equity (ROE)	Net Income ÷ Owners’ Equity
Return on Total Assets	Net Income ÷ Total Assets
Earnings Per Share (EPS)	Net Income ÷ Shares Outstanding

Category 3 — Activity (Evaluating Use of Assets)

Ratio	Formula
Inventory Turnover	COGS ÷ Average Inventory
Average Collection Period	Accounts Receivable ÷ (Net Sales ÷ 365)
Total Assets Turnover	Net Sales ÷ Total Assets

Exam Scenario Recognition

Scenario	Ratio to Apply
”Can the firm pay its current bills?”	Current Ratio
”Same question, but inventory is hard to sell”	Quick Ratio
”How much profit per dollar of shareholder equity?”	Return on Equity (ROE)
“How efficiently does the firm sell and restock inventory?”	Inventory Turnover
”How many days does it take to collect from customers?”	Average Collection Period
”Profit per share for investors”	Earnings Per Share (EPS)