IBT: Accounting and Finance

partnership

A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.

financing activities -

A category in a company's cash flow statement that accounts for external activities that enable a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans, or issuing stock. Cash flow from financing activities shows investors the company's financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.

Students will need to be able to calculate the following ratios using the formulas and financial statement information. Students also need to know what is a good/acceptable ratio. View notes or p. 306 in the textbook. Current Ratio

Current Assets / Current Liabilities Tells you if the business can pay its debts as they become due. Should be at least 1:1 for a healthy business; means that there are at least as many current assets as current liabilities

Revenue Accounts

Help identify the source of revenue Typically include: Sales revenue Interest revenue Revenue from sale of assets

What does "liquid" mean?

How fast can you use them? Think about eating a frozen dinner. It has to be thawed before it can be used.

Why Businesses Need Accounting External Users

In order to provide accurate financial information for: - Owners and potential investors or creditors to help them understand the business's financial situation Business decision makers need to be able to read and understand these financial statements in order to guide their company with informed decisions. It doesn't matter if we are talking about Apple Inc. or the local gas station—if a business is to survive and thrive, its managers must know how to create, read, and analyze financial statements.

Why Businesses Need Accounting Internal users

In order to provide accurate financial information for: Management to help them make sensible business decisions

Liabilities - examples

Include: Accounts Payable (money owed to suppliers) Loans (Notes Payable) (debts that are not due for typically a year or more) Accrued Payroll and Withholding mortgage payable (money owed on a purchased building)

Fixed Assets - examples

Include: Land Buildings Machinery Vehicles used in connection with the business

IASB Definition

International Accounting Standards Board

FASB Purpose

Is a non-government group of seven members supported by a staff of more than 60 Sets GAAP Works to reconcile differences between international standards and GAAP so reports created under international standards will be acceptable for companies in U.S. markets

GAAP Definition

Generally Accepted Accounting Principles

Financial performance ratios

Comparisons of a company's financial elements that indicate how well the business is performing.

accounting cycle STEPS

(1) journalize (2) post. (3) trial balance; (4) adjustments; (5) adjusted trial balance; (6) financial statements; (7) closing entries; (8) after-closing trial balance.

gross margin -

A company's revenue minus its cost of goods sold. Gross margin is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale. Also called "gross profit" or "gross income."

net income -

A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes, and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over time.

double taxation

A dual tax obligation that occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do. When corporations pay out dividends to shareholders, those dividend payments are taxable even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level.

limited liability company (LLC)

A hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

corporation

A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

chart of accounts

A list of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.

accounting cycle

A sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals.

APB

Accounting Principles Board predecessor to FASB

corporation Advantages

Advantages: Ability to raise large amounts of capital by selling shares of ownership; limited liability; professional management (board of directors)

partnership Advantages

Advantages: Easy to start; more than one source for startup capital; workload can be divided among partners

sole proprietorship Advantages

Advantages: Easy to start; owner keeps all of the profits; you are your own boss

limited liability company (LLC) Advantages

Advantages: Members are protected from personal liability for business decisions or actions of the LLC. Also, there are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit.

Recognize examples of Internal users of Accounting Info

Almost every employee of a company utilizes internal information, from the CEO right down to the worker on the shop floor who just wants to know how well the company is doing. Some internal users, such as the payroll department, rely on accounting information more than others. The most common internal users are: Board of directors Chief executive officer (CEO) Chief financial officer (CFO) Vice presidents Managers Supervisors

cost of sales -

Also referred to as "cost of goods sold," the direct costs attributable to the production of the goods sold by a company. This includes both the materials and the direct labor costs used to produce the good. It excludes indirect expenses such as distribution and sales force costs. Cost of sales appears on the income statement and can be deducted from revenue to calculate a company's gross margin.

AICPA

American Institute of Certified Public Accountants

operating activities -

An accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service.

investing activities -

An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from money spent on investments in capital assets such as buildings and equipment.

