intro to business chapter 14

Dodd-Frank Act

- a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage - gave FRB the task of implanting the legislation - this legislation limits the type software assets commercial banks can buy, the amount of capital they must maintain and the use of derivative instruments scubas options, futures, and structured investment products

Sarbanes-Oxley Act

- after accounting scandal of Enron and world com congress passed this - required firms to be more rigorous in their accounting and reporting practices - made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail time for inaccurate misleading or illegal accounting statements

- each country - international financial reporting standards

- blank has a different set of rules that the businesses within that country are required to use for their accounting process and financial statements - but a number of countries have adapted a set of accounting principles known as blank

the big four

- ernst and young - KPMG - Deloitte - price water- housecoopers

booking keeping

- very narrow and very mechanical - typically limited to the routine, day to day recording of business transactions

Ledger

a book or computer file with separate sections for each account

financial map

a budget is like a blank, showing how the company expects to move form point a to point b over a specific period of time

not using its assets productively - a key managerial failing

a company with a low return on assets is probably blank

income statement

a financial report that shows an organizations profitability over a period of time - month quarter or year

assets

a firm's economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things

Current Liabilities

a firm's financial obligations to short-term creditors, which must be repaid within one year, while long term liabilities have longer repayment terms

great efficiency but also lost of sales due to insufficient stock levels

a high inventory turnover ratio may indicate blank but may also indicate the possibility of blank

low stockholder returns and may indicate a need for immediate managerial attention

a low return on equity means blank

financial straits

a low times interest earned ratio indicates that even a small decrease in earnings may lead a company into blank

a business is selling off existing long term assets and reducing its capacity for the future so a negative number in this category isn't always good

a positive number for investing activities means a business is blank

debt to total assets ratio

a ratio indicating how much of the firm is financed by debt and how much by owners' equity

Quick Ratio (Acid Test)

a stringent measure of liquidity that eliminates inventory

trial balance

a summary of the balances of all the accounts in the general ledger

double-entry bookkeeping

a system of recording and classifying business transactions that maintains the balance of the accounting equation

journal

a time-ordered list of account transactions

- assets - liabilities - owners equity

accountants are concerned with reporting an organizations blank (3)

private accountants

accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements

financial statements

accountants summarize the info for a firms business transactions in various blank - for a variety of stakeholders including managers, investors, creditors, and government agencies

four or five year college

accountants unlike bookkeepers usually complete course work beyond blank

examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements

accounting cycle steps

financial language

accounting is the blank that organizations use to record, measure, and interpret all of their financial transactions and records and is very important in business

- filing income taxes - obtaining credit form lenders - reporting results to the firms stockholders

accounting statements are used for what three tings

Forensic Accounting

accounting that is fit for legal review and involves analyzing financial documents in search of fraudulent entries of financial misconduct - function much like detectives

an allowance for bad debts that management doesn't expect to be paid back.

accounts receivable usually include an allowance for blank

net receivables

accounts receivables, less allowance for bad debts; represents the amount of money the business expects to receive from its customers

inappropriate accounting practices (banks failed to understand their health: many developed questionable lending practices and investments based on subprime mortgages made to individuals who had poor credit)

after 5 years of the Sarbanes Oxley act being passed, the world experienced a financial crisis in 2008 part of which was due to excessive risk taking and blank

liquidity

all asset accounts are listed in descending order of blank - that is how quickly each could be turned into cash

use the language of accounting

all business from small to large use blank to take their use of funds, measure profitability, and budget for future expenditures

assets liabilities or owners equity

all business transactions are classified as what three things

current assets

also called short term assets, are those that are used or converted into cash whiting the course of a colander year

second tier accounting firms that are much smaller than the big four

also, many public accountants work for one of the blank

certified public accountant

an individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records

budget

an internal financial plan that forecasts expenses and income over a set period of time

balance sheet assets to sales which are found in the income statement

asset utilization ratios retail to balance sheet blank which are found where

broken down into specific categories: cash equipment invents then on other side debts to suppliers loans and equity

assets liabilities and owners equity are blank by most organizations to provide more specified info about the transaction

retained earnings

at the end of each accounting period the dollar amounts in all the revenue accounts and expense accounts are moved into an account called blank - one of the owners equity accounts

