CH 12 Small business Accounting

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

business entity concept

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

operating income

amount of income earned by the regular operations of the business

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

financing activities

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

current ratio

value of current assets divided by current liabilities

retained earnings

1) The sum of all the profits and losses that the business experiences from formation. (2) A balance sheet item in owners' equity that reflects the wealth created by the business from its formation

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

accounting equation

Assets = Liabilities + Owners' Equity)

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

depreciation

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

permanent accounts

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

investing activities

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

fixed costs

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

total cost

Total costs 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

financial strength

ability of a business to survive adverse financial events

variable costs

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

expense

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

variance

difference between an actual and budgeted revenue or cost (in a different context is also means permission from a government organization to act differently than the laws state

owners' equity

difference between assets and liabilities of a business

statement of cash flows

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

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

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

liquidity

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

standard budgeting

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

budget cycle

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

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

tax accounting

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

Tax accounting

based on governmental requirements

asset

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

financial flexibility

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

Financial accounting

formal, rule-based accounting principles

GAAP

generally accepted accounting principles: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.

cost-volume-profit analysis

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

profit planning

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

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

going concern concept

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

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

revenue

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

Managerial accounting

intended for planning, directing, and controlling a business

financial statements

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