Current Assets - examples

Checking or money market accounts - Money available immediately Accounts Receivable - Money owed to the business for purchases made by customers

Audit

An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). Any publicly traded corporation must by law have its financial statements reviewed and approved by certified public accountants (CPAs). CPAs are trained experts in financial reporting and provide an objective, unbiased picture of how the financial information was gathered and reported.

Current Assets

Are any assets which can be easily converted into cash within one calendar year, such as:

Overhead Costs

Are expense items which cannot be clearly associated with a particular product or function Are the costs of resources used to maintain a business's existence

Assets

Are items of value which a company owns include everything that is of value to the company. A resource with economic value that an individual, corporation, or country owns or controls. (2) A balance sheet item representing what a firm owns.

Expense Accounts

Are specific for the expense they incur Usually incur the same expenses from month to month

Assets - 2 types

Are subdivided into current and long-term assets to reflect the ease of liquidating each asset

Liabilities

Are the opposite of assets Are also known as obligations of one company to another; amounts owed Comprise all debts and monies which are owed to outside creditors, vendors, or banks are debts—money owed to others. A listing of all of a company's debt sheds light on its financial position. : A company's legal debt or obligations incurred during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.

Asset formula Basic Accounting Equation

Assets=Liabilities + Owner's Equity Assets = Liabilities + Capital Assets = Liabilities + Capital (Equity/Stockholders Equity)

Depreciation - Examples

Can occur with equipment such as: automobiles computers fax machines A business purchases a truck which loses value the minute it is driven out of the dealership. The truck is considered an operational asset in running the business, but each year the truck is used, it loses some value. Eventually, the truck stops running and has no value to the business.

corporation Disadvantages

Disadvantages: Loss of control; double taxation; profits are divided

sole proprietorship Disadvantages

Disadvantages: Unlimited liability; owner typically provides all startup capital; owner absorbs all the losses; usually very long hours to save on labor costs

partnership Disadvantages

Disadvantages: Unlimited liability; potential conflict among partners; profits are split

limited liability company (LLC) Disadvantages

Disadvantages: When a member/owner of an LLC leaves, the business is often dissolved and the members must fulfill all remaining obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. Also, members of an LLC are considered self-employed and must pay the self-employment tax contributions toward Medicare and Social Security.

EBIT

Earnings before interest and taxes—an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings," "operating profit," and "operating income."

Assets - Examples

Examples include: cash in the bank company car rights and claims having value for the firm accounts receivable (money still owed by customers) machinery real estate patents inventory supplies land buildings equipment

Recognize examples of External users of Accounting Info

External users of a business's financial information have an interest in the business, but they do not have any involvement in its day-to-day operations. Examples of external users include: Owners not running the company every day Creditors Suppliers Potential or current investors Government agencies Customers Trade associations

Accounting is a process to figure out how much money a business made last year T/F

False

GAAP is a law which all companies must follow T/F

False Are not laws, although the U.S. Securities and Exchange Commission (SEC) requires they be followed in financial reporting

FASB Definition

Financial Accounting Standards Board

Long-term assets - examples

For example: real estate and machinery

Accounting

Is the recording, reporting, and analysis of financial transactions according to accepted principles in order to provide meaningful financial information. the language of business—a language used to understand income statements, statements of retained earnings, and balance sheets

IASB Purpose

It's hard to compare apples and oranges, so the IASB is trying to do for companies in countries around the world what GAAP does for American companies—encourage everybody to use the same set of standards and practices in reporting financial information. Every day the world gets a little smaller as corporations merge and expand overseas, so interpreting and comparing accounting information from country to country can become difficult. The IASB works toward standardizing accounting information in more than 100 participating countries.

Overhead Costs - Examples

May include: insurance office supplies cleaning services

Depreciation

Measures the loss in value of an asset Is an annual expense and is listed in an income statement under expenses

Accounts Receivable

Money owed by customers (individuals or corporations) in exchange for goods or services that have been delivered or used but not yet paid for. Money owed to the business for purchases made by customers

Who must follow GAAP?