- traditional format: placed the organizations assets of the left side and its liabilities and owners equity on the right side - vertical forma: with assets on top followed by liabilities and owners equity

balance sheets are often presented into different formats: (the second is the most new)

look at financial statements to determine a companies ability to meet current and future debt obligations if a loan or credit is granted

banks and other lends look at financial statements to determine ...

lower

bc some assets may have been financed with debt not contributed by the owners, the value of the owners equity is usually considerably blank than the total value of the firms assets

balance

because assets= liabilities plus owners equity - when ana records 325 on both sides of account the account increases the same on both sides and remains in blank

Contributed Capital

because each stock type issued by an organization represents a different claim on the organization, each must be represented by a separate owners equity account called blank

riskier than equity

because the use of debt carries an interest charge that must be paid regularly regardless of profitability, debt financing is much more blank

"Top-down" master budgets

begin at the upper management level and filter down to the individual department level (budget)

individuals and businesses

blank and blank can hire public accountants

revenues and expenses

blank increases owners equity accounts while blank decreases the account

long term or fixed assets

blank represent a commitment of organizational funds of at least one year.

- less training

book keeps generally require less blank than accountants

obtaining and recording the info that accountants require to analyze a firms financial position

bookkeepers are responsible for blank and blank the information that accountants require to analyze a firms financial position

ratio analysis

calculations that measure an organization's financial health

operating revenues

cash inflows in the form of payments from customers

expected operating expenses

cash outflows, such as wages materials costs and taxes

express officially an unbiased opinion regarding the accuracy of clients financial statements

certification gives a public accountant the right to blank

Association of Certified Fraud Examiners (ACFE)

certifies accounting professionals as certified fraud examiners

profit margin, return on assets, and return on equity

common profitability ratios include what three things

revenue and expense accounts during accounting period

companies record their operational activities in what two account during accounting period

higher returns

companies using their assets more productively have blank returns on assets than their less efficient counter parts

Owner's Equity

contains all the money that has ever been contributed to the company that never has to be paid back - funds can come from investors who have given money or assets to the company or it can come from past profitable operations

beginning inventory + interim purchases - ending inventory

cost of goods sold =

Curren ratio

current assets / current liabilities

debts(assets - equity)/total assets

debt to total assets formula

Liabilities

debts that firm owes to others

receivable turnover

demonstrates how quickly a firm is able to collect payments on its credit sales - no payments = no no profits

- begins cycle by gathering and examining source documents (checks, credit card receipts, sales, slips, and other related evidence concerning specific transactions)

describe examining source documents

- info from trial balance is also used to prepare the companys financial statements - CPA must attest or certify that the organization followed generally accepted accounting principles in preparing the financial statements - when these statements are completed the organizations books are closed and the accounting cycle begins anew for the next accounting period

describe financial statements as last step in accounting cycle

- transfers information from her journal into a ledger - price is known as posting - at the end of accounting period (usually yearly but occasionally quarterly or monthly) you prepare a trial balance - if upon totaling, trial balance doesn't balance, you or her accountant must look for mistakes but if trial balance is correct the accountant can prepare financial statements

describe post transactions

- records financial transactions in a journal - while most businesses keep a general journal in which all transactions are recorded some classify transactions into specialized journals for specific types of transaction accounts

describe recording transactions

trip wire or feedback loop

deviations between expected operating expenses and revenues serve as a blank or blank to launch more detailed financial analysis in an effort to pinpoint trouble spots and opportunities

sale of stock

during any period of time the owners equity account may change because the blank (or contributions withdrawals by owners), the net income or loss or the dividends paid

