chapter 17

accounting cycle

6-step procedure that results in the preparation and analysis of the major financial statements 1. analyze source documents (sales slips, travel records, etc.) 2. record transactions in journals 3. transfer (post) journal entires to ledger 4. take a trial balance 5. prepare financial statements: balance sheet, income statement, statements of cash flows 6. analyze financial statements

bookkeeping tasks

1. divide all the firms transactions into meaningful catagories (sales documents, purchasing receipts, and shipping documents) keeping the information organized and manageable 2. record financial data from original transactions documents into a record book or computer program called a journal, where data is first entered

processing (part of the accounting system)

1. recording: entries are made into journals 2. classifying: the effects of these journal entries are transfers or posted into ledgers 3. all accounts are summarizes

accounting profession

5 key working areas: (disciplines) 1. managerial accounting 2. financial accounting 3. auditing 4. tax accounting 5. governmental and not-for-profit accounting

acid test ratio

A liquidity ratio that measures a firm's ability top meet its short-term debts. This ratio ignores stocks when calculating because some stocks (e.g. Ferrari cars or Airbus jets) cannot be quickly and easily turned into cash.

inventory turnover ratio

A ratio that measures the liquidity of inventory by measuring the number of times average inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period.

depreciation

Any decrease or loss in value caused by age, wear, or market conditions

liquidity

Availability of resources to meet short-term cash requirements. The ease with which an asset can be converted into cash.

capital account

a portion of the balance of payments comprised of foreign purchases of U.S. assets minus U.S. purchases of foreign assets, plus the change in official reserves

(CMA) certified management accountant

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....provides information to managers INSIDE the organization

trial balance

a proof of the equality of debits and credits in a general ledger A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. a list of accounts and their balances at a given time

(FASB) Independent Financial Accounting Standards Board

defines the generally accepted accounting principles (GAAP) that accountants must follow. if accounting reports are prepared in accordance with GAAP, users can expect the information to meet standards upon which accounting professionals have agreed

financial accounting

differs from managerial accounting in that the financial information and analysis it generates are for people primarily outside the organization

assets

economic resources (things of value) owned by a firm including: productive, tangible items such as 1. equiptement 2. buildings 3. land 4. furniture 5. motor vehicles that help generate income as well as intangible items with value: 1. patents 2. trademarks 3. copyrights 4. goodwill (reputation and superior products)

(CPA) certified public accountant

passes a series of exams meets certain educational and experience requirements

public accountant

provides accounting services to individuals or businesses on a fee basis

liabilities

what the business owes to others, its debts

journal

where the days transactions are kept journal comes from french word jour "day"

private accountant

works for single firm, government agency, or nonprofit organization

Arthur Andersen

one of the nations leading accountants, was forced out of business after being convicted of obstruction of justice for shredding records in the Enron case (the conviction was later overturned by the US Supreme Court)

fixed assets

Long-term assets that are relatively permanent such as land, buildings, or equipment.

owners equity

The amount remaining after the value of all liabilities is subtracted from the value of all assets.

financial statement

a summary of all the financial transactions that have occurred over a particular period. indicate a firms financial health and stability, and are key factors management decision making

annual report

a yearly statement of the financial condition, progress, and expectations of an organization companies are seeking to reduce cost by putting the annual report on the firms website and making better use of the Form 10-k that is required by the Securities and Exchange commission

accounting

accounting goes far beyond the recording of financial information. accountants classify and summarize financial data provided by bookkeepers, and then interpret the data and report the information to management. they also suggest strategies for improving the firms financial condition and prepare financial analysis and income tax returns

accounting information

accounting reports and financial statements reveal as much about a businesses health as pulse and blood pressure reading tell us about a persons health almost impossible to understand business operations without being able to read, understand, and analyze accounting reports and financial statements

independent audit

an evaluation and unbiased opinion about the accuracy of a company financial statements. annual reports also often include an auditors unbiased written opinion

