chapter 17

tax accountant

An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies

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

income statement

summarizes a firm's revenues and expenses over a given period of time and highlights the total profit or loss the firm experienced during that period

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.

annual report

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

6 steps

1. Analyze source documents 2.Record transactions in journals 3.Transfer (post) journal entries to ledger 4.Take a trial balance 5.Prepare financial statements(balance sheet, income statement, statement of cash flows) 6.Analyze financial statements

accounting cycle

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

financial accounting

Accounting information and analyses prepared for people outside the organization.

statement of cash flows (three major activities of a firm)

1. Operations are cash transactions associated with running the business. 2. Investments are cash used in or provided by the firm's investment activities. 3. Financing is cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends.

accountant

1. classify and summarize financial data provided by bookkeepers, and then interpret the data and report the information to the management 2. suggest strategies for improving the firm's financial condition and prepare financial analyses and income tax returns.

bookkeeper

1. divide all the firm's transactions into meaningful categories 2. record financial data from the original transaction documents into a record book or computer program called a journal.

purpose of accounting

1. to help managers make well-informed decisions 2.to report financial information about the firm to interested stakeholders

ledger

A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place.

Cost of goods sold

Cost of merchandise sold or cost of raw materials or parts used for producing items for resale.

Operating expenses

Costs involved in operating a business, such as rent, utilities, and salaries.

Assets

Economic resources (things of value) owned by a firm, including tangible and intangible items and goodwill. intangible assets such as brand names (Coca-Cola, Starbucks, etc.) can be among the firm's most valuable resources, they are not listed on a company's balance sheet if they were developed within the company.

GAAP

Generally Accepted Accounting Principles

Gross profit

How much the firm earned by buying or selling merchandise.

fixed assets

Long-term assets that are relatively permanent such as land, buildings, or equipment.

Net income after taxes

Profit or loss over a 4 specific period after subtracting all costs and expenses, including taxes.

auditing

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

Liquidity

The ease with which an asset can be converted into cash.

income statement

The financial statement that shows a firm's profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss.

trial balance

a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced

financial statement

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

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.

Usually a company with a current ratio of 2.0 or better is considered a safe risk for lenders granting short-term credit

an acid-test ratio between 0.50 and 1.0 is usually considered satisfactory

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.

basic earnings per share (basic EPS) ratio

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

Ratio analysis

assessment of a firm's financial condition, using calculations and financial ratios developed from the firm's financial statements.

fundemental accounting equation

assets=liabilities+ owner's equity

owners' equity

stockholders' equity; value of what stockholders own in a firm (minus liabilities)

key financial statements

balance sheet, income statement, statement of cash flows

Notes Payable

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

three categories of assets

current assets, fixed assets, intangible assets

account payable

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

liability

debt

current liabilities

debts due in one year or less

long-term liabilities

debts not due for one year or more

Return on equity

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

Cash flow

is simply the difference between cash coming in and cash going out of a business.

journal

is where the day's transactions are kept

current assets

items that can or will be converted into cash within one year

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

bonds payable

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

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).

Profitability (performance) ratios

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

Leverage (debt) ratios

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

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 the firm can convert into common stock.

debt to owners' equity ratio

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

statement of cash flows

provides a summary of money coming into and going out of the firm. it tracks a company's cash receipts and cash payments

public accountant

provides accounting services to individuals or businesses.

Managerial accounting

provides information and analysis to managers inside the organization to assist them in decision making.

current ratio

ratio of a firm's current assets to its current liabilities.

balance sheet

reports assets and claims to assets at a specific point in time; details what the company owns and owes on a certain day

net income or net loss

resources (revenue) left over or depleted

earnings per share (EPS)

revealing ratio because earnings help stimulate the firm's growth and provide for stockholders' dividends.

revenue

the monetary value of what a firm received goods sold, service render and other payments

double-entry bookkeeping

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

bookkeeping

the recording of business transactions

accounting

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

inventory turnover ratio

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

Depreciation

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

goodwill

value attached to factors such as a firm's reputation, location, and superior products. Goodwill is included on a balance sheet only when one firm acquires another and pays more for it than the value of its tangible assets.

equity

value of things you own (assets) minus the amount of money you owe others (liabilities)

return on sales

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

private accountant

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