Chapter 17 Foundations of Business Accounting
recording of business transactions, is a basic part of financial reporting
bookkeeping
examples of intangible assets
patents, trademarks, copyrights, goodwill
what all does profitability (performance) ratios measure
1) earnings per share (EPS) 2) return on sales 3) return on equity
the practice of writing every transaction in two places in called
double-entry bookkeeping
financial statement that reveals whether the business is actually earning a profit or losing money
income statement
government accounting standards are set by an organization called the
governmental accounting standards board (GASB)
examples of fixed assets
land, buildings, equipment, property, and plants
bookkeepers use a specialized accounting book or computer program called a
ledger
measures the degree to which a firm relies on borrowed funds in its operations
leverage (debt) ratios
accountants list assets on the firm's balance sheet in order of their _______
liquidity
the ease with which assets can be converted into cash
liquidity
assessment of a firm's financial condition, using calculations and financial ratios developed from the firms financial statements
ratio analysis
accumulated earnings from the firm's profitable operations that are reinvested in the business and not paid out to stockholders in distributions of company profits
retained earnings
more efficiency a firm sells or turns over its inventory, the higher its ________
revenue
the value of what stockholders own in a firm is called _____ ____
stockholders' equity
systematic write-off of the cost of a tangible asset over its estimated useful life
depreciation
fundamental accounting equation
assets = liabilities + owner's equity
reviewing and evaluating the info used to prepare a company's financial statement is referred to as
auditing
financial statement that reports a firm's financial condition at a specific time
the balance sheet
debt to owners' equity ratio
total liabilities/owners' equity
after moving transactions into a ledger the next step in the accounting cycle is to prepare a
trail balance
why do accounts use a ledger
transfer info from accounting journals into specific categories so managers can find all the info about a single account
_______ _______ details what the company owns and owes on a certain day
balance sheet
the fundamental accounting equation must always be ________
balanced
long-term liabilities, money lent to the firm that it must pay back
bonds payable
the accounting cycle relies on __________ and __________
bookkeeping and accounting
after allocating taxes, we get
bottom line
inventory turnover ratio
costs of goods sold/average industry
current ratio
current assets/current liabilities
current liabilities vs. long-term liabilities
current liabilities: debts due in one year or less long-term liabilities: debts not due in one year or less
who is the acid test particularly important to
firms with difficulty converting inventory into quick cash
on a balance sheet, everything you own are your ______ and the money you owe others are your ______ and the resulting figure is your net worth, or ______
assets liabilities equity
fiscal year can begin
at any date designated by the business
net income the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time
bottom line
why is it important to compare a firms' debt ratios to those of other firms In its industry
cause debt financing is more acceptable in some industries than others
why its EPS a revealing ratio
cause learnings help stimulate the firm's growth and provide for stockholders' dividends
accountants _______ and ________ financial date provided by bookkeepers
classify and summarize
two key liquidity ratios are the
current ratio acid-test ratio
summary of all the financial transactions that have occurred over a particular period that indicate the firm's financial health and stability and are key factors in management decision making
financial statement
what do companies do when preparing a balance sheet
follow the procedures set in the fundamental accounting equation
when happens if a business has cash coming in at a later date, but no cash to pay current expenses
force firm into bankruptcy, even though sales may be strong, all because cash wasn't available when it was most needed
revenue - cost of goods sold
gross profit (gross margin)
an asset is fixed or long-term because
it takes time, effort, and paperwork to sell
accounting is often called the
language of business
provides information and analysis to managers inside the organization to assist them in decision making
managerial accounting
short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date
notes payable
what does lower-than-average inventory turnover ratio often indicate
obsolete merchandise on hand or poor buying practices
amount of the business that belongs to the owners minus any liabilities the business owns
owners' equity
indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners
return on equity
why do bookkeepers record all transactions in two places
so they can check one list of transactions against the others to make sure both add up to the same amount
trained in tax law and is responsible for preparing tax returns, or developing tax strategies
tax accountant
economic resources (things of value) owned by a firm that includes productivity, tangible items such as equipment, buildings, land, furniture, and motor vehicles that help generate income, as well as tangible items with value like patents, trademarks, copyrights, and goodwill
assets
why is computerized accounting programs help small businesses
because they don't have the variety of accounting personnel within their companies that larger firms enjoy
an accountant who has a bachelor's degree and two year of experience in internal auditing, and who has passed an exam administered by the Institute of Internal Auditors
certified internal auditor (CIA)
ratio of a firm's current assets to its current liabilities that appears on the firm's balance sheet
