CHP 12: Small Business Accounting: Projecting and Evaluating Performance

current ratio

the value of current assets divided by current liabilities -measure of of liquidity

variable costs

those costs that change with each unit produced, for example: raw materials -related to the sale of items or production

cost of goods sold budget

A schedule that shows the predicted cost of product actually sold during the accounting period.

Gross margin

sales - COGS =

leashold records

needed if your business has made improvements to leased property or equipment

cash flow statement

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

cash accounting

A system in which revenue and expenses are counted as they are actually received.

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. -used to produce tax returns and schedules

Net Present Value (NPV) analysis

a dollar to be received today has more utility (value) than does a dollar to be received at some time in the future -accept the largest NPV

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

the ability of a business to meet both short and long term obligations

liquidity is a measure of

activity-based cost estimates

An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.

Accounts Receivable

money owed to your business by customers

sales budget

shows the projected future level of sales in units multiplied by the sales price per unit

asset

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

business plan

specifies the amounts and types of inputs required to achieve a set of desired outcomes

indirect statement

starts with net income and adjusts the accruals and deferrals to provide cash flow info that can be easily reconciled to other financial statements

permanent accounts

the accounts of assets, liabilities, and owner's equity, excluding accounts for revenues and expenses

articulate

the concept that info flows from the income statement through the statements of retained earnings and owner's equity to the balance sheet

variance

the difference between an actual and budgeted revenue or cost

owner's equity

the difference between assets and liabilities

break even point

the point at which the costs of producing a product equal the revenue made from selling the product -total cost = gross revenue

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 owner's equity

total cost

the sum of fixed and variable costs

costs

the value of whatever you give up to get what you need or want

bounded rationality models

theories based on the assumption of limited human abilities

fixed costs

those costs that remain constant regardless of quantity of output, for example, rent -those costs that cannot be assigned to a specific item sold or manufactured -incurred whether you sell or make one product

insurance register

to ease the problems of keeping necessary insurance coverage current and in force

payroll

to ensure that payroll and employment taxes are kept current

total liabilities and equity

total assets + current liabilities + long term liabilities + owner's equity =

total variable cost + total annual fixed cost + desired profits

total revenue =

noncash investing and financing activities

transactions in which an exchange of value other than cash takes place

1. the ability to sell nonoperating assets 2. the ability to obtain loans or to sell additional stock 3. the ability to increase efficiency and to lower costs of operation

3 measures of financial flexibility

1. cash flows from operating activities 2. cash flows from investing activities 3. cash flows from financing activities 4. net effect of foreign exchange rates 5. net change in cash balance during the period 6. noncash investing and financing activities

6 items that must be in the statement of cash flows

master budget

A budget, also referred to as a comprehensive budget, consists of sets of budgets that detail all projected receipts and spending for the budgeted period.

managerial accounting

Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business. -attempts to predict the results of mgt decicisions

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.

internal (cost) factors

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

external (cost) factors

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

investors who want to know the equity of company bankers who want to estimate the likely future cash flows to repay loans

Balance sheet is useful for

investment records

needed if your business keeps surplus cash invested in securities

QuickBooks, Sage BusinessWorks, and Microsoft Accounting Express, Xero

Common small business systems

total assets

Current assets + fixed assets + other assets =

1. Disagreements about what exactly should be reported as revenue 2. Disputes over when to recognize revenues

Difficulties in understanding the income statement

income statement statement of retained earnings statement of owner's equity balance sheet cash flow statement

Five common financial statements

2.0 and higher is better

For current ratio, the minimum acceptable ratio is

a complete business plan will be developed

From the sales forecast and from your knowledge of cost behaviors, collections, payments, and expenses, a

operating income

Gross margin - Operating expenses =

pro forma

Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.

planning, organizing, staffing, directing, and controlling

Managers have 5 primary functions in a business

cash, short-term investments, accounts receivable

Measures of financial strength

1. differential revenue and expenses 2. net present value (NPV) analysis

Methods for choosing among investment alternatives

Revenue - expenses

Net income =

net income

Net income before tax - income tax =

plan for inventory purchases

Once sales have been projected, the next step is to

net income before tax

Operating income - interest expense =

1. All values are historical values 2. Contain estimated amounts which may differ greatly from actual values 3. Certain assets and liabilities are omitted

Problems with the balance sheet

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.

entity that is separate from its owners -thus it is simply a chart that shows everything that a business owns and who has how much ownership in those business assets

The accounting equation is based on the concept that a business is an

1. cash receipts 2. cash disbursements 3. cash budget

The final schedules to be completed to produce a master budget are

a forecast of your future sales

The first step in budgeting is to make

sales budget.

