Business 1.0-Chapter 17-Understanding Accounting and Financial Information

Depreciation

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

Financial Accounting Standards Board (FASB)

defines the generally accepted accounting principles (GAAP) that accountants must follow

Cost of goods sold (or cost of goods manufactured)

A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale

Fundamental Accounting Equation

Assets=Liabilities+Owners' equity This is the basis for the balance sheet

Current Ratio=

Current Assets/currents liabilities

Long-term liabilities

Debts not due for one year or more

Equity=

assets-liabilities

Acid-test=

(Cash+Accounts receivable+Marketable securities)/Current liabilities

Inventory Turnover

(Cost of goods sold)/(Average Inventory)

Return on equity

(Net income after tax)/Total owners' equity indirectly measures risk by telling us how much a firm earned for each dollar

Basic Earnings per share=

(Net income after taxes)/(Number of common stock shares outstanding)

Return on Sales=

(Net income)/(Net sales)

3 major activities of a firm:

-Operations: cash transactions associated with running the business -Investments: Cash used in or provided by the firm's investment activities -Financing: Cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends

Common Liability accounts recorded on a balance sheet:

1) Accounts Payable: current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for 2) Notes Payable: short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date 3) Bonds Payable: Long-term liabilities; money lent to the firm that it must pay back

3 Categories of assets

1) Current Assets: items that can or will be converted into cash within one year (cash, accounts receivable, and inventory) 2) Fixed Assets: long-term assets that are relatively permanent such as land, buildings, and equipment 3) Intangible Assets: Long-term assets that have no physical form but do have value (patents, trademarks, copyrights, goodwill)

Five Key areas of the accounting profession

1) Managerial Accounting 2) Financial Accounting 3) Auditing 4) Tax Accounting 5) Governmental Not-for-Profit Accounting

Key Financial Statements:

1) The balance sheet 2) The income statement 3) The statement of cash flows

Certified Management Accountant (CMA)

A professional accountant who has met certain educational and experience requirements, passed a qualifying exam, and been certified by the Institute of Certified Management Accountants

Accounting Cycle

A six-step procedure that results in the preparation and analysis of the major financial statements 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

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

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 transactions that have occurred over a particular period

Annual Report

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

Financial Accounting

Accounting information and analyses prepared for people outside the organization

Government and Not-for-Profit Accouting

Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget

Managerial Accounting

Accounting used to provide information and analyses to managers inside the organization to assist them in decision making

Tax Accountant

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

Certified Internal Auditor (CIA)

An accountant who has a bachelor's degree and two years of experience in internal auditing, and who has passed an exam administered by the Institute of Internal Auditors

Certified Public Accountant (CPA)

An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA)

Public Accountant

An accountant who provides accounting services to individuals or businesses on a fee basis

Private Accountant

An accountant who works for a single firm, government agency, or nonprofit organization

Accounts Receivable

An amount of money owed to the firm that it expects to receive within one year

Independent Audit

An evaluation and unbiased opinion about the accuracy of a company's financial statements

Operating Expenses

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

Assets

Economic resources (things of value) owned by a firm

Gross Profit (or gross margin)

How much a firm earned by buying (or making) and selling merchandise

Sarbanes-Oxley Act (Sarbox)

Legislation that created new government reporting standards for publicly traded companies

Income statement

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

Inventory Turnover Ratio

Measures the speed with which inventory moves through the firm and gets converted in to sales

Bottom Line

Net income (or perhaps net loss)-sales returns, costs, expenses, and taxes over a period of time

Income Statement

Summarizes revenues, cost of goods, and expenses (including taxes), for a specific period and highlights the total profit or loss the firm experienced during that period -Shows profit or loss over a specific period of time

Statement of cash flows

Provides a summary of money coming into and going out of the firm. Tracks a company's cash receipts and cash payments -Highlights the difference between cash coming in and cash coming out of a business

Balance Sheet

Reports the firm's financial condition on a specific date/time -Details what the company owns and owes on a specific day -Composed of 3 major accounts: assets, liabilities, and owners' equity

Net income or Net Loss

Revenue left over or depleted after all costs and expenses, including taxes, are paid

Retained Earnings

The accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends

Owners' Equity

The amount of the business that belongs to the owners minus any liabilities owed by the business

Ratio Analysis

The assessment of a firm's financial condition using calculations and interpretations or financial ratios developed from the firm's financial statements

Cash Flows

The difference between cash coming in and cash going out of business

Liquidity

The ease with which an asset can be converted into cash

Auditing

The job of reviewing and evaluating the information used to prepare a company's financial statements

Accounting Systems

The method we use to record and summarize accounting data into reports

Double-entry Bookkeeping

The practice of writing every business transaction in two places

Journal

The record book or computer program where accounting data are first entered

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

Stockholders' equity/shareholders' equity=

The value of what stockholders own in a firm-liabilities

Liabilities

What the business owes to others (debts)

Debt to owners' equity ratio=

total liabilities/owners' equity