Chapter 17: Accounting

Negative Cash Flow

Can occur when a company has more cash going out compared to coming in

Investments

Cash is used by the firms investment activities

Using tech in accounting

Computerized accounting programs can instantly post info from journals to cell phones, so financial information is readily available whenever the organization needs it (accounting software, such as Intuit's Quickbooks, address the specific needs of a small business)

Accounting is usually concerned with creating groups:

a group of all purchases, a group of all sales transactions

Statement of cash flows

highlights the difference between cash coming in and cash going out of a business. It tracks a company's cash receipts

Large and small businesses often survive or fail based on:

how financial procedures are handled/financial management

Current Assets

items that can or will be converted into cash within one year, such as cash "accounts receivable" (money owed to your company that is expected to be received within one year), and inventory

Bonds Payable

long-term Liabilities that represent money lent to the company (from when an investor buys a company bond) that must be paid back by the company receiving the loan. Note: like the US government, a company can issue a bond to the public. If this happens, the public (investors) is temporarily loaning money to the company.

Profitability (performance) ratios

measure how effectively a firm's managers are using the firm's various resources to achieve profits for the firm

Activity ratios

measure how effectively management is turning over inventory (this indicates how fast inventory gets converted into sales)

Disbursements

paying someone money

Income Statements

shows a firm's profit (or loss) after costs, expenses, and taxes. Summarizes all the resources that have come into the firm (revenue) from operating activities, money resources the firm used up, expenses it incurred in doing business, resources it has left after paying all costs and expenses and taxes

Owner's Equity

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

Fundamental accounting equation

the basis of the balance sheet

Leverage (debt) Ratio

the degree to which a firm is relying on borrowed funds to run the operations of its business (formula: total liabilities/ owner's equity)

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

Net Sales

the gross sales minus returns, discounts, and allowances. (ex: if Foot Locker sells a pair of sneakers to a customer, that is categorized as Foot Locker's "gross sales". But if the customer returns the sneakers because there was a problem with the sneakers, then this is categorized as a part of "net sales")

Stockholders' Equity

the owner's claims to funds thy have invested in the organization (such as stock). As a result, owner's equity in these organizations is called stockholder's equity

Accounting (the language of business)

the recording, classifying, summarizing, and interpreting of financial events and transactions. This information enables a company's management and other interested parties (stakeholders) to make good descisions.

Net Income or Net Loss

the resources (revenue) left over or depleted after all costs and expenses and taxes are paid (sometimes referred to as the bottom line)

Assets

Equal to (balanced with) the liabilities and owner's equity

6 Steps in the Accounting Cycle

1. Analyze source documents (sales slips, travel records, etc) 2. Record Transactions in journals 3. Transfer (post) journal entries to ledger 4. Take a trial Balance 5.

Processing

1. Entries are made into journals, recording 2. The effects of these journal entried are transferred or posted into ledgers: classified 3. All accounts are summarized

Accounting Cycle

A Six-step procedure that results in the preparation and analysis of the major financial statements (handled by bookkeeper and accountant)

Accounting system

A method to record and summarize accounting data

Financial Statement

A summary of all the transaction that have occurred over a particular period

Common Liabilities listen on the balance sheet

Accounts payable, Notes payable, Bonds Payable

Must follow GAAP

Any company that is publicly traded (required by the U.S. Securities and Exchange Commission (SEC)

Financing

Budgeting for marketing activities, obtaining the necessary funds needed for operations, and providing financial assistance to customers so they can purchase the business products and service.

Operating expenses

Costs incurred in operating a company, including paying employee salaries, buying office supplies (chairs, desks, printers, etc.) renting a space to operate the business (if that space is not owned by the company), buying insurance, paying utilities light heat and power, marketing

Operating expenses

Costs involved in operating a business, including the need to purchase office supplies

LIabilities (2 Types)

Current liabilities, long-term liabilities

Accounts Payable

Currents liabilities involving money that a company owes to others (like suppliers, creditors) for merchandise or services purchased on credit but not yet paid for

Liabilities

Debts the company owes to outside companies or individuals

Bookkeeper's Role

Divide a firm's transactions into meaningful categories and posts the financial data into a record book or computer program called a journal (done daily)

Assets

Economic resources (things of value) owned by a company that can help generate income; items can be tangible or intangible

Accounting Year

Either a calandar year or a fiscal year (which can begin ay any date designed by the business)

Five key areas of accounting disciplines

Financial accounting, managerial accounting, auditing, tax accounting, governmental and not-for-profit accouting

Balance Sheet

Financial statement that reports a firm's financial conditions at a specific time and is composed of three major accounts: 1. assets 2. liabilities 3. owner's equity

Statement of Cash Flows

Financial statements that reports cash receipts and disbursements related to a firms three major activities

Users of Accounting Information & Report Types Examples

Government taxing authorities(ex, the Internal Revenue Service)- tax returns Government Regulatory agencies- required reports People interested in the organization's income and financial position (owners, creditors, financial analysts)

The accounting system (in order)

Inputs (accounting documents), processing, outputs (financial statements)

Fixed Assets

Items such as land, buildings, and equipment that are relatively permanent; these are classified as long-term assets