Owner's Equity

equals assets minus liabilities and reflects historical values

third

expenses is the blank category on an income statement

understand interpret and even develop the accounting system necessary to classify and analyze complex financial info

extra school years allow accountants to blank

performance

financial ratios are used to weigh and evaluate a firms blank

return on stockholders investments and overall quality of he firms management team

financial statements evaluate the blank

audited

financial statements that attest an accurate reflecting of the underlying financial condition of the firm are blank

excess of 50 percent

firms in verystable and or regulated indicts scubas electric utilities are able to carry debt ratios well in blank

has little inventory that is physical but instead downloads it

for Microsoft a high inventory turnover means

cost of goods sold

for most manufacturing and retail concerns, the next major item after revenues included in the income statement is blank

net income after taxes

for profitability ratios the numerator is always blank

income statement and balance sheet

for return on assets computation it requires data from both the blank and blank

it satisfies a performance obligation by transferring a promised good to service to a customer

generally accepted practice is that firms should book revenue when blank

operating income and earnings before interest and taxes

generally, accountants divide profits into individual sections such as blank and blank

ground up

generally, the larger and more rapidly growing an organization the greater the change it will build its master budget from blank

revenues - cost of goods sold required to generate revenues

gross income or profit equation

PCAOB

has the ability to file a disciplinary order against a firm or individual that either temporarily or permanently prohibits that firm or individual from practicing accounting

creditors need for safety

high liquid ratios may satisfy a credits need for blank

a short term lender examines a firms cash inflow to assess its ability to repay a loan quickly with cash generated from sales a longer term lender is more interested in the comp nays profitability and indebtedness to other lenders

how do banks and lenders determine a company's ability to meet current and future debt obligations? short term lender vs longer term

doesn't mean you can't use it

if a machine as a zero value on the firms balance sheet when it fully depreciates doesn't mean blank

previous two years income statement to permit comparison of performance form one period to another

like most companies, Microsoft, presents not only the current years results but also the blank

high turnover ratios imply that cash is flowing through an organization very quickly - situation that reduces need for the type of reserves measured by liquidity ratios

liquidity ratios are generally beset examined in conjunction with asset utilization bc why

efficiently

liquidity ratios that are too high may indicate the organization is not using its current assets blank

outsiders

managers also use accounting statements to report the business financial performance to blank

1- to aid in internal planning and control 2- for external purposes such as reporting to the internal revenue services, stock holders, creditors, customers, employees, and other interested parties

managers and owners use financial statements for what two things

inefficiency in their operations

managers can use asset utilization ratios to pinpoint blank

below 50 percent

managers of most firms tend to keep debt to asset levels below blank

forensic

many auditing firms are partly adding or expanding blank or fraud detection services

financial stamens

many business failures can be linked to ignorance of the information hidden in the blank

two three or even more

many corporations issue blank different classes of common and preferred stock each with different dividend payments and or voting rights

cooked books for

many forensic accountants root out evidence of blank for federal agencies like the federal bureau of investigation or the internal revenue services

self employed or members of large public accounting firms

many public accountants are either blank or members of blank

assets on hand

microsofts current ratio indicates that for every one dollar of current liabilities the firm has 2.35 of current blank on hand

diluted earnings per share

net income / number of shares outstanding (diluted)

Return on Equity

net income divide by owners equity also called return on investments ROI

earnings per share

net income or profit divided by the number of stock shares outstanding

they use their funds to meet their state objectives

nonbusiness organizations such as charities and governments also use accounting to demonstrate to donors and taxpayers how well they use their blank to meet their stated objectives

- donations from individuals or grants from governments and private foundations

nonbusiness organizations typically obtains revenues through blank

temporary investments, accounts receivable, and inventory

on the balance sheet: cash is followed by what things in order?

when a business should recognize revenue- during a projector after the project is completed?