The first step in preparing a master budget is to prepare a

amount to be used + desired ending amount - beginning amount

The formula used to produce schedules of a master budget: amount to be bought =

economy of scale

The idea that it is cheaper (per item) to make many of an item than few.

liquidity, financial flexibility, and financial strength of the business

The information in the balance sheet is used to determine the

1. simplicity of use 2. accuracy of detail 3. timeliness of reports 4. understandability to the manager of the business 5. security of data

The primary criteria for a small business record keeping are

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. -the outflows are the cash investments made by the business to acquire noncash assets

managerial tax financial

Three types of accounting

1. good information 2. efficient ways to condense info so that it is understandable 3. Methods to help compare alternatives

To make good decisions, we need

single step multiple step

Two formats for income statements

Reporting to outsiders record keeping taxation control of revceivables

USES OF FINANCIAL ACCOUNTING

1. used by you, lenders, and investors to analyze the effectiveness of business operations

Use of the income statement

1. Produce info that is useful in managing your business 2. To meet legal or contractual requirements

Why do accounting?

your business is public

You are not required to meet the rules of financial accounting unless

cash

_____ is the most liquid assets

expense

a decrease in owner's equity caused by consuming your product or service

balance sheet

a statement of what a business owns (assets), what it owes others (liabilities), and how much value the owners have invested in it (equity)

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

what the business owns = claims on the business assets = liabilites + owner's equity

accounting equation

revenue

an increase in owner's equity caused by selling your product or service

fixed asset accounting

automatically calculates and accumulates depreciation

illiquid asset

cannot be quickly converted into cash without much loss of value

inventory budget

combined purchase and cost of goods sold budget into a single ____ budget

direct statement

developed solely from the cash records of the company and does not make any reconciliation to the income statement -GAAP prefered

credit card sales function

enables reconciling your sales records with the amount of discount and chargebacks taken by your credit card provider

inventory accounting

facilitates maintaining the appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels

financial statments

formal summaries of the content of an accounting system's records of transactions -the final output of a computer system

current

in accounting, means an asset that will be turned into cash in less than one year or a liability that must be paid in less than one year

long term

in accounting, refers to an asset that will still have value to the business more than one year from now or a liability that will still be owed more than one year from now

completely liquid asset

one that can be converted to cash instantly at its full value

cash outflows

payments of cash

expendables

products used in the sales, manufacturing, or delivery that are not part of the finished product

public business

A business that has its stock bought and sold on an organized stock exchange, such as the New York Stock Exchange.

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.

business entity concept

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

liquidity

a measure of how quickly a company can raise money through internal sources by converting assets to cash -measure of the expected time before an asset can be converted into cash, and of the expected time before a liability must be paid

cash inflows

receipts of cash

labor budget

shows both the amount and cost of labor needed to meet output goals

historical value

the cost of the asset when it was acquired

1. Business entity concept 2. Going concern concept 3. Accounting Equation 4. The premise of revenue and expense 5. The principle that accounting information must be useful to the owners and managers of businesses

The basic concepts of accounting

retained earnings

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

Multiple-step income statement format

lists revenues from operations separately from other income and gains

net change in cash balance

reconciles the net increase or decrease with the beginning cash balanch and the ending cash balance

accounts payable

records to track what you owe and to make timely payments in order to capture prompt pay discounts and to maintain a good credit rating for your business

financial accounting

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

Cost-Volume-Profit Analysis

A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.

differential revenues and expenses

comprises estimating the changes in revenues and expenses from current operating results that will occur if each alternative is taken -accept the investment with the greatest profit

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

Single-step income statement format

provides little detail - it simply lists all revenues and gains together, then lists all expenses and losses together

accounts revievable

records if you provide credit to your customers

depreciation

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

operating income

represents just how well management achieved sales and controlled costs to produce profits -measure of how much debt a business can support

outsourcing

requires that a decision be made whether the business should make a component of its own product or purchase the component from another business