chapter 14 Business
statement of cash flows
A financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year.
income statement
A financial statement that summarizes a firm's revenues and expenses and shows its total profit or loss over a period of time.
certified management accountant (CMA)
A managerial accountant who has completed a professional certification program, including passing an examination.
double-entry bookkeeping
A method of accounting in which each transaction is recorded as two entries so that two accounts or records are changed.
financial accounting
Accounting that focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a business.
managerial accounting
Accounting that provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations.
certified public accountant (CPA)
An accountant who has completed an approved bachelor's degree program, passed a test prepared by the American Institute of CPAs, and met state requirements. Only a CPA can issue an auditor's opinion on a firm's financial statements.
long-term liabilities
Claims that come due more than one year after the date of the balance sheet.
liquidity ratios
Ratios that measure a firm's ability to pay its short-term debts as they come due.
profitability ratios
Ratios that measure how well a firm is using its resources to generate profit and how efficiently it is being managed.
debt ratios
Ratios that measure the degree and effect of a firm's use of borrowed funds (debt) to finance its operations.
net sales
The amount left after deducting sales discounts and returns and allowances from gross sales.
net loss
The amount obtained by subtracting all of a firm's expenses from its revenues, when the expenses are more than the revenues.
net profit (net income)
The amount obtained by subtracting all of a firm's expenses from its revenues, when the revenues are more than the expenses.
net working capital
The amount obtained by subtracting total current liabilities from total current assets; used to measure a firm's liquidity.
retained earnings
The amounts left over from profitable operations since the firm's beginning; equal to total profits minus all dividends paid to stockholders.
ratio analysis
The calculation and interpretation of financial ratios using data taken from the firm's financial statements in order to assess its condition and performance.
expenses
The costs of generating revenues.
revenues
The dollar amount of a firm's sales plus any other income it received from sources such as interest, dividends, and rents.
operating expenses
The expenses of running a business that are not directly related to producing or buying its products.
generally accepted accounting principles (GAAP)
The financial accounting standards followed by accountants in the United States when preparing financial statements.
return on equity (ROE)
The ratio of net profit to total owners' equity; measures the return that owners receive on their investment in the firm.
current ratio
The ratio of total current assets to total current liabilities; used to measure a firm's liquidity.
debt-to-equity ratio
The ratio of total liabilities to owners' equity; measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner's funds).
liquidity
The speed with which an asset can be converted to cash.
owners' equity
The total amount of investment in the firm minus any liabilities; also called net worth.
gross sales
The total dollar amount of a company's sales.
cost of goods sold
The total expense of buying or producing a firm's goods or services.
assets
Things of value owned by a firm.
balance sheet
A financial statement that summarizes a firm's financial position at a specific point in time.
private accountants
Accountants who are employed to serve one particular organization.
current assets
Assets that can or will be converted to cash within the next 12 months.
current liabilities
Short-term claims that are due within a year of the date of the balance sheet.
depreciation
The allocation of an asset's original cost to the years in which it is expected to produce revenues.
gross profit
The amount a company earns after paying to produce or buy its products but before deducting operating expenses.
Financial Accounting Standards Board (FASB)
The private organization that is responsible for establishing financial accounting standards in the United States.
auditing
The process of reviewing the records used to prepare financial statements and issuing a formal auditor's opinion indicating whether the statements have been prepared in accordance with accepted accounting rules.
inventory turnover ratio
The ratio of cost of goods sold to average inventory; measures the speed with which inventory moves through a firm and is turned into sales.
net profit margin
The ratio of net profit to net sales; also called return on sales. It measures the percentage of each sales dollar remaining after all expenses, including taxes, have been deducted.
earnings per share (EPS)
The ratio of net profit to the number of shares of common stock outstanding; measures the number of dollars earned by each share of stock.
liabilities
What a firm owes to its creditors; also called debts.
public accountants
Independent accountants who serve organizations and individuals on a fee basis.
Sarbanes-Oxley Act
Legislation passed in 2002 that sets new standards for auditor independence, financial disclosure and reporting, and internal controls; establishes an independent oversight board; and restricts the types of non-audit services auditors can provide audit clients.
fixed assets
Long-term assets used by a firm for more than a year such as land, buildings, and machinery.
intangible assets
Long-term assets with no physical existence, such as patents, copyrights, trademarks, and goodwill.