CHP 12: Small Business Accounting: Projecting and Evaluating Performance
current ratio
the value of current assets divided by current liabilities -measure of of liquidity
variable costs
those costs that change with each unit produced, for example: raw materials -related to the sale of items or production
cost of goods sold budget
A schedule that shows the predicted cost of product actually sold during the accounting period.
Gross margin
sales - COGS =
leashold records
needed if your business has made improvements to leased property or equipment
cash flow statement
A statement of the sources and uses of cash in a business for a specific period of time.
cash accounting
A system in which revenue and expenses are counted as they are actually received.
MACRS rate
An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System. The MACRS approach lets taxpayers depreciate more of the cost earlier in the life of a capital expense.
tax accounting
An accounting approach based on specific accounting requirements set by governmental taxing agencies. -used to produce tax returns and schedules
Net Present Value (NPV) analysis
a dollar to be received today has more utility (value) than does a dollar to be received at some time in the future -accept the largest NPV
budget
a financial plan for the future based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals
the ability of a business to meet both short and long term obligations
liquidity is a measure of
activity-based cost estimates
An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.
Accounts Receivable
money owed to your business by customers
sales budget
shows the projected future level of sales in units multiplied by the sales price per unit
asset
something the business owns that is expected to have economic value in the future
business plan
specifies the amounts and types of inputs required to achieve a set of desired outcomes
indirect statement
starts with net income and adjusts the accruals and deferrals to provide cash flow info that can be easily reconciled to other financial statements
permanent accounts
the accounts of assets, liabilities, and owner's equity, excluding accounts for revenues and expenses
articulate
the concept that info flows from the income statement through the statements of retained earnings and owner's equity to the balance sheet
variance
the difference between an actual and budgeted revenue or cost
owner's equity
the difference between assets and liabilities
break even point
the point at which the costs of producing a product equal the revenue made from selling the product -total cost = gross revenue
Generally Accepted Accounting Principles (GAAP)
the standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accounting reports to the government
accounting equation
the statement that assets equal liabilities plus owner's equity
total cost
the sum of fixed and variable costs
costs
the value of whatever you give up to get what you need or want
bounded rationality models
theories based on the assumption of limited human abilities
fixed costs
those costs that remain constant regardless of quantity of output, for example, rent -those costs that cannot be assigned to a specific item sold or manufactured -incurred whether you sell or make one product
insurance register
to ease the problems of keeping necessary insurance coverage current and in force
payroll
to ensure that payroll and employment taxes are kept current
total liabilities and equity
total assets + current liabilities + long term liabilities + owner's equity =
total variable cost + total annual fixed cost + desired profits
total revenue =
noncash investing and financing activities
transactions in which an exchange of value other than cash takes place
1. the ability to sell nonoperating assets 2. the ability to obtain loans or to sell additional stock 3. the ability to increase efficiency and to lower costs of operation
3 measures of financial flexibility
1. cash flows from operating activities 2. cash flows from investing activities 3. cash flows from financing activities 4. net effect of foreign exchange rates 5. net change in cash balance during the period 6. noncash investing and financing activities
6 items that must be in the statement of cash flows
master budget
A budget, also referred to as a comprehensive budget, consists of sets of budgets that detail all projected receipts and spending for the budgeted period.
managerial accounting
Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business. -attempts to predict the results of mgt decicisions
operating activities
Activities involved in producing and selling goods and services.
financing activities
Activities through which cash is obtained from and paid to lenders, owners, and investors.
internal (cost) factors
Aspects of or choices within the business which could cause the business's costs to change.
external (cost) factors
Aspects of the world outside the business which could cause the business's costs to change.
investors who want to know the equity of company bankers who want to estimate the likely future cash flows to repay loans
Balance sheet is useful for
investment records
needed if your business keeps surplus cash invested in securities
QuickBooks, Sage BusinessWorks, and Microsoft Accounting Express, Xero
Common small business systems
total assets
Current assets + fixed assets + other assets =
1. Disagreements about what exactly should be reported as revenue 2. Disputes over when to recognize revenues
Difficulties in understanding the income statement
income statement statement of retained earnings statement of owner's equity balance sheet cash flow statement
Five common financial statements
2.0 and higher is better
For current ratio, the minimum acceptable ratio is
a complete business plan will be developed
From the sales forecast and from your knowledge of cost behaviors, collections, payments, and expenses, a
operating income
Gross margin - Operating expenses =
pro forma
Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.
planning, organizing, staffing, directing, and controlling
Managers have 5 primary functions in a business
cash, short-term investments, accounts receivable
Measures of financial strength
1. differential revenue and expenses 2. net present value (NPV) analysis
Methods for choosing among investment alternatives
Revenue - expenses
Net income =
net income
Net income before tax - income tax =
plan for inventory purchases
Once sales have been projected, the next step is to
net income before tax
Operating income - interest expense =
1. All values are historical values 2. Contain estimated amounts which may differ greatly from actual values 3. Certain assets and liabilities are omitted
Problems with the balance sheet
financial strength
The ability of a business to survive adverse financial events.
going concern concept
The accounting concept that a business is expected to continue in existence for the foreseeable future.
entity that is separate from its owners -thus it is simply a chart that shows everything that a business owns and who has how much ownership in those business assets
The accounting equation is based on the concept that a business is an
1. cash receipts 2. cash disbursements 3. cash budget
The final schedules to be completed to produce a master budget are
a forecast of your future sales
The first step in budgeting is to make
sales budget.