Must be followed by: Any company which distributes its financial statements to the public Any company whose stock is publicly traded Certified public accountants Anyone who handles a company's financial accounts

Students will need to be able to calculate the following ratios using the formulas and financial statement information. Students also need to know what is a good/acceptable ratio. View notes or p. 306 in the textbook. Return on Equity Ratio

Net Profit / Owner's Equity Shows the rate of return the owners are getting on the money they invested in the company. Should be compared to return they could receive if they used their money in other ways such as investing in other companies.

cash flow statement -

One of the quarterly financial reports publicly traded companies are required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows from both ongoing operations and external investment sources as well as all cash outflows for business activities and investments. Payments and receipts of cash in a business can be divided among three categories: operating activities, financing activities, and investing activities.

Profit formula

Profit = Revenue - Expenses

general journal purpose

The journal entries help managers analyze and describe what has happened to the business financially.

Net Income (profit) formula

Revenues - Expenses = Net Income (Profit)

Company A has revenues of $46,555 and $55,421 for the years 2018 and 2019, respectively. Company B has revenues of $875,650 and $945,250 for the years 2018 and 2019, respectively. Which company is growing faster by percentage growth rate?

SOLUTION: For each company, divide 2019 revenue by 2018 revenue, subtract 1 and multiply by 100. Company A's growth rate is 19%; Company B's growth rate is 8%.

A company's revenue shrinks by 25% from 2018 to 2019. How much must it grow by in 2020 to reach its 2018 level?

SOLUTION: If R equals 2018 revenue, then R x (1 - 0.25) = .75R = 2019 revenue. If 2020 revenue climbs back to R, then growth rate is (R / .75R - 1) x 100 = 33.33%

You make entries to the mileage expense account. A saleswoman drives to a town 25 miles south and 50 miles west. She goes there and back via a straight highway that leads directly there. You reimburse mileage at $0.52 per mile. How much should you reimburse her?

SOLUTION: Straight line distance is the square root of 252+502 = 55.9 She went there and back, so 55.9 x 2 = 111.8 miles 111.8 x $0.52 per mile = $58.14

You are auditing a bean producing company. They list as asset $800,000 worth of beans valued at $1.50 per cubic foot, stored in a silo 40 feet in diameter and 60 feet high. Should you be concerned?

SOLUTION: The volume of the beans is r2h = 3.14 x 40 x 40 x 60 = 301,440 cubic feet At $1.50 per cubic foot, this is only worth $452,160 You should be concerned.

SOX Definition

Sarbanes-Oxley Act

matching principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. If a cost cannot be linked to revenues or to an accounting period, the expense is recorded immediately.

posting

The updating of the ledger accounts to reflect the transactions recorded in the journal. In a computerized accounting system, posting happens almost instantaneously.

SOX Purpose

This 2002 law created the Public Company Accounting Oversight Board. This board oversees the audits of public companies to help protect investors and ensure the accurate preparation of auditors' reports. An act passed by U.S. Congress in 2002 to protect investors from fraudulent accounting activities by corporations. SOX mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

SEC Purpose

This government agency has the legal power to enforce GAAP compliance among publicly traded corporations A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors corporate takeovers in the U.S.

sole proprietorship

This is an unincorporated business owned by one person. This type of business is common for small retail stores, farms, service businesses, and professional practices (such as law, medicine, or accounting). It is the most common type of business. An unincorporated business with one owner who pays personal income tax on profits from the business. With little government regulation, they are the simplest business to set up or take apart, making them popular among individual self-contractors or business owners

Students will need to be able to calculate the following ratios using the formulas and financial statement information. Students also need to know what is a good/acceptable ratio. View notes or p. 306 in the textbook. Debt to Equity Ratio

Total Liabilities / Owner's Equity Tells you how much the business is relying on money borrowed from others that will have to be paid back rather than money provided by owners. Want to see ratio of about 1:1 but no higher than 2:1. Too little debt means that a company may not be using all of its resources effectively while too much debt puts a business at risk in meeting its obligations to lenders.

