UCSD Econ 4 Terms - Financial Accounting

CFA

Certified Fraud Examiner

CIA

Certified Internal Auditor

CMA

Certified Management Accountant

CPA

Certified Public Accountant, licensed by states, only persons permitted to audit a companies financial reports and attest that those reports fairly present the financial position of the entity.

EA

Enrolled Agent

SFAS

Statements of Financial Accounting Standards

Direct expenses

costs associated directly with revenue such as COGS, Sales commissions, shipping

Retained Earnings

sum of business's earnings over life of the business that has not been distributed or paid out to investors

cost-recovery process

the expectation that revenue from sales will recover the cost of assets purchased to make sales

SCF

Statement of Cash Flows

Realization Principle

1) seller & buyer agree on price 2) seller delivers good or service 3) seller has cash price or reasonable expectation of receiving cash price in near future

Four fundamental accounting steps

1. Collection 2. Measurement 3. Classification 4. Presentation

Basic Accounting Equation

A = L + E (Assets = Liabilities + Equity) OR Assets = Financial Capital

APB

Accounting Principles Board

AICPA

American Institue of Certified Public Accountants

Stock elements

Assets, liabilities, equity at a point in time

Five core elements to accounting

Assets, liabilities, equity, revenue, expense

Four financial statements

Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Shareholder's Equity

Loans

Borrowed money

Assets (made of)

Current Assets + Long-Lived Assets

Liabilities (made of)

Current Liabilities + Long-term debt

The Big 4 Accounting Firms

Deloitte & Touche, Ernst & Young, Price-Coopers, KPMG

DB

Depreciable Basis

Revenue recognition

Determining when a sales activity generates revenue (typically when the product has been delivered, the price is known by both buyer & seller, and the seller has a reasonably high expectation of collecting cash from the buyer)

EBITDA

Earnings before interest, taxes, depreciation, and amortization

FASB

Financial Accounting Standards Board (successor to APB)

FAS

Financial Accounting Standards or 'Standards'

FF&E

Furniture, Fixtures, & Equipment

GAAP

Generally Accepted Accounting Principles

GOA

Government Accounting Office

IPR&D

In-process R&D e.g. student currently getting an education

IBD

Interest bearing debt

IFRS

International Financial Reporting Standards

P-in-K (Pink)

Paid in Capital = initial amount contributed by investors in the early stages of the company and at intial offerings of it's stock

Two major types of equity

Paid-in-capital (Pink) and retained earnings

Equity (made of)

Paid-in-capital + retained earnings

PP&E

Plant, property, and equipment

Balance Sheet

Reports A = L + E at a point in time

Income Statement

Revenue/Sales (Expenses) = Net Earnings/Profits or further Revenue (Direct Expenses) = Gross Profit (General Expenses) = Operating Profit (Interest Expense) = Pre-Tax Profit (Tax Expense) = Net Profit

SEC

Securities and Exchange Commission

SG&A

Selling, General, or Administrative Expenses

Materiality Principle

Significance of a reportable item determines how it will be reported, thus small transactions are usually aggregated and reported together

The Entity Assumption

a business is separate from its owners or other businesses

Accrual Accounting

a conceptual framework for the preparation and auditing of financial statements and accounts.

Financial accounting

a highly stylized system of information gathering, processing, and reporting

AR

accounts receivable or receivables -- credit sales; money owed to the company from prior period sales, when customers purchase but do not pay in-cash at POS

non-recurring expenses

aka Losses, just one time expenses

Carrying value

aka book value, because value is carried on the books

Liquidity

allows creditors and investors to undo their transactions

Form 10-K

annual report for a publicly traded company

Tax accounting

applies tax code to calculate taxable income and to asses values for the payent of other taxes -- rules based and formulaic

Financial Position

assets, liabilities, equity

Flow elements

assets, liabilities, equity over a period of time

single-step statement

basic income statement that simply reports sales minus expenses

Financial Performance

bottom-line measure -- profits / net income

Period Assumption

business activities will be reported over specific periods,

Comparability & Consistency Principle

businesses should apply the same accounting choices year after year -- if you change, you have to change past reports so that they can be compared easily

