Business Chapter 17

assets

Economic resources (things of value) owned by a firm.

balance sheet

Financial statement that reports a firm's financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners' equity. <div class="div"

statement of cash flows

Financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.

What is the major value of ratio analysis to the firm?

Ratio analysis provides the firm with information about its financial position in key areas for comparison to other firms in its industry and its own past performance.

notes payable

Short-term or long-term liabilities that a business promises to repay by a certain date.

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.

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.

managerial accounting

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

fixed assets

Assets that are relatively permanent, such as land, buildings, and equipment.

What is the job of an auditor?

Auditors review and evaluate the standards used to prepare a company's financial statements. An independent audit is conducted by a public accountant and is an evaluation and unbiased opinion about the accuracy of a company's financial statements.

What is the difference between bookkeeping and accounting?

Bookkeeping is part of accounting and includes the systematic recording of data. Accounting includes classifying, summarizing, interpreting, and reporting data to management.

What are the six steps of the accounting cycle?

The six steps of the accounting cycle are (1) analyzing documents; (2) recording information into journals; (3) posting that information into ledgers; (4) developing a trial balance; (5) preparing financial statements—the balance sheet, income statement, and statement of cash flows; and (6) analyzing financial statements.

What is a balance sheet?

A balance sheet reports the financial position of a firm on a particular day. The fundamental accounting equation used to prepare the balance sheet is Assets = Liabilities + Owners' equity

certified management accountant (CMA)

A professional accountant who has met certain educational and experience requirements, passed a qualifying exam in the field, 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.

financial accounting

Accounting information and analyses prepared for people outside the organization.

What is accounting?

Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions that affect an organization. The methods we use to record and summarize accounting data into reports are called an accounting system.

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).

private accountant

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

independent audit

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

What is an income statement?

An income statement reports revenues, costs, and expenses for a specific period of time (say, the year ended December 31, 2015). The formulas we use in preparing the income statement are: Revenue − Cost of goods sold = Gross margin Gross margin − Operating expenses = Net income before taxes Net income before taxes − Taxes = Net income (or net loss) Net income or loss is also called the bottom line.

fundamental accounting equation

Assets = Liabilities + Owners′ equity; this is the basis for the balance sheet.

What are the major accounts of the balance sheet?

Assets are economic resources owned by the firm, such as buildings and machinery. Liabilities are amounts the firm owes to creditors, bondholders, and others. Owners' equity is the value of everything the firm owns—its assets—minus any liabilities; thus, Owners' equity = Assets − Liabilities.

What is a statement of cash flows?

Cash flow is the difference between cash receipts (money coming in) and cash disbursements (money going out). The statement of cash flows reports cash receipts and disbursements related to the firm's major activities: operations, investments, and financing.

operating expenses

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

gross profit (or gross margin)

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

What are journals and ledgers?

Journals are the first place bookkeepers record transactions. Bookkeepers then summarize journal entries by posting them to ledgers. Ledgers are specialized accounting books that arrange the transactions by homogeneous groups (accounts).

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 that represent money lent to the firm that must be paid back

How does managerial accounting differ from financial accounting?

Managerial accounting provides information and analyses to managers within the firm to assist them in decision making. Financial accounting provides information and analyses to external users of data such as creditors and lenders.

net income or net loss

Revenue left over 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 of financial ratios developed from the firm's financial statements.

cash flow

The difference between cash coming in and cash going out of a 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.

double-entry bookkeeping

The practice of writing every business transaction in two places

depreciation

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

liabilities

What the business owes to others (debts).

What is the difference between a private accountant and a public accountant?

A public accountant provides services for a fee to a variety of companies, whereas a private accountant works for a single company. Private and public accountants do essentially the same things with the exception of independent audits. Private accountants do perform internal audits, but only public accountants supply independent audits.

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.

government and not-for-profit accounting

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

How do computers help accountants?

Computers can record and analyze data and provide financial reports. Software can continuously analyze and test accounting systems to be sure they are functioning correctly. Computers can help decision making by providing appropriate information, but they cannot themselves make good financial decisions. Accounting applications and creativity are still human functions.

accounts payable

Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for.

current assets

Items that can or will be converted into cash within one year.

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.

What are the four key categories of ratios?

The four key categories of ratios are liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios.