Chapter XVII

Notes Payable

can be short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date.

Current Liabilities

debts due in one year or less.

Financial Accounting

generates financial information and analyses for people primarily outside the organization.

Inventory Turnover Ratio

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

Capital Account

The owners' equity account will differ according to the type of organization. For sole proprietors and partners, owners' equity means the value of everything owned by the business minus any liabilities of the owner(s), such as bank loans. Owners' equity in these firms is called the _______ _______

Acid test ratio formula

(Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

Liquidity Ratios

Measure a company's ability to turn assets into cash to pay its short-term debts (liabilities that must be repaid within one year).

Leverage (debt) ratio

Measures the degree to which a firm relies on borrowed funds in its operations.

debt to owners' equity ratio

Measures the degree to which the company is financed by borrowed funds that it must repay.

basic earnings per share formula

Net income after taxes / Number of common stock shares outstanding

Net Sales

gross sales minus returns, discounts, and allowances.

Basic earnings per share (basic EPS) ratio

helps determine the amount of profit a company earned for each share of outstanding common stock.

Owner's Equity

the amount of the business that belongs to the owners, minus any liabilities the business owes. The formula for this is assets minus liabilities.

Current Ratio

the ratio of a firm's current assets to its current liabilities. This information appears on the firm's balance sheet.

Journal

Bookkeepers then record financial data from the original transaction documents (sales slips and so forth) into a record book or computer program called a _______.

Bonds Payable

long-term liabilities; money lent to the firm by bondholders that it must pay back.

certified public accountant (CPA)

An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and meets the state's requirement for education and experience is recognized as this. These find careers as private or public accountants and are often sought to fill other financial positions within organizations.

Financing

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

Bookkeeping

The recording of business transactions. It is a basic part of financial reporting.

Depreciation

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Annual report

a yearly statement of the financial condition, progress, and expectations of an organization.

Fundamental Accounting Equation

the basis for the balance sheet Assets ($80,000) = Liabilities + Owners' equity ($30,000 +$50,000)

debt to owners' equity ratio formula

total liabilities / owners' equity

Liabilities

what the business owes to others—its debts.

double-entry bookkeeping

The practice of writing every transaction in two places. It requires two entries in the journal and in the ledgers (discussed next) for each transaction.

Accounting

The recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation.

Net income (net loss)

The resources (revenue) left over or depleted after cost, taxes, and expenses are referred to as

Retained Earnings

accumulated earnings from the firm's profitable operations that are reinvested in the business and not paid out to stockholders in distributions of company profits.

Fixed Assets

long-term these that are relatively permanent such as land, buildings, and equipment. (On the balance sheet we can also refer to these as property, plant, and equipment.)

Public accountant

provides accounting services to individuals or businesses. Such services can include designing an accounting system, helping select the correct software to run the system, and analyzing an organization's financial performance.

Gross Sales

refers to the total of all sales the firm completed.

Current Ratio Formula

Current Ratio = Current Assets / Current Liabilities

Assets

Economic resources (things of value) owned by a firm. They include productive, tangible items such as equipment, buildings, land, furniture, and motor vehicles that help generate income, as well as intangible items with value like patents, trademarks, copyrights, and goodwill.

Intangible Assets

Long-term these that have no physical form but do have value. Patents, trademarks, copyrights, and goodwill are intangible assets.

key financial statements of a business

1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows

Account Receivable

An amount of money owed to the firm that it expects to receive within one year.

Operations

Cash transactions associated with running the business.

Managerial Accounting

provides information and analysis to managers inside the organization to assist them in decision making. This is concerned with measuring and reporting costs of production, marketing, and other functions; preparing budgets (planning); checking whether or not units are staying within their budgets (controlling); and designing strategies to minimize taxes.