Intangible Assets

Items such as patents, trade marks, and copyrights that don't have a physical form but do have value, there are classified as long-term assets

Four Main Categories of Ratios

Liquidity ratios, leverage (debt) ratios, profitability (performance) rations, activity ratios

Liquidity Ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Cost of Goods Sold

Money spent to make or buy inventory (also called "merchandise") that is sold to customers. Making inventory means there were raw materials or parts used for producing items for sale (or resale) to customers. Cost of goods sold may also include shipping and warehouse costs

Three major activities of a firm

Operations, Investments, Financing

Current Liabilities

Payments that are due in one year or less

Long-Term Liabilities

Payments that are not due for one year or longer

Net Income or Net Loss after Taxes

Profit or loss after subtracting all costs and all expenses and all taxes. "Net Income" can also be called "net earnings". If net income is positive, this would be the second type of profit. This type of profit can also be called "net profit"

Balance Sheet

Reports what a company owns and owes (the co's financial condition) on a specific date

Net Profit or Loss

Revenue minus sales returns, costs, expenses, and taxes over a period of time. This is the bottom line

Math Formula for Income Statement

Revenue- cost of goods sold=Gross Profit Gross Profit-Operating Expenses=Net income before taxes Net income before taxes-taxes= Net income or loss

Inputs (accounting documents)

Sales documents, purchasing documents, shipping documents, payroll records, bank records, travel records, entertainment records

Notes Payable

Short-term or long-term liabilities that a company promises to pay by a certain date. A "note" is a legal document specifying the details about how much money was borrowed and when it needs to be paid back

The Owner's Equity account differs based on the type of organization/business:

Sole Proprietors, Partnerships, Corporations

Generally accepted accounting principles (GAAP)

Standards upon which accounting professionals have agreed (procedures for calculating numbers) Defined by Financial accounting Standards Board (FASB- an independent organization)

Income Statement

Summarizes revenue a company earned selling its products, compared to cost of goods sold and other expenses (included taxes). This highlights total profit or loss experienced during a period

Ratio Analysis

The assessment of a firm's financial condition using calculations and interpretations of financial rations. These ratios are developed from information found in the firms financial statements- especially the balance sheet and income statement

Assets= Liabilities + Owner's Equity

The equation must always be balanced in this formula

Gross Profit

The first type of profit. How much was earned by making/buying inventory then selling the inventory (also called merchandise) to the public. BUT then later, the accountant needs to subtract operating expenses to know the true financial performance of the company

Double-entry bookkeeping

The practice of writing every business transaction in two places; done so they can check one list of transactions against the other for accuracy. (books should add up to the same amount, otherwise bookkeeper knows there is a mistake)

Journal

The record book or computer program where accounting data is first entered; divides the business' transactions into meaningful categories to keep information organized and manageable

Bookkeeping

The recording of business transactions (basic part of financial reporting) Note: accounting goes far beyond just recording

Gross Sales

The total of all sales the firm completed

Assets

The value the company owns which comes from all the tangible and intangible items the company owns (such as buildings, land, supplies, inventory, cash, money owed to the company, trademarks, patents, etc.)

Examples of financial events and transactions

When a company buys its inventory from a supplier, when a company sells its inventory to the public, when a company acquires insurance, when a company pays its employees, when a company uses its supplies.

Information used in accounting

Will assure stakeholders that accounting information is accurate

Bookkeeper vs. Accountant

_________ classifies and summarizes the firm"s financial data, while _________ interpret the data, prepare financial statements, and report the information to management

Ledger

a specialized accounting book or computer program in which information from accounting journals has been transferred/accumulated into specific categories and posted so that managers can find all the information about one account in a single place

Trial Balance

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

Financial Accounting

accounting information and analyses prepared for people not only inside the organization (like owners, etc) but outside the organization as well

Managerial Accounting

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

Retained Earnings

accumulated earnings from the organization's profitable operations that are reinvested in the business. In other words, these earnings are not paid to stockholders in distributions of company profits

Outputs (financial documents)

balance sheet, income statement, statement of cash flow, other reports

Positive Cash Flow

can occur when a company has more cash coming in compared to going out

operations

cash transactions are used to help run the business

Accountants

classify and summarize data provided by bookkeeppers, interpret the data, report the information to management, suggest strategies for improving business' financial condition, prepare financial analyses and income tax returns

Assets (3 types)

current assets, fixed assets, intangable assets

Depreciation

the systematic write-off of the cost of a tangible. asset over its estimated useful life. This is an expense for the company, but a non-cash expense. Selling expenses are relared to the marketing and distribution of the firms goods and services

Capital Account

the value of everything owned by the organization, minus any liabilities of the owner(s), such as bank loans. Owner's equity in these organizations is called the capital account

Owner's equity

the value of the company based on the amount of money owners invested into their company, plus "retained earnings"

Revenues

vale of whats recieved from sales (like goods sold and services rendered), and other financial sources (like rents recieved if the company owns a building and rents its space to others, money paid to the company for use of its patents/trademarks, interest earned from investments, etc.)

Liabilities

what the company owes to others (debts)