CH 12 Key terms

cost of goods sold

An expense recognized at the time of a sale of merchandise in the amount of the cost of the merchandise to the seller.

expense

A decrease in owners' equity caused by consuming your product or service.

budget

A 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.

liquidity

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

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.

statement of cash flows

A statement of the sources and uses of cash in a business for a specific period of time. Also called a cash flow statement.

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.

budget cycle

A term applied to the schedule and the process for setting the schedule for making purchases by an individual or an organization.

internal (cost) factors

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

external (cost) factors

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

outsourcing

Contracting with people or companies outside your business to do work for your business.

financial statements

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

account

In terms of accounting practice, an account is a chronological list of all additions to and subtractions from a single type of asset (e.g., cash, receivables, loans outstanding).

liabilities

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

on account

Merchandise purchased or sold with payment due in the future, usually within one month.

pro forma financial statements

Planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows.

financial strength

The ability of a business to survive adverse financial events.

going concern concept

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

permanent accounts

The accounts of assets, liabilities, and owners' equity, excluding accounts for revenues and expenses.

operating income

The amount of income earned by the regular operations of the business.

business entity concept

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

articulate

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

variance

The difference between an actual and budgeted revenue or cost.

profit planning

The process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes.

variance analysis

The process of determining the effect of price and quantity changes on revenues and expenses.

investing activities

The purchase and sale of land, buildings, equipment, and securities.

generally accepted accounting principles (GAAP)

The standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accounting reports to the government.

accounting equation

The statement that assets equal liabilities plus owners' equity (Assets = Liabilities + Owners' Equity).

retained earnings

The sum of all profits and losses, less all dividends paid since the beginning of the business.

current ratio

The value of current assets divided by current liabilities.

variable costs

Those costs that change with each unit produced, for example, raw materials.

fixed costs

Those costs that remain constant regardless of quantity of output, for example, rent.

financial accounting

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

standard budgeting

A method for business forecasting and control in which specific expected volumes and prices per unit are used

cost-volume-profit analysis

A method for planning operations necessary to attain a specific profit goal. Break-even analysis is a specific application of cost-profit-volume analysis.

managerial accounting

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

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.

MACRS rate

An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System. The MACRS approach lets taxpayers depreciate more of the cost earlier in the life of a capital expense.

tax accounting

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

investment

An asset that is acquired for the purpose of either generating future incomes and cash flows or appreciating in value to provide an increase in future wealth.

revenue

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

depreciation

Regular and systematic reduction in income that transfers asset value to expense over time.

asset

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

owners' equity

The difference between assets and liabilities of a business.

net present value (NPV)

The difference between the present value of cash inflows and the present value of cash outflows over a specified period of time.

total cost

are simply the sum of all costs that are incurred within an accounting period. For the purposes of cost-volume-profit analysis, total costs are set equal to the sum of fixed costs and variable costs.