What is the Matching Principle in financial accounting?

Expenses must be matched and recognized in the same accounting period as the revenues they helped generate.

What is the Cash Ratio formula?

Cash Ratio = (Cash and Cash Equivalents + Marketable Securities) / Current Liabilities, providing the most stringent and conservative test of immediate liquidity.

What is the Present Value formula for a perpetual, constant stream of cash flows (Perpetuity)?

PV = C / r, where C is the periodic payment and r is the discount rate.

State the compound interest formula for Future Value (FV).

FV = PV * (1 + r)^n, where PV is present value, r is interest rate per period, and n is total compounding periods.

State the Present Value (PV) formula for a single future sum.

PV = FV / (1 + r)^n = FV * (1 + r)^(-n).

What is the Current Ratio formula and what does a ratio below 1.0 signify?

Current Ratio = Current Assets / Current Liabilities; a value below 1.0 indicates that short-term obligations exceed short-term liquid assets, signaling potential liquidity stress.

How is ending Retained Earnings calculated on the statement of retained earnings?

Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid.

What are the three core sections of the Statement of Cash Flows?

Cash Flow from Operating Activities (CFO), Cash Flow from Investing Activities (CFI), and Cash Flow from Financing Activities (CFF).

How is straight-line depreciation calculated for a fixed capital asset?

Annual Depreciation Expense = (Historical Asset Cost - Estimated Salvage Value) / Useful Economic Life (in years).

State the three-component DuPont Analysis decomposition of Return on Equity (ROE).

ROE = Net Profit Margin * Asset Turnover * Financial Leverage = (Net Income / Revenue) * (Revenue / Total Assets) * (Total Assets / Shareholders' Equity).

How is Cash Flow from Operations calculated using the indirect method?

Start with Net Income, add back non-cash expenses (Depreciation & Amortization), add non-operating losses (or subtract gains), and adjust for net changes in operating working capital.

What does Asset Turnover measure and how is it calculated?

Asset Turnover = Revenue / Average Total Assets; it measures operational efficiency by evaluating how many dollars of top-line revenue are generated per dollar of asset investment.

Why is Net Present Value (NPV) theoretically superior to IRR when evaluating mutually exclusive projects?

Because IRR assumes reinvestment of interim cash flows at the IRR itself (unrealistic for high-IRR projects) and ignores project scale, whereas NPV assumes reinvestment at the actual cost of capital and directly measures total wealth creation.

What is EBITDA and why do financial analysts utilize it?

Earnings Before Interest, Taxes, Depreciation, and Amortization; it isolates core operating performance and operational cash generation by stripping out financing structure, tax regimes, and non-cash capital depreciation.

What is the timing difference between an Ordinary Annuity and an Annuity Due?

An Ordinary Annuity has periodic cash flows occurring at the end of each period, whereas an Annuity Due has cash flows occurring at the beginning of each period, making its present value larger by a factor of (1 + r).

How do changes in Current Assets and Current Liabilities affect Cash Flow from Operations?

An increase in Current Assets is a use of cash (cash outflow/subtracted); an increase in Current Liabilities is a source of cash (cash inflow/added).

What is the Payback Period, and what are its primary analytical limitations?

The time required for cumulative project cash inflows to equal the initial outlay; limitations include ignoring the time value of money and ignoring all cash flows occurring after the payback cutoff.

How does accrual accounting differ from cash accounting?

Accrual accounting records revenues when earned and expenses when incurred regardless of when cash changes hands; cash accounting records transactions only when cash is received or paid.

What is the difference between Annual Percentage Rate (APR) and Effective Annual Rate (EAR)?

APR is the nominal stated annual rate ignoring intra-year compounding; EAR accounts for intra-year compounding: EAR = (1 + APR / m)^m - 1, where m is compounding frequency per year.

What does the Debt-to-Equity (D/E) Ratio measure, and how is it calculated?

D/E = Total Debt / Total Shareholders' Equity; it measures a company's financial leverage and the relative proportion of debt versus equity financing.

State the fundamental balance sheet accounting equation.

Assets = Liabilities + Shareholders' Equity.

What is the formula for the Present Value of a Growing Perpetuity?

PV = C_1 / (r - g), where C_1 is next period's cash flow, r is discount rate, and g is perpetual growth rate (valid only when r > g).

Distinguish between Return on Assets (ROA) and Return on Equity (ROE).

ROA = Net Income / Total Assets (measures management efficiency at deploying asset base); ROE = Net Income / Shareholders' Equity (measures net profitability generated per dollar of equity invested).

List the sequential income statement line items from Net Sales down to Net Income.

