MGM101 Chapter 14 - Understanding Accounting

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

E. short-term expenditures

Accounts payable and current inventories are examples of​ ______. A. liquidity B. board of directors C. investment D. long-term growth E. short-term expenditures

Cost of Goods Sold (COGS)

All expenses directly involved in producing or selling a good or service during a given time period.

Accounts Payable

Amounts due from the firm to its suppliers for goods and/or services purchased on credit, a form of current liability

Private Accountant

An accountant hired as a salaried employee to deal with a company's day-to-day accounting needs

Auditing

An accountant's examination of a company's financial records to determine if it used procedures to prepare its financial reports

Inventory Turnover Ratio

An activity ratio that measures the average number of times inventory is sold and restocked during the year.

Paid-In Capital

Any additional money invested in the firm by the owners

Liability

Any debt owed by a firm or individual to others

Long-Term Liabilities

Any debts owed by the firm that are not due for at least one year

Revenues

Any monies received by a firm because of selling a good or service or from other sources such as interest, rent, and licensing fees.

Financial Statements

Any of several types of broad reports regarding a company's financial status; most often used in reference to balance sheets, income statements, and/or statements of cash flows.

Owner's equity

Any positive difference between a firm's assets and its liabilities; what would remain for a firm's owners if the company were liquidated, all its assets were sold, and all its debts were paid

Asset

Anything of economic value owned by a firm or individual

Accounting Equation

Assets = Liabilities + Owner's Equity

Fixed assets

Assets that have long-term use or value to the firm, such as land, buildings, and machinery

Current Asset

Cash and other assets that can be converted into cash within a year

Operating Income

Compares the gross profit from business operations against operating expenses.

Cash flows from operations

Concerned with the firm's main operating activities

Operating Expenses

Costs incurred by a firm other than those included in cost of goods sold.

Current Liabilities

Debt that must be paid within one year

Budget

Detailed statement of estimated receipts and expenditures for a future period of time.

General and administrative expenses

Expenses related to the general management of the company. Includes management salaries, insurance expenses, maintenance costs.

Selling Expenses

Expenses resulting from activities related to selling the firm's goods or services. May include salaries for the sales force, delivery costs, and advertising expenses.

Matching Principle

Expenses should be matched with revenues to determine net income for an accounting period.

Current Ratio

Financial ratio for measuring a company's ability to pay current debts out of current assets. Most common type of short-term solvency ratio.

Short-Term Solvency Ratio

Financial ratio for measuring a company's ability to pay immediate debts (liquidity).

Long Term Solvency

Financial ratio for measuring a company's ability to pay long-term debts.

The Evolving Role of the Modern Accountant

In addition to analytical and technical skills, like analyzing historical financial data, creating financial statements, and providing interpretations of financial data and documents, CPAs are now required to provide more intimate leadership (overall operations, strategy, data management, HR, and technical resources).

Tax Services

Includes not only helping with filing tax returns, tax planning, and can help restructure, a business to save millions of dollars in taxes

Managerial (or Management) Accounting

Internal procedures that alert managers to problems and aid them in planning and decision-making

B. Auditing

KPMG provided what accounting service to Xerox from 1997-​2000? A. Controller B. Auditing C. Private accounting D. Managerial

Activity Ratios

Measures how efficiently a firm uses its resources; used by investors to assess their probable returns.

Profitability Ratios

Measures of a firm's overall financial performance in terms of its likely profits; used by investors to assess their probable returns.

Intangible Assets

Non-physical assets, such as a patent or trademark, that have economic value in the form of expected benefit

Return on Sales

Ratio calculated by dividing net income by sales revenue.

Solvency Ratios

Ratios that estimate the financial risk that is evident in a company.

Cash flows from financing

Reports net cash from all financing activities. Includes cash inflows from borrowing or issuing stock, as well as outflows for payment of dividends and repayment of borrowed money.