one of the controversies in accounting has been when a business should what

times interest earned ratio

operating income divided by interest expenses

wages earned by employees but not yet paid and taxes owed to the government

other liabilities include blank - and these accounts are consolidated into an accrued expenses account

income earned by the organization and retained to finance continued growth

owners equity on a balance sheet includes the owners contributions to the organization along with blank earned by the organization and retained to blank continued growth and development

cash flow

perhaps management greatest single concern is blank

changes in top management

poor performance in financial statements results in blank

CPAS

private accountants can become blank

Certified Management Accountants (CMA)

private accountants who, after rigorous examination, are certified by the National Association of Accountants and who have some managerial responsibility

income statement

profit margin is based solely on the data obtained form the blank

debt utilization ratios

ratios that measure how much debt an organization is using relative to other sources of capital, such as owners' equity

asset utilization ratios

ratios that measure how well a firm uses its assets to generate each $1 of sales

Profitability Ratios

ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners' equity, and sales

liquidity ratio

ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt

relationship, comparison to its competitors, and its state goals

ratios themselves aren't very useful what matter is the blank of the calculate ratio to the previous years performance, blank (2)

Accounts Receivable

refers to money owed the company by its clients or customers who have promised to pay for the products at a later date

cash inflows and outflows

regardless of focus, the principle value of a budget lies in its breakdown of blank

accounts payable

represents amounts owed to suppliers for goods and services purchased with credit

statement of operations

represents future revenues from long term contracts signed to deliver services such as cloud storage

gross income or profit

revenues minus the cost of goods sold required to generate the revenues

general and administrative expenses

salaries of executive and their staff and the costs of owning and maintain the general office

Receivables Turnover

sales divided by accounts receivable

inventory turnover

sales divided by total inventory

research and development costs

scientific engineering and marketing personnel and the equipment and information used to design and build prototypes and samples

Financial Accounting Standards Board (FASB)

setting up the principles and standards of financial accounting and reporting in the private sector since 1973 - its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public - including: issuers, auditors and users of financial information

profit margin

show the over percentage of profits earned by the company

return on equity

shows how much income is generated by each one dollar the owners have invested

bottom up master budget

start at the department or project level and are combined at the chief executives office

return on equity ratio as one of their key performance yardsticks

stockholders are always concerned with how much money they will make on their investments and they frequently use blank as yardstick

trust

strong compliance to accounting principles create blank among stakeholders

annual report

summary of a firm's financial information, products, and growth plans for owners and potential investors

dividends per share

the actual cash received for each share owned

Cost of Goods Sold

the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies

historical collections experience and is diluted from the accounts receivable balance to present a more realistic view of the payments likely to be received in the future called net receivables

the bad debts adjustment is normally based on blank

owns or controls

the balance sheet indicates what eh organization blank or blank and the various sources of the funds used to pay for these assets such as bank debt or owners equity

accounting equation

the balance sheet takes its name from its reliance on the blank - assets MUST equal liabilities plus owners equity

closed out to the owners equity account

the basic accounting equation will not balance until the revenue and expense accounts balances have been moved or blank

- cash from (used for) operating activiites - cash from (used for) investing activities - cash from (used for) financial activities

the change in cash is explained through details in three categories for statement of cash flows such as

expenses

the costs incurred in the day to day operations of an organization

profits

the difference between what it costs to make and sell a product and what a customer pays for it

stock price

the earnings per share ratio is imprint bc yearly changes in earnings per hire in combination with other economy wide factors detmeurine a company's blank

one size does NOT fit all - manufacturing firms service providers and nonprofit organizations each use a different set of accounting principals or rules upon which the cpa has agreed

the fact that different organizations generate income in different ways suggests that when it comes to financial statements blank

funds

the faster a company grows the more blank the company for the future growth or in the case of both companies acquisitions of new technology created by smaller companies

Accounting Cycle

the four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements

the better the cost controls within the company and the higher the return on every dollar of revenue

the higher the profit margin the better the cost blank and the higher the blank

subtracting the firms expenses from its revenues

the income statement indicates the firms profitability or income (the bottom line) by subtracting blank

of the companys overall revenues and the costs incurred in generating those revenues

the income statement offers the clearest possible picture of the companys blank

1- how much did the firm make or lose? 2- who much is the firm presently worth based on historical values found on the balance sheet?

