Chapter 14

The private organization that is responsible for establishing financial accounting standards in the United States.

Financial Accounting Standards Board (FASB)

Long-term assets with no physical existence, such as patents, copyrights, trademarks, and goodwill.

intangible assets

The ratio of cost of goods sold to average inventory; measures the speed with which inventory moves through a firm and is turned into sales.

inventory turnover ratio

What a firm owes to its creditors; also called debts.

liabilities

Legislation passed in 2002 that sets new standards for auditor independence, financial disclosure and reporting, and internal controls; establishes an independent oversight board; and restricts the types of non-audit services auditors can provide audit clients.

Sarbanes-Oxley Act

The speed with which an asset can be converted to cash.

liquidity

Ratios that measure a firm's ability to pay its short-term debts as they come due.

liquidity ratios

Claims that come due more than one year after the date of the balance sheet.

long-term liabilities

Accounting that provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations.

managerial accounting

The amount obtained by subtracting all of a firm's expenses from its revenues, when the expenses are more than the revenues.

net loss

The amount obtained by subtracting all of a firm's expenses from its revenues, when the revenues are more than the expenses.

net profit (net income)

The ratio of net profit to net sales; also called return on sales. It measures the percentage of each sales dollar remaining after all expenses, including taxes, have been deducted.

net profit margin

The amount left after deducting sales discounts and returns and allowances from gross sales.

net sales

The amount obtained by subtracting total current liabilities from total current assets; used to measure a firm's liquidity.

net working capital

The expenses of running a business that are not directly related to producing or buying its products.

operating expenses

The total amount of investment in the firm minus any liabilities; also called net worth.

owners' equity

Accountants who are employed to serve one particular organization.

private accountants

Ratios that measure how well a firm is using its resources to generate profit and how efficiently it is being managed.

profitability ratios

Independent accountants who serve organizations and individuals on a fee basis.

public accountants

The calculation and interpretation of financial ratios using data taken from the firm's financial statements in order to assess its condition and performance.

ratio analysis

The amounts left over from profitable operations since the firm's beginning; equal to total profits minus all dividends paid to stockholders.

retained earnings

The ratio of net profit to total owners' equity; measures the return that owners receive on their investment in the firm.

return on equity (ROE)

The dollar amount of a firm's sales plus any other income it received from sources such as interest, dividends, and rents.

revenues

The process of reviewing the records used to prepare financial statements and issuing a formal auditor's opinion indicating whether the statements have been prepared in accordance with accepted accounting rules.

auditing

A financial statement that summarizes a firm's financial position at a specific point in time.

balance sheet

A managerial accountant who has completed a professional certification program, including passing an examination.

certified management accountant (CMA)

An accountant who has completed an approved bachelor's degree program, passed a test prepared by the American Institute of CPAs, and met state requirements. Only a CPA can issue an auditor's opinion on a firm's financial statements.

certified public accountant (CPA)

The total expense of buying or producing a firm's goods or services.

cost of goods sold

Assets that can or will be converted to cash within the next 12 months.

current assets

Short-term claims that are due within a year of the date of the balance sheet.

current liabilities

The ratio of total current assets to total current liabilities; used to measure a firm's liquidity.

current ratio

Ratios that measure the degree and effect of a firm's use of borrowed funds (debt) to finance its operations.

debt ratios

The ratio of total liabilities to owners' equity; measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner's funds).

debt-to-equity ratio

The allocation of an asset's original cost to the years in which it is expected to produce revenues.

depreciation

A method of accounting in which each transaction is recorded as two entries so that two accounts or records are changed.

double-entry bookkeeping

The ratio of net profit to the number of shares of common stock outstanding; measures the number of dollars earned by each share of stock.

earnings per share (EPS)

The costs of generating revenues.

expenses

Accounting that focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a business.

financial accounting

Long-term assets used by a firm for more than a year such as land, buildings, and machinery.

fixed assets

The financial accounting standards followed by accountants in the United States when preparing financial statements.

generally accepted accounting principles (GAAP)

The amount a company earns after paying to produce or buy its products but before deducting operating expenses.

gross profit

The total dollar amount of a company's sales.

gross sales

A financial statement that summarizes a firm's revenues and expenses and shows its total profit or loss over a period of time.

income statement

A financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year.

statement of cash flows

The process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities.

accounting

The ratio of total current assets excluding inventory to total current liabilities; used to measure a firm's liquidity.

acid-test (quick) ratio

Ratios that measure how well a firm uses its assets.

activity ratios

A yearly document that describes a firm's financial status and usually discusses the firm's activities during the past year and its prospects for the future.

annual report

Things of value owned by a firm.

assets