Students will need to be able to calculate the following ratios using the formulas and financial statement information. Students also need to know what is a good/acceptable ratio. View notes or p. 306 in the textbook. Net Income Ratio

Total Sales / Net Income Shows how much profit is being made by each dollar of sales for the period being analyzed. Compare to ratio for past periods and to other companies.

Accounting allows a business to track and identify trends and make decisions which can quickly boost profitability or avoid cash shortages T/F

True

Accounting helps a business identify trends in sales and expenditures T/F

True

Most companies have only a few income accounts. T/F

True Most companies have only a few income accounts. That's really the way you want it. Too many accounts are a burden for the accounting department and probably don't tell management what it wants to know. Nevertheless, if there's a source of income you want to track, create an account for it in the chart of accounts and use it.

GAAP differs from the International Financial Reporting Standards T/F

True Differ somewhat from International Financial Reporting Standards

Expense Accounts - Examples

Typically include: salaries and wages telephone utilities repairs maintenance depreciation interest rent

SEC Definition

U.S. Securities and Exchange Commission

net loss -

When expenses exceed income or total revenue produced for a given period of time.

Income Tax

a required contribution for the support of a national, state, or local government calculated based on income

Profit

also known as net income, is what the business has left over or what is gained after expenses are paid.

Operating Expenses

are the daily expenses incurred in the operation of your business are divided into two categories: Selling General & Administrative Expenses

What are the 3 primary financial statements used in business to report information?

balance sheet, income statement, statement of retained earnings, (and cash flow statement.)

What is the most liquid asset?

cash

GAAP Purpose

greed-upon standards companies abide by when collecting and reporting their financial information. These are principles established primarily for companies in the United States that determine what information should be included in financial statements and how the statements should be prepared. These principles were developed by the FASB. Are detailed accounting principles, guidelines, and rules used to prepare, present, and report financial statements Have been recognized as authoritative by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) Are generally accepted industry practices Attempt to standardize and regulate accounting definitions, assumptions, and methods Allow the assumption that there is consistency from year to year in the methods used to prepare a company's financial statements Permit reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry

Total Expenses

is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income

Gross Profit

is derived by subtracting the cost of goods sold from net sales figures does not include any operating expenses or income taxes

Net Income

is the amount of money the business has earned after paying income taxes

Long-term assets

less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash

Sales figures

represent the amount of revenue generated by the business represent the total sales, less any product returns or sales discounts

Net Income Before Taxes

represents the amount of income earned by a business prior to paying income taxes is arrived at by subtracting Total Operating Expenses from Gross Profit

ABC Company has two outside sales associates. They traveled the following number of miles last month on sales calls in their personal cars. They are paid $.57 per mile for travel. How much did ABC Company reimburse them in mileage expense in total for the month? (Show your work.) Salesman 1 450 miles Salesman 2 600 miles Total $ __________________

salesman 1 = 256.5 salesman 2 = 342 TOTAL = 598.5

Expenses

the cost of goods and services used up in the process of obtaining revenue. The economic costs a business incurs through its operations. In order to maximize profits, businesses must attempt to reduce expenses without cutting into revenues. the costs of running the business, or the money going out

Cost of Goods Sold (COGS)

the costs directly associated with making or acquiring products, such as materials purchased from outside suppliers used in the manufacturing of the product

general journal defnition

the first place transactions are recorded. It has columns for dates, invoice or check numbers, and debit or credit records. The general journal also provides a description of each transaction. s the tool businesses use to record each material financial transaction. It is kind of like a diary for a business, except instead of writing in paragraphs, general journal entries are recorded in a format that enables a manager to quickly scan the journal and identify what transpired in a given period of time.

Revenue or Sales

the money made from goods sold or services rendered by a business The money a company receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" (or "gross income") figure from which costs are subtracted to determine net income. sometimes called income, is the money a business takes in.