current ratio
for a fee, what accounting services would a public accountant provide to individuals or businesses
designing an accounting system, helping correct software to run the system, and analyzing an organizations financial performance
how does financial accounting differ from managerial accounting
differs from managerial in that the financial information and analyses it generates are for people primarily "outside" the organization - goes not only to company owners, managers, and employees, but also to creditors and lenders, employee unions, customers, suppliers, gov agencies, and general public
why does computerized accounting programs helps accountants
free accountant's time for more important tasks such as financial analysis and financial forecasting
how much a firm earned by buying (or making) and selling merchandise
gross margin
when we subtract the cost of goods from net sales, we get ____ _____ or ____ ____
gross profit gross margin
refers to the total of all sales the firm completed and net sales are gross sales minus returns, discounts, and allowances
gross sales
an auditor not only examines the financial ____ of an organization but also its ________ efficiencies and effectiveness
health; operational
financial crisis of 2008 led congress to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act which
increased financial regulation affecting accounting by increasing the power of the PCAOB to oversee auditors of brokers and dealers in securities markets
why is ratio analysis useful
it can compare the company's performance to its financial objectives ad to the performance of other firms in its industry on liquidity, amount of debts, profitability, and overall business activity
a business' relationship with Its ______ is critical to preventing cash flow problems
lenders
measures a company's ability to turn assets into cash to pay its short-term debts (liabilities that must be repaid within one year)
liquidity ratios
monetary value of what a firm received for goods sold, services rendered and other payments
revenue
____ expenses are related to the marketing and distribution of the firms' goods or services, such as advertising, supplies, and salaries
selling
what does government and not-for-profit accounting do
supports organizations whose purpose is not generating a profit, but serving ratepayers, taxpayers, and others according to daily approved budget
a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced
trial balance
what are some duties of managerial accounting
- concerned with measuring and reporting costs of production, marketing, and other functions - preparing budgets (planning) - checking whether or not units are staying within their budgets (controlling) - designing strategies to minimize taxes
when dealing with the acid-test ____ and ___ is usually considered satisfactory, but boarding on cash flow problems meaning it may not meet its short-term debt, may have to go to high cost lender for financial assistance
.5 and 1
three parts of a financial statement
1) the balance sheet - reports firm's financial condition on specific date 2) the income statement - summarizes revenues, cost of goods, and expenses for a specific period and highlights the total profit or loss the firms experienced during that period 3) statement of cash flow - provides summary of money coming into and going out of firm and tracks company cash receipts and cash payments
in the debt to owners' equity ratio anything above _____ percent shows a firm has more debt than equity
100
when looking at the current ratio, a ___ or better is considered a safe risk for lenders granting short-term credit, since it appears to be performing in line with market expectations
2
accounting reports are prepared in accordance with _______, so users can expect the info to meet standards upon which accounting professionals have agreed
GAAP
scandals caused scrutiny of the accounting industry, and U.S. Congress passed the ___________ which created new gov reporting standards for publicly traded companies and created the ________________, which is charged with overseeing the AICPA
Sarbanes-Oxley Act (Sarbox) - Public Company Accounting Oversight Board (PCAOB)
yearly statement of the financial condition, progress, and expectations of an organization
annual report
recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operations
accounting
6 step procedure that results in the preparation and analysis of the major financial statements
accounting cycle
method we use to record and summarize accounting data into reports
accounting system
current liabilities/bills the company owes others for merchandise or services it purchased on credit but has not yet been paid
accounts payable
an amount of money owed to the firm that it expects to receive within one year
accounts receivable
measures the cash, marketable securities (stocks/bonds), and receivables of a firm, compared to its current liabilities and appears on a balance sheet
acid test or quick ratio
______ ratios tell us how effectively management is turning over inventory
activity
general expenses are _______ expenses of the firm such as office salaries, depreciation, insurance and rent
administrative
accounting year is either ______ or _____ year
calendar or fiscal
acid test
cash + accounts receivable + marketable securities / current liabilities
____ _____ highlights difference between cash coming in and cash going out of business
cash flow
poor ____ ____ is a major operating problem for many companies and difference for small and seasonal business
cash flow
the difference between cash coming in and cash going out of a business
cash flow
examples of current assets
cash, accounts receivable, and inventory
speedier conversion means ______ liquidity
higher
how do you know if a business has severe cash flow problems
if a firm has reached its credit limit and can borrow no more
when does goodwill appear on a balance sheet
