Ch 12 - Small business accounting: projecting and evaluating performance
financing activities
activities through which cash is obtained from and paid to lenders, owners, and investors
tax accounting
an accounting approach based on specific accounting requirements set by governmental taxing agencies
investment
an asset that is acquired for the purpose of either generating future incomes and cash flows or appreciating in value to provide an increase in future wealth
asset
something the business owns that is expected to have economic value in the future
total cost
sum of fixed cost and variable costs
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
accounting equation
the statement that assets equal liabilities plus owner's equity Assets = liabilities + owner's equity
articulate
the concept that information flows from the income statement through statements of retained earnings and owner's equity to the balance sheet
owner's equity
the difference between assets and liabilities of a business
income statement
the primary source of information about a business' profitability
profit planning
the process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes
investing activities
the purchase and sale of land, buildings, equipment, and securities
permanent accounts
the accounts of assets, liabilities, and owner's equity, excluding accounts for revenues and expenses
operating income
the amount of income earned by the regular operations of the business
business entity concept
the concept that a business has an existence separate from that of its owners
variable costs
the costs that change with each unit produced. Ex: raw materials
net present value (NPV)
the difference between the present value of cash inflows and the present value of cash outflows over a specified period of time
variance analysis
the process of determining the effect of price and quantity changes on revenues and expenses
budget cycle process
the schedule and process for setting the schedule for making purchases by an individual or an organization
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
current ratio
the value of current assets divided by current liabilities
retained earnings
(1) the sum of all the profits and losses that the business experiences from formation. (2) a balance sheet item in owner's equity that reflects the wealth created by the business from its formation
True
(T/F) The accounting equation states that assets must always equal liabilities plus owners' equity.
balance sheet
(also called Statement of Financial Position)- presents a "snapshot" of the financial holdings and liabilities at the close of business on a specified date
financial, managerial, and tax accounting
3 types of accounting in small businesses
cost-volume-profit analysis
This is a managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales to maximize profits:
pro forma
What term is used to describe financial statements that consist of estimated or hypothetical information?
income statement
Which financial statement will tell you if your small business made a profit or a loss for a particular period of time?
customer preferences
Which of the following is typically NOT an accounting function that will be part of an accounting system that you setup for your small business?
financial accounting
Which type of accounting follows a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators?
financial flexiility
a business' ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs -Includes (1) the ability to sell non-operating assets, (2) the ability to obtain loans or to sell additional stock, and (3) the ability to increase efficiency and to lower costs of operation
account
a chronological list of all additions to and subtractions from a single type of asset (cash receivables, loans outstanding)
expense
a decrease in owner's equity caused by consuming your product or service
budget
a financial plan for the future based on a single level or operations; a quantitative expression of the use of resources necessary to achieve a business' strategic goals
financial accounting
a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, and regulators
liquidity
a measure of how quickly a company can raise money through internal sources by converting assets to cash
managerial accounting
accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business
operating activities
activities involved in producing and selling goods and services
internal factors
aspects of or choices within the business that could cause the business; costs to change
external factors
aspects of the world outside the business that could cause the business' costs to change
cash flow statement
computed to see the sources and uses of cash by the business
outsourcing
contracting with people or companies outside your business to do work for your business
fixed costs
costs that remain constant regardless of quantity of output. Ex: rent
liabilities
legal obligations to give up things of value in the future
on account
merchandise purchased or sold with payment due in the future, usually within one month
accounts receivable
money owed your business by consumers
revenues - expenses
net income=
pro forma financial statements
planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows
variance
(1) the difference between an actual and budgeted revenue or cost. (2) permission from a government organization to act differently than the laws state
standard budgeting
a method for business forecasting and control in which specific expected volumes and prices per unit are used
Cost-Volume-Profit Analysis
a method for planning operations necessary to attain a specific profit goal. Break-even analysis is a specific application of cost-profit-volume analysis
statement of cash flows
a statement of the sources and uses of cash in a business for a specific period of time.
income statement
a statement that lists revenues and expenses and shows the amount profit a business makes for a specific period of time
balance sheet
a statements of what a business owns (assets). What it owes to others (liabilities), and how much value the owners have invested in it (equity)
costs of goods sold
an expense recognized at the time of a sale of merchandise in the amount of the cost of the merchandise to the seller
revenue
an increase in owner's equity caused by selling your product or service