Chapter 17

Accounting cycle

A six-step procedure that results in the preparation and analysis of the major financial statements.

Trial balance

A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced.

Financial Statement

A summary of all the transactions that have occurred over a particular period.

Basic earning per share ratio

helps determine the amount of profit a company earned for each share outstanding common stocks. net income after taxes/#of common stock shares outstandings

Profitability (performance) ratios

measure how effectively a firm's managers are using its various resources to achieve profits.

Cost of goods sold

A measure of the costs of merchandise sold or cost of raw materials and supplies used for producing items for resale.

Certified management accountant (CMA)

A professional accountant who has met certain educational and experience requirements, passed a qualifying exam, and been certified by the institute of certified management accountants.

Ledger

A specialized accounting book or computer program in which information from accounting journal is accumulated into specific categories and posted so that managers can find all the information about one account in the same place.

Annual report

A yearly statement of the financial condition, progress, and expectation of an organization.

Financial accounting

Accounting information and analyses prepared for people outside the organization.

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 an duly approved budget.

Managerial accounting

Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.

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.

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 a firm earned by buying (or making) and selling merchandise.

Journal

The record of book or computer program where accounting data are first entered.

Bookkeeping

The recording of business transactions.

Accounting

The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.

Depreciation

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Return on equity

indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners. over 15%=reasonable return. net income after tax/total owners' equity.

Current ratio

measures liquidity, current assets/current liabilities.

diluted earning per share ratio

measures the amount of profit earned for each share outstanding common stock, but also considers stock options, warrants, prefferred stock, and convertible debts securities the firm can convert into common stock.

Acid test ratio

measures the cash, marketable securities, and receivable of a firm, compared to its current liabilities.

Cash flow

The difference between cash coming in and cash going out of a business.

Liquidity

The ease with which in asset can be converted into cash.

Income statement

The financial statement that shows a firm's profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, and the resulting net income.

Auditing

The job of reviewing and evaluating the information used to prepare a company's financial statements.

Double-entry bookkeeping

The practice of writing business transaction in two places.

Leverage (debts) ratio

measures the degree to which a firm relies on borrowed funds in its operations.

Debts to owners' equity ratio

measures the degree to which the company is financed by borrowed funds that it must repay. above 100%=more debt than equity.

Inventory turnover ratio

measures the speed with which inventory moves through the firm and gets converted into sales. Cost of good sold/average inventory.

Activity ratios

tells us how effectively management is turning over inventory.

Return on sales

tells us whether the firm is doing as well as its competitors in generating income from sales. net income/net sales

Tax accountant

An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.

Certified internal auditor (CIA)

An accountant who has a bachelor's degree and two years of experience in internal auditing, and who has passed an exam administered by the institute of internal auditors.

Certified public accountant (CPA)

An accountant who passes a series of examinations established by the american institute of certified public accountants (AICPA).

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.

Fixed assets

Assets that are relatively permanent, such as land, buildings, and equipment.

Fundamental accounting equation

Assets=liabilities+owner's equity; this is the basis for the balance sheet.

Operating expenses

Costs involved in operating a business, such as rent, utilities, and salaries.

Account payable

Current liabilities are bills the company owes to others for merchandise or services purchased on credit but not yet paid for.

Assets

Economic resources (things of value) owned by a firm.

Current assets

Items that can or will be converted into cash within one year.

Intangible assets

Long-term assets(e.g.,patents, trademarks, copyrights) that have no real physical form but do have value.

Bonds payable

Long-term liabilities that represent money lent to the firm that must be paid back.

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 certain date.

Retained earnings

The accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends.

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 conditions using calculations and interpretations of financial ratios developed from the firm's financial statements.

Liabilities

What the business owes to others (debts)