Net Sales/Revenues -> Cost of Goods Sold (COGS) -> Gross Profit -> Operating Expenses (SG&A, R&D) -> Operating Income (EBIT) -> Net Interest Expense -> Pre-Tax Income (EBT) -> Income Taxes -> Net Income.

Define Internal Rate of Return (IRR) and its standard acceptance criterion.

The discount rate that equates the present value of future cash inflows to initial investment cost, setting NPV = 0. Accept if IRR > Cost of Capital (hurdle rate).

What is Free Cash Flow to Firm (FCFF) and what is its standard formula starting from CFO?

The cash available to all capital providers after operating expenses and reinvestment: FCFF = Cash Flow from Operations + Interest Expense * (1 - Tax Rate) - Capital Expenditures (CapEx).

Why must Sunk Costs be excluded from capital budgeting cash flow analyses?

Because sunk costs are past, unrecoverable outlays that remain unchanged regardless of whether the proposed project is accepted or rejected; only incremental prospective cash flows matter.

What does the Revenue Recognition Principle dictate under GAAP / IFRS?

Revenue must be recognized when performance obligations are satisfied by transferring promised goods or services to the customer, not necessarily when cash is collected.

What is Working Capital (Net Working Capital) and why is it monitored?

Working Capital = Current Assets - Current Liabilities; it measures a firm's operational short-term liquidity and ability to satisfy immediate financial obligations.

Define Net Present Value (NPV) and its investment decision rule.

NPV is the sum of present values of all future cash inflows minus the initial investment outlay: NPV = ∑ [CF_t / (1 + r)^t] - CF_0. Accept the project if NPV > 0; reject if NPV < 0.

What is the Quick Ratio (Acid-Test Ratio) formula, and why does it exclude inventory?

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities; it excludes inventory because inventory cannot be converted into cash immediately without substantial discounting.

What is the Interest Coverage Ratio (Times Interest Earned) formula?

Interest Coverage Ratio = EBIT / Interest Expense; it indicates how many times a company's operating profits can cover its annual contractual interest payments.

Unternehmensfinanzierung — Grundstufe (A1/A2) 4: Financial Accounting, Statements & Time Value of Money

[Deutsch] Unternehmensfinanzierung: Fundamental accounting equations, financial statement mechanics, financial ratio analysis, and core time value of money calculations