financial transactions

buying and selling goods and services, acquiring insurance, paying employees, and using supplies usually we group all purchases together and all sales transactions together

notes payable

can be short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date

computerized accounting programs

can post information from journals instantaneously from remote locations to encrypted laptops or cell phones, making financial information available whenever the organization needs it. the companies sensitive financial information is safe and secure, but is in the accountants hands when needed, freeing accountants time for more important tasks such as financial forecasting particularly helpful to small business owners. accounting software like "Intuits QuickBooks" dress the specific needs of small businesses that are often significantly different from the needs of a major corporation

accounts payable

current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for

source documents

information about business transactions is obtained from original business papers

inputs (part of the accounting system)

inputs accounting documents. sales documents purchasing documents shipping documents payroll records bank records travel records entertainment records

outputs (part of the accounting system)

outputs financial system balance sheet income statement statements of cash flows other reports (e.g., annual reports)

current assets

items that can or will be converted into cash within one year including: cash, accounts receivable, and inventory

intangible assets

long-term assets that have no physical form but do have value. patents, trademarks, copyrights, and goodwill are intangible assets

bonds payable

long-term liabilities that represent money lent to the firm that must be paid back

cost of goods sold (or cost of goods manufactures)

measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale. includes: the purchase price plus any fright charges paid to transport goods, plus any costs associated with storing the goods

leverage (debt) ratios

measures the degree to which a firm relies on borrowed funds in its operations

accounting system

method used to record and summarize accounting data into reports

return on sales

net income divided by net sales

gross profit

net sales minus cost of goods sold

managerial accounting

provides information and analysis to managers (department managers and chief financial officers) inside the organization to assist them in decision making. concerned with: 1. measuring and reporting costs of production 2. marketing, and other functions; 3. preparing budgets (planning); 4. checking whether or not units are staying within their budgets (controlling) 5. designing strategies to minimize taxes

statements of cash flow

reports cash receipts and cash disbursements related to the three major activities of a firm: 1. opperations: cash transactions associated with running the business 2. investments: cash used in or provided by the firms investment activities 3. financing: cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends Describes yearly cash receipts and cash payment

auditing

reviewing and evaluating the information used to prepare a company financial statements

ledger

specialized accounting book or computer program 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.

income statement

summarizes all the resources, called "revenue" that have come 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....shows the firms profit after costs, expenses, and taxes determines whether a business is earning a profit or losing money

balance sheet

the financial statement that reports a firms financial condition at a specific time the assets are equal to or balanced with the liabilities and owners (or stockholders) equity

revenue

the monetary value of what a firm received for goods sold, services rendered, and other payments (such as rents received, money paid to the firm for its use of patents, interest earned, etc)

bottom line

the net income (net loss) the firm incurred from revenue minus sales return, costs, expenses, and taxes over a period of time and the last line on the income statement

double-entry bookkeeping

the practice of writing every transaction in two places. it requires two entries in the journal and in the ledgers for each transaction recording financial transactions that requires a debit entry and credit

basic earnings per share

the ratio of net income after taxes to the number of common stock shares outstanding

bookkeeping

the recording of business transactions, is a basic part of financial reporting.

accounting "language of business"

the recording, classifying, summarizing (recording), 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 operation. major purpose is to help internal managers make well informed decisions and to report financial information about the firm to interested stakeholders: employees, owners, creditors, suppliers, unions, community activists, investors, and the government (for tax purposes)

operating expenses

the sum of the cost of doing business, except the cost of goods; they include such items as sales persons' salaries , bags, paper and pencils, and cleaning of carpets...

net income

the total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings

Sarbanes-Oxley Act (Sarbox)

this legislation created new government reporting standards for publicity traded companies. it also created the PCAOB (Public Company Accounting Oversight Board) which is charged with overseeing the AICPA (Institute of Certified Public Accountants). put into place in order to ensure the integrity of the auditing process

tax accountant

trained in tax and law is responsible for preparing tax returns, or developing tax strategies