Chapter 3 FYI

What are the main types of financial ratios used in ratio analysis?

-activity ratios -profitability ratios -liquidity ratios -debt ratios

What are some benefits of using computers for accounting purposes?

-computers can handle large amounts of financial information -software can help if no strong accounting support is available -information can be posted from journals instantaneously

Revenue is the monetary value of what a firm received for:

-interest earned -services rendered -goods sold

The "bottom line" is:

-net income or loss after taxes -the last line on the income statement

What are the the 6 steps in the accounting cycle?

1. Analyze source documents 2. Record transactions in journals 3. Transfer journal entries to a ledger 4. Take a trial balance 5. Prepare financial statements 6. Analyze financial statements

What are the three major categories on the balance sheet?

assets, owners' equity, and liabilities

Sarbanes-Oxley prohibits accounting firms from providing consulting services to companies that they:

audit

What are examples of profitability ratios?

basic earnings per share, return on equity, return on sales

What are operations within the three major activities of a firm?

cash transactions associated with running the business

What is managerial accounting concerned with?

controlling, preparing budgets, and measuring production costs

What are liabilities within accounting purposes?

debts- what the business owes to others

What kind of statements indicate a firm's financial health and stability?

financial statements such as income statements and balance sheets

Of the three major activities of a firm, cash raised from the issuance of new debt is known as...

financing

What does liquidity refer to?

how fast an asset can be converted into cash

What is environmental scanning?

identifying the factors in the environment that affect marketing success

Where is information from account ledgers summarized before preparing the balance sheet?

in the trial balance

What does an accounting system include?

inputs, processing, outputs

Does managerial accounting provide information to people inside or outside of an organization?

inside

Where is accounting data first entered?

journal

The current ratio is an example of a(n) ____________________ ratio that measures a company's ability to turn assets into cash to pay its short-term debts

liquidity

What are bonds payable?

long-term liabilities that represent money loaned to the firm that must be paid back

What are stakeholders of a business?

management, supplier, employees

What may revenue include?

may include rent received and interest earned

What is the last line on the income statement? The "bottom line".

net income after taxes

What is net income compared to net loss?

net income is the sum of resources left over when revenue is greater than costs and expenses, whereas net loss occurs when the revenue is less than costs and expenses

What is the "bottom line" another name for?

net income or loss

What was Arthur Anderson convicted of?

obstruction of justice

What are the major activities of a firm?

operations, investments, and financing

What are the statement of cash flow reports, cash receipts, and disbursements related to?

operations, investments, and financing

What does marketing research consist of?

paying attention to the needs of stakeholders such as customers, employees, shareholders, dealers, consumer advocates, and media representatives

What do common financial transactions include?

paying employees, buying and selling goods, and acquiring insurance

A measure of performance that tells a firm whether they are doing as well as their competitors in generating income from sales is called:

return on sales

For most firms, where does revenue come from?

sales

What are inputs to the accounting system?

sales documents and shipping documents

What two components can operating expenses be classified into?

selling expenses and general expenses

What is an advantage of the use of computers to maintain and compile accounting information?

speed

What does government and not-for-profit accounting support?

supports organizations whose purpose is not generating a profit, but serving ratepayers, taxpayers, and others according to a duly approved budget

What are disciplines within the accounting profession?

tax accounting, financial accounting, and managerial accounting

What are earnings per share?

the net income after taxes divided by the number of common stock shares outstanding

What is return on equity?

the net income after taxes divided by total owners' equity

What is the fundamental accounting equation?

Assets = Liabilities + Owners' equity

What are examples of current assets?

accounts receivable and inventory

What does the consumer market consist of?

all the individuals and households that want goods and services for personal consumption

What does an income statement summarize?

all the revenue from operating activities, money resources used up, expenses, and resources left after all costs and expenses

What is an independent audit?

an evaluation and unbiased opinion about the accuracy of a company's financial statements

What summarizes revenues, costs, and expenses for a specific period?

an income statement

What must a person do to be a certified management accountant?