the income statement shows a copays profit or loss, while the balance sheet itemizes the value of its assets liabilities and owners equity. together the two statements provide the means of answering two critical questions:

managerial accounting

the internal use of accounting statements by managers in planning and directing the organization's activities

cash flow

the movement of money through an organization over a daily, weekly, monthly, or yearly basis

organization to organization

the number and type of expense accounts vary from blank to blank

- government agencies - stockholders and potential investors, lenders, suppliers, and employees

the primary external use of audited accounting information are blank

bc it eliminated inventory the least liquid current asset

the quick ratio or acid test is far more stringent of liquidity bc it blank

accounting

the recording, measurement, and interpretation of financial information

accounting equation

the relationship among assets, liabilities and owners equity is a fundamental concept in accounting and is known as the blank

net income

the resulting changes in the owners equity account is exactly equal to the blank

balance sheet

the second basic financial statement is the blank - a snapshot of an organizations financial position at a. given moment

signature of a certified public accountant

the single most important component of an annual report is the blank

next

the statement of cash flows takes the cash balance from ones years balance sheet and compares it with the blank while provide detail about how the firm used the cash

statement of cash flows

the third primary financial statement is called blank - which explains how the companys cash changed from beginning of the accounting period to the end - investors look at this who want more info about cash flowing into and out of the firm than is provided onto balance sheet in order to better understand the company's financial heath

revenue

the total amount of money received from the sale of goods or services, as well as from related business activities

net income

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

- accounting equations - double entry bookkeeping system

these two concepts are the starting point for all currently accepted accounting principles

1: selling, general, and administrative expenses 2: research, development, and engineering expenses 3: interest expenses (the costs directly attributable to selling goods or searches are included in the costs of goods sold)

three common expense accounts listed on the income statement

income before interest and taxes/ interest

times interest earned

two separate accounts

to keep the accounting equations in balance, each business transaction must be recorded in blank

government bailed out some of the USAs largest banks and congress passed the Dodd frank act

to prevent a depression from the 2008 financial crisis what did the government do

liabilities or owners equity

total assets must be financed either through borrowing (blank) or through owner investment (blank)

posting

transferring information from journal into a ledger

result of transactions completed over a specified accounting period - accumulation of all financial transactions conducted by an organization since its founding

unlike the income statement, the balance sheet does not represent the result of blank. instead the balance sheet is by definition an accumulation of blank

fourth

usually net income is the blank written on the income statement

- counters - refrigerator display cases - flowers - decorations - goodwill = anas reputation for preparing and delivering beautiful floral arrangements on a timely bases

what are five assets for ants flowershop

- loan from the small business and money owed to flower suppliers and other creditors for items purchased

what are liability in anas flow shop

- profit and loss statement - operating statement

what are other names for the income statement

- study the financial statements in a firms annual report to determine whether the company meets its investment requirements and whether the returns form a given firm are likely to *compare favorably with other similar companies*

what are potential investors concerned with financial stamtents

large cash balance on balance sheet

what could be cause of a low total asset turnover

forensic accounting

what is a growing area for public accountants

if you have a BP credit card the purchase represents and account payable for you and an account receivable for the company.

what is an example of an accounts payable

assets= liabilities + owners equity

what is the accounting equation

5,000 + 4,000 - 5,500 = 3,500

what is the cost of goods sold: - if ana started the accounting period with an inventory of goods for which it paid $5,000. during that period, ana bought $4,000 worth of goods - at the end of the accounting period, anas inventory was worth $5,500 the cost of goods sold during the accounting period would be

revenues

what is typically listed first on the income statement

whats the bottom line? - where the bottom line shows the overall profits or loss of the company after taxes

