BUSI Chapter 8

Out of Pocket Costs

A cost that involves the payment of money or other resources. Ex: the wages a company pays to its workers, the payment it makes to suppliers for raw materials, and the rent paid for office space.

Balance Sheet

A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm's assets, liabilities, and owners' equity. Summarizes a firm's financial position at a SPECIFIC POINT IN TIME.

Budgeting

A management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific period of time. This has advantages which are: -Helps managers clearly specific how they intend to achieve the goals they set during the planning process. -Encourages communication and coordination among managers and employees in various departments within the organization. -Serves as a motivational tool. It identifies goals and demonstrate. -Helps managers evaluate process and performance.

Master Budget

A presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period.

Generally Accepted Accounting Principles (GAAP)

A set of accounting standards that is used in the preparation of financial statements. The SEC has the ultimate legal authority to set and enforce these.

Statement of Retained Earnings

A simple statement that shows how reatined earnings have changed from one accounting period to the next. It is found by subtracting dividends paid from net income.

Accounting

A system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization. The goal of this system is to provide users with relevant, timely information that helps them make better economic decisions.

Activity Based Costing (ABC)

A technique to assign product costs based on links between activities that drive costs and the production of specific products. It helps allocate costs. It has two stages: identify specific activities that create indirect costs and determine the factors that "Drive" the costs of these activities. Difficult to implement.

Horizontal Analysis

Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends. Key component of using comparative financial statements.

Accounting Equation

Assets = liabilties + OE It must always be in balance

Financial Budgets

Budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals. There is a cash budget and a capital budget.

Operating Budgets

Budgets the communicate an organization's sales and production goals and the resources needed to achieve these goals. It is the sales budget, production budget, direct labor budget.

Liabilities

Claims that outsiders have against a firm's assets. Current liabilities: are debts that come due within a year of the date on the balance sheet. Long-term liabilities: debts that don't come due until more than a year after the date on the balance sheet.

Direct Costs

Costs that are incurred directly as the result of some specific cost object. They can be directly traced to the production of the product. They are easy to measure and assign. Ex: wage payment made to workers directly producing a good or service.

Indirect Costs

Costs that are the result of a firm's general operations and are not directly tired to any specific cost object.

Fixed Costs

Costs that remain the same when the level of production changes within some relevant range. Many of these are only for a relevant range of output. Ex: interest on a bank loan, property insurance premiums, rent on an office space.

Variable Costs

Costs that vary directly with the level of production. They rise (vary) when the firm produces more of its goods and services.

10-K

Includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.

Revenue

Increases in a firm's assets that result from the sale of goods, provision of services, or other acivities intended to earn income. A firm normally earns revenue by selling goods or by charging fees for providing services.

Key Users of Accounting Information

Managers, stockholders, employees, creditors, suppliers, government agencies.

Government Accountants

Perform a variety of accounting functions for local,state, or federal government agencies.

Public Accountants

Provide services such as tax preparation, external auditing, or management cunsultating to clients on a fee basis.

Assets

Resources owned by a firm. Different types: Current assets: consists of cash and other assets that the firm expects to use up or convern into cash within a year. Property, plant, and equipment: it lists the value of the company's land, building, machinery, equipment, and other long-term assets. Intangible assets: assets that have no physical existence, like trademarks, patents, copyrights.

Expenses

Resources that are used up as the result of business operations. Indicates the cash a firm spends, or other assets it uses up, to carry out the business activities necessary to generate revenue. Revenue - Costs and expenses = net income

True

T/F: Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded.

Comparative Financial Statements

The balance sheet, income statement, and statement of cash flows must list two or more years of figures side by side, making it possible to see how account values have changed over a period of time. Firms that are not publicly traded still do this, even though GAAP doesn't require them to.

Financial Accounting

The branch of accounting that prepares financial statements for use by owners, creditors, supplies, and other EXTERNAL stakeholders. Focuses almost exclusively on financial information. Prepares a STANDARD set of financial statements. Summarizes past performance and its impact on the form's present condition.

Managerial Accounting

The branch of accounting that provides reports and analysis to managers to help them make informed business decisions.

Owners' Equity

The claims that a firm's owner have against their company's assets.

Net Income

The difference between the revenue a firm earns and the expenses it incurs in a given time period. It is a profit or loss. This is the "bottom line" of a business.

Statement of Cash Flows

The financial statement that identifies a firm's sources and uses of cash in a given accounting period. Cash flows from operating activities: shows the amount of cash that flowed into the company from the sale of goods or services, as well as cash from dividends and interest recieved from goods or services. Cash flows from investing activities: shows the amount of cash recieved from the sale of fixed assets and financial assets bought as long-term investments. Cash flows from financing activities: show the cash the firm received from issuing additional shares of its own stock or from taking out long-term loans.

Income Statement

The financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period. Revenue - Expenses = Net Income

Accrual-Basis Accounting

The method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce. Revenues are recorded when they are earned and payment is reasonbly assured. Ex: If a firm sells goods on credit, it reports revenue before it receives cash.

Implicit Costs

The opportunity cost that arises when a firm uses owner-supplied resources. Not all costs involve monetary payment; sometimes it is what is given up is the opportunity to use an asset in some alternative way.

Financial Accounting Standards Board (FASB)

The private board that establishes the GAAP standards used in the practice of financial accounting. Each member serves a 5 year term and can be reappointed to serve on additional term. Members have to sever all ties with an firms or institutions before they join.

Cost

The value of what is given up in exchange for something. There can be several types of this.

Sarbanes-Oxley Act of 2002

This law banned business relationships that might create conflicts of interest between CPA firms and the companies they audit.

Qualities of Financial Statements

Through GAAP, the FASB aims to ensure that financial statements are: Relevant: the must contain information that helps the user understand the firm's financial performance and condition. Reliable: they must provide information that is objective, accurate, and verifible. Consistent: they must provide financial statements based on the same core assumptions and procedures over time. Comparable: accounting standards must be presented in a reasonably standardized way, allowing users to track the firm's financial performance over a period of years to compare its results with those for other firms.

PCAOB

To protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

External Audit

U.S. securities law require publicly traded corporations in the United States to have an independent CPA firm have one of these performed on their financial statements. Many non-publically traded companies do this as well. The purpose of this is to verify that the company's financial statements were properly prepared in accordance to GAAP.

Independent Auditor's Report

Unqualified (clean) opinion: the auditor doesn't find any problems with the way a firm's financial statements were prepared and presented. Most common. Qualified opinion: the auditor identifies some minor concerns, but believes that on balance the firm's statements remain a fair and accurate representation of the company's financial position. Adverse opinion: auditors discover more serious and widespread problems with a firm's statements. Rare.

Management Accountants

Work within a company and provide analysis, prepare reports and financial statements, and assist managers in their own organization. Internal auditors also work within their organizations to detect internal problems.