The first step in preparing a master budget is to prepare a
amount to be used + desired ending amount - beginning amount
The formula used to produce schedules of a master budget: amount to be bought =
economy of scale
The idea that it is cheaper (per item) to make many of an item than few.
liquidity, financial flexibility, and financial strength of the business
The information in the balance sheet is used to determine the
1. simplicity of use 2. accuracy of detail 3. timeliness of reports 4. understandability to the manager of the business 5. security of data
The primary criteria for a small business record keeping are
variance analysis
The process of determining the effect of price and quantity changes on revenues and expenses.
investing activities
The purchase and sale of land, buildings, equipment, and securities. -the outflows are the cash investments made by the business to acquire noncash assets
managerial tax financial
Three types of accounting
1. good information 2. efficient ways to condense info so that it is understandable 3. Methods to help compare alternatives
To make good decisions, we need
single step multiple step
Two formats for income statements
Reporting to outsiders record keeping taxation control of revceivables
USES OF FINANCIAL ACCOUNTING
1. used by you, lenders, and investors to analyze the effectiveness of business operations
Use of the income statement
1. Produce info that is useful in managing your business 2. To meet legal or contractual requirements
Why do accounting?
your business is public
You are not required to meet the rules of financial accounting unless
cash
_____ is the most liquid assets
expense
a decrease in owner's equity caused by consuming your product or service
balance sheet
a statement of what a business owns (assets), what it owes others (liabilities), and how much value the owners have invested in it (equity)
balance sheet
a statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity)`
income statement
a statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time
what the business owns = claims on the business assets = liabilites + owner's equity
accounting equation
revenue
an increase in owner's equity caused by selling your product or service
fixed asset accounting
automatically calculates and accumulates depreciation
illiquid asset
cannot be quickly converted into cash without much loss of value
inventory budget
combined purchase and cost of goods sold budget into a single ____ budget
direct statement
developed solely from the cash records of the company and does not make any reconciliation to the income statement -GAAP prefered
credit card sales function
enables reconciling your sales records with the amount of discount and chargebacks taken by your credit card provider
inventory accounting
facilitates maintaining the appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels
financial statments
formal summaries of the content of an accounting system's records of transactions -the final output of a computer system
current
in accounting, means an asset that will be turned into cash in less than one year or a liability that must be paid in less than one year
long term
in accounting, refers to an asset that will still have value to the business more than one year from now or a liability that will still be owed more than one year from now
completely liquid asset
one that can be converted to cash instantly at its full value
cash outflows
payments of cash
expendables
products used in the sales, manufacturing, or delivery that are not part of the finished product
public business
A business that has its stock bought and sold on an organized stock exchange, such as the New York Stock Exchange.
financial flexibility
A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs.
business entity concept
The concept that a business has an existence separate from that of its owners.
liquidity
a measure of how quickly a company can raise money through internal sources by converting assets to cash -measure of the expected time before an asset can be converted into cash, and of the expected time before a liability must be paid
cash inflows
receipts of cash
labor budget
shows both the amount and cost of labor needed to meet output goals
historical value
the cost of the asset when it was acquired
1. Business entity concept 2. Going concern concept 3. Accounting Equation 4. The premise of revenue and expense 5. The principle that accounting information must be useful to the owners and managers of businesses
The basic concepts of accounting
retained earnings
The sum of all profits and losses, less all dividends paid since the beginning of the business.
Multiple-step income statement format
lists revenues from operations separately from other income and gains
net change in cash balance
reconciles the net increase or decrease with the beginning cash balanch and the ending cash balance
accounts payable
records to track what you owe and to make timely payments in order to capture prompt pay discounts and to maintain a good credit rating for your business
financial accounting
A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators.
Cost-Volume-Profit Analysis
A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.
differential revenues and expenses
comprises estimating the changes in revenues and expenses from current operating results that will occur if each alternative is taken -accept the investment with the greatest profit
account
in terms of accounting practice, an account is a chronological list of all additions to and subtractions from a single type of asset (e.g. cash, receivables, loans outstanding)
liabilities
legal obligations to give up things of value in the future
Single-step income statement format
provides little detail - it simply lists all revenues and gains together, then lists all expenses and losses together
accounts revievable
records if you provide credit to your customers
depreciation
regular and systematic reduction in income that transfers asset value to expense over time
operating income
represents just how well management achieved sales and controlled costs to produce profits -measure of how much debt a business can support
outsourcing
requires that a decision be made whether the business should make a component of its own product or purchase the component from another business