Cash flows from investing

Reports net cash used in or provided by investing. Includes cash receipts and payments from buying and selling stocks, bonds, property, equipment, and other productive assets.

Management Consulting Services

Specialized accounting services to help managers resolve a variety of problems in finance, production scheduling, and other areas

Accounting Standard for Private Enterprises (ASPE)

Standard accounting rules that can be used by private businesses in Canada in preparing financial reports.

Goodwill

The amount paid for an existing business beyond the value of its other assets

Chartered Professional Accountant (CPA)

The banner (designation) that is being used to unify the accounting profession in Canada.

Liquidity

The ease and speed with which an asset can be converted to cash; cash is said to be perfectly liquid

Revenue Recognition

The formal recording and reporting of revenues in the financial statements.

Controller

The individual who manages all the firm's accounting activities

Financial Accounting System

The process whereby interested groups are kept informed about the financial condition of a firm

Bookkeeping

The recording of financial transactions and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business.

Accounting Cycle

The series of accounting activities included in recording financial information for a fiscal period

Bringing Ethics into the Accounting Equation

The ultimate purpose of strong ethical standards in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

Leverage

Using borrowed funds to make purchases thus increasing the user's purchasing power, potential rate of return, and risk of loss.

A. Balance sheet

Which of the following is like a​ "snapshot" because it shows the financial condition of a company at one point in​ time? A. Balance sheet B. Owners' equity C. Statement of cash flows D. Income statement E. Liquidity

B. Assets​ = Liabilities​ + Owners Equity

Which of the following is the accounting​ equation? A. Liabilities​ = Owners Equity​ + Assets B. Assets​ = Liabilities​ + Owners Equity C. Assets = Liabilities − Owners Equity D. Liabilities​ = Assets​ + Owners Equity E. Owners' Equity​ = Assets​ + Liabilities

D. GASB

Who is the body responsible for setting accounting rules for state and local​ governments? A. IASB B. GAAP C. IMA D. GASB E. AICPA

d. Makes it hard to assess current performance

Why is financial statement accuracy an important concern for the investment community? a. Because doing a job properly is a sign of professionalism b. Financial inaccuracies signal the firm is not using proper technology c. May devalue their investments d. Makes it hard to assess current performance e. Inaccuracies are likely due to differences in accounting practices

Net Income (Net Profit or Net Earnings)

gross profit minus operating expenses and income taxes

A. Full disclosure

​Jason, the CFO of Entertainment​ Enterprises, Inc., is preparing the​ company's financial statements. Along with the​ data, Jason is composing a report that explains the numerical information and provides insight into the​ company's performance. What BEST describes​ Jason's actions? A. Full disclosure B. Long-term solvency C. Revenue recognition D. Leverage E. Goodwill

Retained Earnings

A company's net profits less any dividend payments to shareholders

debt

A company's total liabilities.

Accounting

A comprehensive system for collecting, analyzing, and communicating financial information

Cash Flow Statement (CFS)

A financial statement that describes a firm's generation and use of cash during a given period. Provides information to creditors and stockholders about their year-to-year changes in the firm's balance sheet and income statement.

Gross Profit (Gross Margin)

A firm's revenue (gross sales) less its cost of goods sold.

Debt-To-Equity Ratios

A form of debt ratio calculated as total liabilities divided by owners' equity.

Earnings per Share

A form of profitability ratio calculated as net income divided by the number of common shares outstanding.

Return on Equity

A form of profitability ratio calculated as net income divided by total owners' equity.

Depreciation

Accounting method for distributing the cost of an asset over its useful life

Income Statement (profit-and-loss statement)

A type of financial statement that describes a firm's revenues and expenses and indicates whether the firm has earned a profit or suffered a loss (the bottom line) during a given period.

Balance Sheets

A type of financial statement that summarizes a firm's financial position on a particular date in terms of its assets, liabilities, and owners' equity

Forensic Accountants

Accountants who track down hidden funds in business firms