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Final Exam Multiple Choice Review

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BUSI 2150U
Michael Konopaski

The Accounting EquationAssets must have the following characteristics to be classified as an asset by IFRSProvide future benefit to the entity and it must be probable that the entity will enjoy the benefitWhen accountants speak of an asset having a future benefit they mean it will help the entity generate cashBe controlled by the entity that will obtain the benefits does not necessarily require ownership it can be leasedBe the result of a transaction or event that has already occurredBe measurable Liabilities must have the following characteristics to be classified as an asset by IFRSBe the result of a past transaction or economic eventRequire some kind of economic sacrifice to settleAssetsLiabilitiesOwners EquityWorking Capital EquationWorking capital is the amount of money available to an entity to pay current liabilities or the liquidity of the entityNegative working capital means the entity has more current liabilities than current assets and this could indicate liquidity problems although this is not always trueWorking CapitalCurrent AssetsCurrent LiabilitiesCurrent Ratio EquationThe current ratio gives the relative amount of current assets to current liabilitiesThe larger the ratio the more current assets are available to meet current liabilities which on the surface at least means the entity is more able to meet its obligationsFor example a current ratio of 25 means that for every dollar of current liabilities the entity has 250 in current assetsCurrent RatioCurrent AssetsCurrent LiabilitiesDebttoEquity RatioThe debttoequity ratio is a measure of how an entity is financedThe higher the ratio the more debt the entity is using relative to equityan indication of riskMore debt means more risk because whether it is doing well or poorly the entity must make payments on its debt on timeFor example a ratio of 04 means that an entity is financed with 40 as much liabilities as equityIn other words for every dollar invested by shareholders 040 is supplied by creditorsDebttoEquity RatioLiabilitiesOwners EquityGross Margin The gross margin is the sales less the cost of sales which is typically mainly the cost of the inventory or goods it sellsThis is the amount left over for covering overhead costs and providing profit to owners The higher the gross margin the betterGross MarginRevenueCost of SalesGross Margin Percentage The gross margin percentage is the percentage of each dollar that is available to cover other costs and return a profit to the ownersIf the entity can increase its gross margin percentage without decreasing sales or increasing other costs its net income will increaseThe gross margin percentage makes it easier to compare the performance of different entities and
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