The Cost Principle

businesses will report amounts based on acquisition costs, rather than at fair market value

cash

can be commodity, is liquid, and is money capital (sometimes referred to as excess cash)

Periodic expenses

costs based on a period of time, e.g. rent, salaries, insurance premiums, interest expense

working accounts

current assets & liabilities, aka current accounts

Trade credit

delayed payment, like credit cards

Expense recognition

determines when and what costs should be subtracted from revenue to determine profits in a specific period (guided by the matching principle)

Funding Plan

document describing how much money the company needs, what they will do with the money, and what the people that provide that money will get for it

back office activities

doing what is needed to make selling possible e.g. purchasing inventory, and collecting cash from customers who made purchases on credit, paying bills, etc

Duality principle

everything we own must have a source

Operating expenses

expenses related to business model

FMV

fair market value

Two adjunct elements to accounting

gains, loss

Financial accounting

includes cash-basis and accrual accounting

Liabilities (definition)

likely future economic sacrifices

M&E

meals and entertainment

Multi-step income statement

more detailed, separates out direct expenses from direct and periodic, and financing -- Sales (COGS) = Gross Profit (SG&A) = EBITDA (D&A) = EBIT (Interest) + Gains + (Losses) = EBT (Taxes) (+/- for unusual or infrequent items) = Income from Continuing Operations = Net Income

Costs

must either represent expenses or assets; a business should only incur a cost if it believes that this cost will help generate sales

value proposition

needed to start a business; essentially an arrangement that offers customers a good deal; a desirable product or service at a fair price

Disclosure Principle

not all information relative to financial decision making is quantitative, it might rely on contingencies e.g. a pending lawsuit

long-term liabilities

obligations that stretch out beyond one year

Indirect expenses

other costs required to carry out the sales process but that are neither directly related to sales nor periodic, e.g. utilities, telephone, travel, advertising, training, supplies

Assets (definition)

probable future economic benefits

underwriting

process of finding money for new companies

Objectivity Principle

reported information should be based on objective evidence

Form 10-Q

quarterly report for a publicly traded company

Recurring expenses

regular outflows that aren't related to operating expenses

Financing expenses

related to aquiring capital to finance the business (ex: interest expense b/c loans are used to finance)

Margin

sales / cost of sales

Common stock

shares sold to investors

Cost accounting (managerial accounting)

system for tracking the internal allocation and use of money & resources by an enterprise. involves budgeting, pricing, unity cost measurement, process cost measurement and job calculation costs.

The Realization Principle or Revenue Principle

that businesses will report revenue only when realized. when the transaction is complete (ie goods have been delivered)

Convergence project

the US initiative to move away from GAAP to the IFRS's

Going Concern Assumption

the business will operate indefinitely

Capital Structure

the combination of debt vs equity sold to finance a company

Goodwill

the difference between the purchase price of a business less the fair market value of identifiable assets (basically everything that you can't really put a price tag on for the business)

Real capital

the physical things a company needs to start a business, possibly: office space, retail space, supplies, inventory, printers, etc.

depreciation

the transfer of a portion of an asset's cost from the balance sheet to sequential income statements

front office activites

transactions that reflect the earnings process, they generate revenue & expenses

Monetary Unity Assumption

transactions will be quantified in nominal dollars or other stable currency, unadjusted for inflation

The Matching Principle

trying to match up incurred costs with the revenue they generate e.g. taking client out to lunch lands you a contract

Government accounting

was created for administering contracts and tracking public resources. - used to track expenditures by public entities that receive appropriated funds

equity

what a business owes it's investors, or the net worth of the business; net worth = net book value = assets - liabilities = equity

Just-in-time-purchasing

when products are bought by the company selling at the same time as they are bought by the customer, so they basically 'miss' the balance sheet because they never get entered into the inventory account