chp 17

What are the six steps of the accounting cycle?

(1) analyzing documents; (2) recording information into journals; (3) posting that information into ledgers; (4) developing a trial balance; (5) preparing financial statements—the balance sheet, income statement, and statement of cash flows; (6) analyzing financial statements.

The following are common liability accounts recorded on a balance sheet

Accounts payable are current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for. Notes payable can be short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date. Bonds payable are long-term liabilities; money lent to the firm that it must pay back.

What are the major accounts of the balance sheet?

Assets are economic resources owned by the firm, such as buildings and machinery. Liabilities are amounts the firm owes to creditors, bondholders, and others. Owners' equity is the value of everything the firm owns—its assets—minus any liabilities; thus, Owners' equity = Assets − Liabilities.

are particularly helpful to small-business owners who often lack the strong accounting support within their companies.

Computerized accounting programs

financial statement

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

Accountants who have a bachelor's degree and two years of experience in internal auditing, and who passed an exam administered by the Institute of Internal Auditors, can earn professional accreditation as a

certified internal auditor (CIA).

cost of goods sold (or cost of goods manufactured)

measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale.

Government and not-for-profit accounting

supports organizations whose purpose is not generating a profit, but serving ratepayers, taxpayers, and others.

tax accountant

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

operating expenses

cost involve in operating a business, such as rent, salaries, supplies, utilities, and insurance.

Gross profit (or gross margin)

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

Depreciation

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

What is accounting?

the recording, classifying, summarizing, and interpreting of financial events and transactions that affect an organization. The methods we use to record and summarize accounting data into reports are called an accounting system.

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

trial balance

Accounting software—such as Intuit's QuickBooks and Sage's Peachtre

addresses the specific needs of small businesses

Return on equity

indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners.

owners' equity

the amount of the business that belongs to the owners, minus any liabilities the business owes.

What is the job of an auditor?

review and evaluate the standards used to prepare a company's financial statements. An independent audit is conducted by a public accountant and is an evaluation and unbiased opinion about the accuracy of a company's financial statements.

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.

The statement of cash flows reports cash receipts and cash disbursements related to the three major activities of a firm:

Operations are cash transactions associated with running the business. Investments are cash used in or provided by the firm's investment activities. Financing is cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends.

The formulas we use in preparing the income statement are:

Revenue − Cost of goods sold = Gross margin Gross margin − Operating expenses = Net income before taxes Net income before taxes − Taxes = Net income (or net loss) Net income or loss is also called the bottom line.

The key financial statements of a business are:

The balance sheet. The income statement The statement of cash flows

a yearly statement of the financial condition, progress, and expectations of an organization.

annual report

Retained earnings

are accumulated earnings from the firm's profitable operations that are reinvested in the business and not paid out to stockholders in distributions of company profits.

How do computers help accountants

Computers can record and analyze data and provide financial reports. Software can continuously analyze and test accounting systems to be sure they are functioning correctly. Computers can help decision making by providing appropriate information, but they cannot themselves make good financial decisions. Accounting applications and creativity are still human functions.

lists some of the major provisions of Sarbanes-Oxley

Prohibits accounting firms from providing certain non-auditing work Strengthens the protection for whistle-blowers CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation of securities reporting Prohibits corporate loans to directors and executives of the company. Establishes the five-member Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) to oversee the accounting industry. Stipulates that altering or destroying key audit documents will result in felony charges and significant criminal penalties.

An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and meets the state's requirement for education and experience is recognized as a certified public accountant (CPA).

certified public accountant (CPA).

The practice of writing every transaction in two places is called

double-entry bookkeeping

certified management accountant (CMA)

is 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

What is a balance sheet?

reports the financial position of a firm on a particular day. The fundamental accounting equation used to prepare the balance sheet is Assets = Liabilities + Owners' equity.

What is an income statement?

An income statement reports revenues, costs, and expenses for a specific period of time

What is the difference between bookkeeping and accounting?

Bookkeeping is part of accounting and includes the systematic recording of data. Accounting includes classifying, summarizing, interpreting, and reporting data to management.

Assets are thus divided into three categories, according to how quickly they can be turned into cash:

Current assets are items that can or will be converted into cash within one year. Fixed assets are long-term assets that are relatively permanent such as land, buildings, and equipment. Intangible assets are long-term assets that have no physical form but do have value.

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.

What are the four key categories of ratios?

The four key categories of ratios are liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios.

What is a statement of cash flows?

Cash flow is the difference between cash receipts (money coming in) and cash disbursements (money going out). The statement of cash flows reports cash receipts and disbursements related to the firm's major activities: operations, investments, and financing.

What are journals and ledgers?

Journals are the first place bookkeepers record transactions. Bookkeepers then summarize journal entries by posting them to ledgers. Ledgers are specialized accounting books that arrange the transactions by homogeneous groups (accounts).

How does managerial accounting differ from financial 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.