chapter 17
Certified Public Accountant (CPA)
an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA)
operations
are cash transactions associated with running the business.
investments
are cash used in or provided by the firm's investment activities.
the key financial statements of a business are
balance sheet, income statement, statement of cash flows
financing
cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends.
assets
economic resources (things of value) owned by a firm
difference between revenue and income
income refers to to net profit. Revenue is the total amount of money the business receives from its customers for its products.
what are the four key categories of ratios
liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios.
retained earings
profits that are put aside to run a business
liquidity
the ease with which an asset can be converted into cash
accounting system
the method we use to record and summarize accounting data into reports is an accounting system
bookkeeping
the recording of business transactions
the statement of cash flows
which provides a summary of money coming into and going out of the firm. It tracks a company's cash receipts and cash payments.
Balance Sheet
which reports the firm's financial condition on a specific date.
the income statement
which summarizes revenues, cost of goods sold, and expenses (including taxes) for a specific period and highlights the total profit or loss the firm experienced during that period.
Steps in the Accounting Cycle
1. Analyze source documents 2. Record transactions in journals 3. Transfer journal entries to ledger 4. Take a trial balance 5. Prepare financial statements 6. Analyze financial statements
Income Statement
A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.
What is the difference between a private accountant and a public accountant?
A public accountant provides services for a fee to a variety of companies, whereas a private accountant works for a single company. Private and public accountants do essentially the same things with the exception of independent audits. Private accountants do perform internal audits, but only public accountants supply independent audits.
accounting cycle
A six-step procedure that results in the preparation and analysis of the major financial statements.
ledger
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.
trial balance
A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced.
Financial Statements
A summary of all the transactions that have occurred over a particular period.
annual report
A yearly statement of thefinancial condition, progress,and expectations of anorganization.
financial accounting
Accounting information and analyses prepared for people outside the organization.
How is the job of the bookkeeper different from that of an accountant?
Accounting is the Recording, classifying, summarizing, 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 operations. Whereas bookkeeper is the recording of business transactions, is a basic part of financial reporting. Accounting, however goes far beyond the mere recording of financial information.
government and not-for-profit accounting
Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budge
managerial accounting
Accounting used to provide information and analysesto managers within the organization to assist them in decision making.
tax accountant
An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.
public accountant
An accountant who provides accounting services to individuals or businesses on a fee basis.
private accountant
An accountant who works for a single firm, government agency, or nonprofit organization.
independent audit
An evaluation and unbiased opinion about the accuracy of a company's financial statements.
Fundamental Accounting Equation
Assets = Liabilities + Owners' equity; this is the basis for the balance sheet
fixed assets
Assets that are relatively permanent, such as land, buildings, and equipment. (property, plant, and equipment)
How has computer software helped businesses in maintaining and compiling accounting information?
Computer software helped businesses in maintaining and compiling accounting information by they don't need to enter all of a firm's financial information by hand
operating expenses
Cost incurred in operat- ing a business.
cost of goods sold
Cost of merchandise sold or cost of raw materials or parts used for producing items for resale.
accounts payable
Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for.
balance sheet
Financial statement that reports a firm's financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners' equity.
the statement of cash flows
Financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.
gross profit
How much the firm earned by buying or selling merchandise.
current assets
Items that can or will be converted into cash within one year. (cash, accounts receivable, and inventory)
intangible assets
Long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value. (patents, trademarks, copy rights, and goodwill
bonds payable
Long-term liabilities that represent money lent to the firm that must be paid back
How does financial accounting differ from managerial accounting?
Managerial accounting provides information and analyses to managers within the firm to assist them in decision making. Financial accounting provides information and analyses to external users of data such as creditors and lenders.
net income after taxes
Profit or loss over a specific period after subtracting all costs and expenses, including taxes.
what is the major value of ratio analysis to the firm
Ratio analysis provides the firm with information about its financial position in key areas for comparison to other firms in its industry and its own past performance.
net income or net loss
Revenue left over after all costs and expenses, including taxes, are paid.
notes payable
Short-term or long-term liabilities that a business promises to repay by a certain date
owners equity
The amount of the business that belongs to the owners minus any liabilities owed by the business.
ratio analysis
The assessment of a firm's financial condition using calculations and interpretations of financial ratios developed from the firm's financial statements.
auditing
The job of reviewing and evaluating the information used to prepare a company's financial statements.
double-entry bookkeeping
The practice of writing every business transaction in two places
Accounting
The process of planning, recording, analyzing, and interpreting financial information.
What's the purpose of accounting journals and of a ledger?
The purpose of accounting journals is where the day's transactions are kept. Ledger they transfer (or post) information about a single account, like office supplies or cash, in one place.
journal
The record book or computer program where accounting data are first entered. (day transactions are kept)
revenue
Value of what's received from goods sold, services rendered, and other financial sources.
liabilities
What the business owes to others (debts)