Level: basic
Languages: de → de
Cards: 32
Markdown: Unternehmensfinanzierung — Grundstufe (A1/A2) 4: Financial Accounting, Statements & Time Value of Money (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	What is the Matching Principle in financial accounting?	Expenses must be matched and recognized in the same accounting period as the revenues they helped generate.
2	What is the Cash Ratio formula?	Cash Ratio = (Cash and Cash Equivalents + Marketable Securities) / Current Liabilities, providing the most stringent and conservative test of immediate liquidity.
3	What is the Present Value formula for a perpetual, constant stream of cash flows (Perpetuity)?	PV = C / r, where C is the periodic payment and r is the discount rate.
4	State the compound interest formula for Future Value (FV).	FV = PV * (1 + r)^n, where PV is present value, r is interest rate per period, and n is total compounding periods.
5	State the Present Value (PV) formula for a single future sum.	PV = FV / (1 + r)^n = FV * (1 + r)^(-n).
6	What is the Current Ratio formula and what does a ratio below 1.0 signify?	Current Ratio = Current Assets / Current Liabilities; a value below 1.0 indicates that short-term obligations exceed short-term liquid assets, signaling potential liquidity stress.
7	How is ending Retained Earnings calculated on the statement of retained earnings?	Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid.
8	What are the three core sections of the Statement of Cash Flows?	Cash Flow from Operating Activities (CFO), Cash Flow from Investing Activities (CFI), and Cash Flow from Financing Activities (CFF).
9	How is straight-line depreciation calculated for a fixed capital asset?	Annual Depreciation Expense = (Historical Asset Cost - Estimated Salvage Value) / Useful Economic Life (in years).
10	State the three-component DuPont Analysis decomposition of Return on Equity (ROE).	ROE = Net Profit Margin * Asset Turnover * Financial Leverage = (Net Income / Revenue) * (Revenue / Total Assets) * (Total Assets / Shareholders' Equity).
11	How is Cash Flow from Operations calculated using the indirect method?	Start with Net Income, add back non-cash expenses (Depreciation & Amortization), add non-operating losses (or subtract gains), and adjust for net changes in operating working capital.
12	What does Asset Turnover measure and how is it calculated?	Asset Turnover = Revenue / Average Total Assets; it measures operational efficiency by evaluating how many dollars of top-line revenue are generated per dollar of asset investment.
13	Why is Net Present Value (NPV) theoretically superior to IRR when evaluating mutually exclusive projects?	Because IRR assumes reinvestment of interim cash flows at the IRR itself (unrealistic for high-IRR projects) and ignores project scale, whereas NPV assumes reinvestment at the actual cost of capital and directly measures total wealth creation.
14	What is EBITDA and why do financial analysts utilize it?	Earnings Before Interest, Taxes, Depreciation, and Amortization; it isolates core operating performance and operational cash generation by stripping out financing structure, tax regimes, and non-cash capital depreciation.
15	What is the timing difference between an Ordinary Annuity and an Annuity Due?	An Ordinary Annuity has periodic cash flows occurring at the end of each period, whereas an Annuity Due has cash flows occurring at the beginning of each period, making its present value larger by a factor of (1 + r).
16	How do changes in Current Assets and Current Liabilities affect Cash Flow from Operations?	An increase in Current Assets is a use of cash (cash outflow/subtracted); an increase in Current Liabilities is a source of cash (cash inflow/added).
17	What is the Payback Period, and what are its primary analytical limitations?	The time required for cumulative project cash inflows to equal the initial outlay; limitations include ignoring the time value of money and ignoring all cash flows occurring after the payback cutoff.
18	How does accrual accounting differ from cash accounting?	Accrual accounting records revenues when earned and expenses when incurred regardless of when cash changes hands; cash accounting records transactions only when cash is received or paid.
19	What is the difference between Annual Percentage Rate (APR) and Effective Annual Rate (EAR)?	APR is the nominal stated annual rate ignoring intra-year compounding; EAR accounts for intra-year compounding: EAR = (1 + APR / m)^m - 1, where m is compounding frequency per year.
20	What does the Debt-to-Equity (D/E) Ratio measure, and how is it calculated?	D/E = Total Debt / Total Shareholders' Equity; it measures a company's financial leverage and the relative proportion of debt versus equity financing.
21	State the fundamental balance sheet accounting equation.	Assets = Liabilities + Shareholders' Equity.
22	What is the formula for the Present Value of a Growing Perpetuity?	PV = C_1 / (r - g), where C_1 is next period's cash flow, r is discount rate, and g is perpetual growth rate (valid only when r > g).
23	Distinguish between Return on Assets (ROA) and Return on Equity (ROE).	ROA = Net Income / Total Assets (measures management efficiency at deploying asset base); ROE = Net Income / Shareholders' Equity (measures net profitability generated per dollar of equity invested).
24	List the sequential income statement line items from Net Sales down to Net Income.	Net Sales/Revenues -> Cost of Goods Sold (COGS) -> Gross Profit -> Operating Expenses (SG&A, R&D) -> Operating Income (EBIT) -> Net Interest Expense -> Pre-Tax Income (EBT) -> Income Taxes -> Net Income.
25	Define Internal Rate of Return (IRR) and its standard acceptance criterion.	The discount rate that equates the present value of future cash inflows to initial investment cost, setting NPV = 0. Accept if IRR > Cost of Capital (hurdle rate).
26	What is Free Cash Flow to Firm (FCFF) and what is its standard formula starting from CFO?	The cash available to all capital providers after operating expenses and reinvestment: FCFF = Cash Flow from Operations + Interest Expense * (1 - Tax Rate) - Capital Expenditures (CapEx).
27	Why must Sunk Costs be excluded from capital budgeting cash flow analyses?	Because sunk costs are past, unrecoverable outlays that remain unchanged regardless of whether the proposed project is accepted or rejected; only incremental prospective cash flows matter.
28	What does the Revenue Recognition Principle dictate under GAAP / IFRS?	Revenue must be recognized when performance obligations are satisfied by transferring promised goods or services to the customer, not necessarily when cash is collected.
29	What is Working Capital (Net Working Capital) and why is it monitored?	Working Capital = Current Assets - Current Liabilities; it measures a firm's operational short-term liquidity and ability to satisfy immediate financial obligations.
30	Define Net Present Value (NPV) and its investment decision rule.	NPV is the sum of present values of all future cash inflows minus the initial investment outlay: NPV = ∑ [CF_t / (1 + r)^t] - CF_0. Accept the project if NPV > 0; reject if NPV < 0.
31	What is the Quick Ratio (Acid-Test Ratio) formula, and why does it exclude inventory?	Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities; it excludes inventory because inventory cannot be converted into cash immediately without substantial discounting.
32	What is the Interest Coverage Ratio (Times Interest Earned) formula?	Interest Coverage Ratio = EBIT / Interest Expense; it indicates how many times a company's operating profits can cover its annual contractual interest payments.