1. pass a qualifying exam 2. meet the educational requirement 3. be certified by the Institute of Certified Management Accountants

What three primary things does the Sarbanes-Oxley Act do?

1. requires CEOs to certify the accuracy of financial reports 2. prohibits accounting firms from providing consulting services to companies they audit 2. strengthens the protection of whistleblowers

What companies in the early 2000s were involved in major accounting scandals?

Enron, WorldCom, and Tyco

What are users of managerial accounting information?

The Chief Financial Officer and Department managers

What are accounts payable?

a current bill that a company owes to others that is the result of buying merchandise on credit

What are notes payable?

a liability that can be short-term or long-term that a business promises to repay by a certain date

What kind of accountant works for a single firm or agency and performs accounting functions for use in making decisions within that firm or agency?

a managerial accountant

The Red Cross is a non-profit which would most likely require the services of which type of accountant?

public or private accountant

What are activity ratios?

ratios used to measure the effectiveness of management in utilizing the assets that are available

What is considered to be apart of accounting?

recording financial transactions, interpreting financial transactions, and classifying financial transactions

What is a annual report?

the yearly statement of the firm's financial condition, progress, and expectations provided to stakeholders

What is a tax accountant trained in? What are they responsible for?

they are trained in tax law and are responsible for preparing tax returns or developing tax strategies

What has a tax accountant specialized and learned? What are they responsible for?

they have learned tax law and are responsible or preparing tax returns

What do profitability ratios measure?

they measure how effectively a firm is using its various resources to achieve profits

What is the role of an auditor?

to review and evaluate a company's financial information

What are the key working areas of accounting?

-tax accounting -financial accounting -government and not-for-profit accounting -auditing -managerial accounting

What is a satisfactory acid-test ratio, although it could be a sign of some cash flow problems?

0.5-1.0

What is critical to understanding the health of a business?

accounting reports and financial statements

What does bookkeeping involve whereas what do accountants classify?

bookkeeping involves the cording of business transactions, whereas accountants classify and summarize financial data provided by bookkeepers

What assets may be included on a balance sheet?

both tangible and intangible resources

What are examples of fixed assets?

buildings and equipment

What is ratio analysis?

calculating and interpreting financial ratios developed from the firm's financial statements

Businesses that are not incorporated identify the investment of the sole proprietor through the __________ accountant.

capital

What is financing within the three major activities of the firm?

cash raised by taking new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends

What are investments within the three major activities of the firm?

cash used in or provided by the firm's investment activities

The basic earnings per share ratio helps determine the amount of a profit a company earned for each share of outstanding ____________________.

common stock

What type of information is reported by accounting to stakeholders?

financial

What is the term given to a specialized accounting book or computer program in which information is transferred into specific categories, so managers can find all the information about a single account in one place?

ledger

Does financial accounting provide information to people inside or outside of an organization?

outside

What is the primary purpose of the Sarbanes-Oxley Act?

oversight

What is a term for all resources that come into the firm from operating activities?

revenue

What is the equation for stockholders equity?

stockholders equity = the value of what stockholders' own in a firm - liabilities

What must a certified public accountant follow?

the GAAP in the United States

What is critical in understanding business operations?

the ability to read, understand, and analyzed accounting reports and financial statements

What are retained earnings?

the accumulated earnings from a company's profit that are reinvested into the business and not paid out to stockholders

What is the purpose of a balance sheet vs. the purpose of an income statement?

the balance sheet reports a firm's financial condition on a specific date, whereas the income statement summarizes revenues, costs, and expenses for a specific period

What does the cost of goods sold measure?

the costs of merchandise the firm sells or the materials and supplies used to manufacture them for sale

How do cash flow problems usually start?

the firm uses up its credit

What does a balance sheet report?

the firm's financial condition on a specific date

What does the income statement show?

the firm's profit after costs, expenses and taxes

What is the GAAP?

the principles that accountants must follow in order to assure that a firm's accounting information is accurate

What is an inventory turnover ratio?

the ratio that measures the speed with which inventory moves through the firm and gets converted into sales