Accounting, Finance, and Business Law
Accounting, Finance, and Business Law tests whether you can record transactions, read financial statements, apply time-value and ratio analysis, and recognize the legal rules governing contracts, sales, and business relationships.
Accounting fundamentals
The accounting equation - Assets = Liabilities + Equity - must balance after every transaction. Debits increase assets and expenses; credits increase liabilities, equity, and revenue. The accounting cycle runs from journal entries to posting, trial balance, adjusting entries, and closing entries. The statements link: income statement to retained earnings to balance sheet to cash flow statement. Accrual accounting recognizes revenue when earned and expenses when incurred, not when cash moves.
Finance essentials
Time value of money: FV = PV(1 + r)^n, and present value discounts future cash flows. Break-even units = fixed costs ÷ (price − variable cost per unit). Liquidity ratios (current, quick), profitability ratios (gross margin, net margin, return on equity), and leverage ratios (debt-to-equity) each answer different questions.
Business law basics
A valid contract needs offer, acceptance, consideration, capacity, and legality; some contracts must be in writing under the statute of frauds, such as sales of land or goods of $500 or more under UCC Article 2. Article 2 governs sales of goods; common law governs services. Torts may be intentional, negligent, or strict liability. Agency law binds a principal for an agent's acts within actual or apparent authority.
Worked example
A firm has current assets of $120,000 including $40,000 inventory, and current liabilities of $60,000. Current ratio = 2.0; quick ratio = (120,000 − 40,000) ÷ 60,000 = 1.33. It then borrows $30,000 cash due in 90 days: current assets become $150,000 and liabilities $90,000. Current ratio falls to 1.67 and quick ratio to 1.0 - short-term borrowing can weaken liquidity ratios even as cash rises.
Traps that cost marks
Do not assume every debit is an increase. Do not mix cash-basis figures into an accrual income statement. In law items, check whether goods or services are involved before citing the UCC, and remember that a promise without consideration is generally unenforceable.