included on balance sheet when one firm acquires another and pays more for it than the value of its tangible assets
_____ ______ reports the firm's financial operations over a particular period of time, usually a year, a quarter of a year, or a month
income statement
______ _______ shows the revenue a firm earned selling its products composed to its selling costs over a specific period of time
income statement
why is the need for trained accountants in the government and not-for-profit accounting
need for trained accountants is increasing because contributors want to know how their money is spent
after deducting all expenses, we can determine the firm's net income before taxes, also referred to as
net earnings or net profit
return on equity
net income after tax/total owners' equity
basic earnings per share
net income after taxes/ number of common stock shares outstanding
gross profit - operating expenses
net income before taxes
net income before taxes - taxes
net income or net loss
the resources (revenue) left over or depleted are referred to as
net income or net loss
assets are divided into 3 categories according to how quickly they can be turned into cash
1) current assets - items that can or will be converted into cash within one year 2) fixed assets - long-term assets that are relatively permanent 3) intangible assets - long-term assets that have no physical form but do have value
2 jobs of bookkeeping
1) divide all the firms transactions are meaningful categories 2) then record financial data from the original transaction documents into a record book of complete program called a JOURNAL
statement of cash flow 1) ______ are cash transactions associated with running the business 2) ________ are cash used in or provided by the firm's investment activities 3)_______ is cash raised by taking on new debt, or equity capital or cash used to pay business expenses, pay debts, or company dividends
1) operations 2) investments 3) financing
what are some common liabilities on a balance sheet
1) accounts payable 2) notes payable 3) bonds payable
financial accounting standards board requires companies to report their quarterly EPS in two ways
1) basic earnings per share (basic EPS) - helps determine the amount of profit a company earned for each share of outstanding common stock 2) diluted earnings per share (diluted EPS) - measures amount of profit earned for each share of out-standing common stock, but also considers stock options, warrants, preferred stock, and convertible debt securities the firm can convert into common stock
owner's equity account records the owners' claims to funds they have invested in the firm (stock), as well as retained earnings
corporations
measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale
cost of goods sold
why do organizations employ a private accountant
because they only work for a single firm, gov agency, or nonprofit organization and it is critical for firms to keep accurate financial information
_____ ____ _____ can post info from journals instantaneously from remote locations to encrypted laptops of call phones, making financial info available whenever the organization needs it
computerized accounting programs
a professional accountant who has met certain educational and experience requirements, passed a qualifying exam, and has been certified by the Institute of Certified Management Accountants
certified management accountant (CMA)
an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and meets the state's requirement for education and experience is recognized as a
certified public accountant (CPA)
how are company's seeking to reduce cost now since pressure from stakeholders for detailed financial information has grown
companies are seeking to reduce cost by putting the annual report on the firm's website and making better use of the form 10-K that is required by the securities and exchange commission
measures the degree to which the company is financed by borrowed funds that it must repay
debt to owners' equity ratio
represents the value attached to factors such as a firm's reputation, location, and superior products
goodwill
what is the major purpose of accounting
help managers make well-informed decisions and to report financial info about firm to stakeholders
financial statement that shows a firms bottom line profit after costs, expenses, and taxes
income statement
summarizes all the resources, called revenue, that have come up into the firm from operating activities, money resources the firm used up, expenses it incurred in doing business, and resources it has left after paying all costs and expenses, including taxes
income statement
An _____ _____ is an evaluation and unbiased opinion about the accuracy of a company's financial statements
independent audit
the ___________________ defines the generally accepted accounting principles (GAPP) that accountants must follow
independent financial accounting standard boards (FASB)
measures the speed with which inventory moves through the firm and gets converted into sales
inventory turnover ratio
what is the purpose of auditing
perform to guarantee that the organization is carrying out proper accounting procedures and financial reporting
return on sales is an indicator of ______
performance
measures how effectively a firm's managers are using its various resources to achieve profits
profitability (performance) ratios
converting the firm's inventory to _____ is a key function of management
profits
cost of goods sold includes the ______ price plus any _____ charges paid to transport goods, plus any cost associated with _____ the goods
purchase freight storing
examples of operating expenses
rent, salaries, supplies, utilities, and insurance
tells us whether the firm is doing as well as its competitors in generating income from sales and is calculate by comparing net income to total sales
return on sales
reports cash receipts and cash disbursements related to the 3 major activities of a firm
statement of cash flow