what question is derived from the income statement

- income statement - balance sheet - statement of cash flows

what three things are the best known financial statements that are provided to stockholders and potential investors in a firms annual report as well as to tother relevant outsiders such as creditors government agencies and the internal revenue services

gross profit, earnings before interest and taxes, and net income

what three things are the results of calculations made from the revenues and expenses accounts - they are not actual accounts

when many accounting firms failed to abide by GAAP

what what the cause of government taking greater role in making rules, requirements, and policies for accounting firms and businesses through the *securities and exchange commissions and public company accounting oversight board*

decreases

when a corporation elects to pay dividends it blank the cash account (in the assets category on the balance sheet) as well as the capital count (in the owners equity part of the balance sheet)

master budgets

while most companies provide blank for the entire firm, many also prepare budgets for smaller segments of the organizations such as divisions, departments, product lines, or projects

so little inventory

why is Microsofts quick ratio almost the same as its Current ratio

because if the organization were to sell off all of its assets and pay off all of its liabilities any remaining funds would be owners equity

why would account listed on a balance sheet as owners equity differ drastically from company to company?

- controller - tax accountant - internal auditor

with titles such as blank(3) private accountants are deeply involved in many of the most imprint financial decisions of the organizations of which they work

to count how much it has sold and how may expenses have been incurred during a period of time

zeroing out the balances allows the company to do what

reasonable expectations for salary and other benefit requests

labor unions and employees use financial statements to establish blank

cash from operating activities

Calculated by combining the changes in the revenue, expense, current assets and current liability accounts - includes all the accounts on the balance sheet that relate to computing revenues and expenses for the accounting period

cash from financing activities

Calculated from changes in the long-term liability accounts and the contributed capital accounts in owners' equity

cash from investing activities

Calculated from changes in the long-term or fixed asset accounts

profit margin

Net Income/Sales

return on assets

Net Income/Total Assets

accrued expenses

Representing all unpaid financial obligations incurred by the organization

Total Asset Turnover

Sales/Total Assets

reduced 10k

if a manufacturer purchases a 100k machine expected to last 10 years - rather than writing the expense as 100k in the first year and no expense for that equipment over the next nine years - they can report deprecations expenses of 10k per year for the next ten years - because that better matches the cost of the machine to the years of the machine is used: each time this depreciating is written off as an expense, the book value of the machine is also reduce blank

she records 325 in liability or a debt to a supplier but at the same time she has to record the money as an asset in inventory

if ana busy 325 dollars worth of roses on credit from a creditor to fill a wedding order what does she have to do when she records this? (double entry bookkeeping)

10,000 - 3,500 = 6500

if ana had total revenues of 10,000 over the same period of time, and the cost of goods sold was 3500 what is the gross income or profit

likely paying off longer term debt or returning contributed capital to investors

if cash from financing activities is negative the company is blank

we can see that the company bought land, investments, equipment (inventory)

if the cash form investing activities is negative we can see that blank

making extra cash that it can use to invest in increase long term capacity or to pay off debt such as loans or bonds

if the cash from operating activities is a positive number then the business is making blank

selling expenses

include advertising and sales salaries

interest expenses

include the direct costs of borrowing money

depreciation

included in the general and administrative category is a special type of expense known as blank, the process of spreading the costs of long lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used

total asset turnover

indicates whether a company is using its assets productively

raw material. work in progress, finished goods ready for delivery

inventory may be held in the form of what three things on the balance sheet

per share data

investors may use blank to compare the performance of one company with another on an equal or per share basis, generally the more shares of stock a company issues the less income is amiable for each share

daily/weekly/monthly/ yearly

it is not unusual for an organization to prepare separate blank(4) budgets

inadequate cashflow

it is not unusual for highly successful and rapidly growing businesses to struggle to make payments to employees, suppliers, and lenders due to balnk

long term investments cut as plants and equipment and intangible assets such as corporate goodwill or reputation as well as patents and trademarks

items classified as fixed include blank

original cost less accumulated depreciation.

items on the balance sheet are listed. on the basis of their original blank rather than their present value