Ch. 12 Accounting: Project and Evaluating performance

Balance Sheet

A statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity)

Income Statement

A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time.

most common ration used to estimate liquidity

current ratio

Liquidity

measure of how quickly a company can raise money through internal sources by converting assets to cash

Business Entity Concept

the concept that a business has an existence separate from that of its owners

Current ratio rule of thumb

the minimum acceptable ratio is 2.0, and higher is better

investing activities

the purchase and sale of land, buildings, equipment, and securities

Variable costs

those costs that change with the level of output

Fixed costs

those costs that remain essentially at the same level, regardless of any changes in the volume of production

Uses of financial accounting

valuable aid in decision making

Managerial Accounting

• Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business.

Revenue

• An increase in owners equity caused by selling your product or service

Financial Reprots

• Formal summaries of the content of an accounting system's records of transactions.

Problems in interpreting balance sheeet

-historical values -estimated amounts -certain assets/liabilities omitted

Budgeting relationhips

1st step in sales forecast

Financial Flexibility

A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs.

Financial Accounting

A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators.

Cost-Volume-Profit Analysis

A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.

Operating Activities

Activities involved in producing and selling goods and services.

Financing activities

Activities through which cash is obtained from and paid to lenders, owners, and investors.

Tax Accounting

An accounting approach based on specific accounting requirements set by governmental taxing agencies.

Internal cost factors

Aspects of or choices within the business which could cause the business's costs to change.

External Cost Factors

Aspects of the world outside the business which could cause the business's costs to change.

TC = TR

Breakeven Point

Budget

Financial plan for the future based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals

Pro Forma

Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.

Liability

Legal obligations to give up things of value in the future.

Profit

Revenue - Expense = Profit

Net Income =

Revenues - Expenses

Asset

Something the business owns that is expected to have economic value in the future.

Articulate

The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet.

Owner's Equity

The difference between assets and liabilities of a business.

Economy of Scale

The idea that it is cheaper (per item) to make many of an item than few.

current ratio

The value of current assets divided by current liabilities

Cost

The value of what ever you give up to get what you need or want.

FC/(R-vc)

breakeven point

the most liquid of assets

cash

More cash and cash equivalents indicate ______ strength

higher

an asset that cannot be sold quickly without suffering a significant discount from its true value

illiquid asset

Primary source of info about a business' profitability

income statement

Cash Flow Statement

statements of the sources and uses of cash in a business for a specific period of time

Benefits of the Income Statement

• Most small business: all sales to customers are made either for cash or as credit card transactions that are essentially the same as cash. • In many cases, the income statement of a small business is a reliable report of just how well the business is doing in producing profits.

Going Concern

• The accounting concept that a business is expected to continue in existence for the foreseeable future.

Accounting Equation

• The statement that assets equal liabilities plus owner's equity

Difficulties in understanding the Income statement

•Disagreements about exactly what should be reported as revenues. •Disagreements over when to recognize revenues.