Cost of goods sold (cost of goods manufactured)

measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale. It makes sense to compare how much a business earned by selling merchandise and how much it spent to make or buy the merchandise. This includes the purchase price plus any freight charges paid to transport goods, plus any costs associated with storing the goods.

return on sales

Tells us whether the firm is doing as well as its competitors in generating income from sales.

Independent Audit

An evaluation and unbiased opinion about the accuracy of a company's financial statements. Annual reports often include an auditor's unbiased written opinion.

Investments

Cash used in or provided by the firm's investment activities.

Current Assets

Items that can or will be converted into cash within one year. They include cash, accounts receivable, and inventory.

Ledger

bookkeepers use a specialized accounting book or computer program called a ______. In the ______, they transfer (or post) information from accounting journals into specific categories so managers can find all the information about a single account, like office supplies or cash, in one place.

inventory turnover formula

cost of goods sold/average inventory

Accounts Payable

current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for.

Long-Term Liabilities

debts not due for one year or more.

Profitability (performance) ratios

measure how effectively a firm's managers are using its various resources to achieve profits.

Liquidity

the ease with which firms can convert them to cash. Speedier conversion means higher this.

Private accountant

works for a single firm, government agency, or nonprofit organization.

Accounting Cycle

A six-step procedure that results in the preparation and analysis of the major financial statements. It relies on the work of both a bookkeeper and an accountant.

Trial Balance

A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. If the information in the account ledgers is not accurate, the accountant must correct it before preparing the firm's financial statements.

Financial Statement

A summary of all the financial transactions that have occurred over a particular period. Financial statements indicate a firm's financial health and stability, and are key factors in management decision making.

Accounting System

Financial transactions include buying and selling goods and services, acquiring insurance, paying employees, and using supplies. Usually we group all purchases together, and all sales transactions together. The method we use to record and summarize accounting data into reports is an __________ ______

Gross Profit (gross margin)

How much a business earned by buying (or making) and selling merchandise.

operating expenses

In selling goods or services, a business incurs certain ________ _________ such as rent, salaries, supplies, utilities, and insurance.

Return on equity

Indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners.

diluted earnings per share (diluted EPS) ratio

Measures the amount of profit earned for each share of outstanding common stock, but also considers stock options, warrants, preferred stock, and convertible debt securities.

acid-test ratio (quick ratio)

Measures the cash, marketable securities (such as stocks and bonds), and receivables of a firm, compared to its current liabilities. Again, this information is on a firm's balance sheet.

Statement of cash flows

Reports cash receipts and cash disbursements related to the three major activities of a firm: 1. Operations 2. Investments 3. Financing

Auditing

Reviewing and evaluating the information used to prepare a company's financial statements.

Government and not-for-profit accounting

Supports organizations whose purpose is not generating a profit, but serving ratepayers, taxpayers, and others according to a duly approved budget. Federal, state, and local governments require an accounting system that helps taxpayers, special interest groups, legislative bodies, and creditors ensure that the government is fulfilling its obligations, and making proper use of taxpayers' money.

Ratio Analysis

The assessment of a firm's financial condition, using calculations and financial ratios developed from the firm's financial statements. This is especially useful in comparing the company's performance to its financial objectives and to the performance of other firms in its industry.

Cash Flow

The difference between cash coming in and cash going out of a business. Poor ____ ____ constitutes a major operating problem that many companies face.

Balance Sheet

The financial statement that reports a firm's financial condition at a specific time.

Income Statement

The financial statement that shows a firm's bottom line—that is, its profit (or loss) after costs, expenses, and taxes. This summarizes all the resources, called revenue, that have come into the firm from operating activities, money resources the firm used up, expenses it incurred in doing business, and resources it has left after paying all costs and expenses, including taxes.

Revenue

The monetary value of what a firm received for goods sold, services rendered, and other payments (such as rents received, money paid to the firm for use of its patents, interest earned, etc.).

Bottom line

The net income (or perhaps net loss) the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time.

Tax Accounting

Trained in tax law and is responsible for preparing tax returns, or developing tax strategies.