SmBs Ch. 13

Tax Accounting

an accounting approach based on specific accounting requirements set by government taxing agencies

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

Business entity concept

concept that business has an existence separate from that of its owners

articulate

concept that info flows from the income statement through the statements of retained earnings and owner's equity to the balance sheet

Financial reports

formal summaries of the content of an accounting system's records of transactions

GAAP

used in all audits and submissions of accounting reports to the government

-reporting to outsiders -record keeping -taxation -control of receivables -analysis of business operations

uses of financial accounting

cost

value given up to obtain something you want

Owner's equity

whatever value is left after all liabilities have been paid

Master Budget

A budget which consists of sets of budgets that detail all projected receipts and spending for the budgeted period. also referred to as a comprehensive budget

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.

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. ->Variable, fixed costs

Cost of Goods Sold

A schedule that shows the predicted cost of product actually sold during the accounting period.

Cash flow statement

A statement of the sources and uses of cash in a business for a specific period of time.

Managerial accounting

Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business.

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.

A label applied to variances to indicate their effect upon the income statement; -Favorable variances would result in profits being greater than budgeted, all other things being equal; -Unfavorable variances would result in profits being less than budgeted, all other things being equal.

Favorable/Unfavorable Variance

Liability

Legal obligation to pay some amount at a time in the future

Modified Accelerated Cost Recovery System Lets taxpayers depreciate more cost earlier

MACRS rate

1. to produce info that is useful to you for managing your business 2. to meet legal or contractual requirements

Only two reasons to do accounting

● 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. ● Payroll records to ensure that payroll and employment taxes are kept current. ● Fixed asset accounting that automatically calculates and accumulates depreciation. ● Inventory accounting that facilitates maintaining the appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels. ● Credit card sales function to enable reconciling your sales records with the amount of discount and charge backs taken by your credit card provider. ● Accounts receivable records if you provide credit to your customers. Accurate and timely accounts receivable records are essential for making decisions concerning the extension of credit. Accurate records also help produce accurate billing of customers, and thus help to maintain good customer relations. ● Insurance register to ease the problems of keeping necessary insurance coverage current and in force. ● Investments records if your business keeps surplus cash invested in securities. ● Leasehold records if your business has made improvements to leased property or equipment.

Setting Up an Accounting System

Going concern concept

The accounting concept that a business is expected to continue in existence for the foreseeable future.

Variance

The difference between an actual and budgeted revenue or cost

Breakeven Point

The point at which total costs equal gross revenue.

Variance Analysis

The process of determining the effect of price and quantity changes on revenues and expenses.

-Good information -Efficient ways to condense information so it is understandable -Methods to help compare alternatives.

To make a good decision we need...

-proves what your business did financially -shows how much business is worth -banks, creditors, development agencies, and investors require it -provides easy to understand plans for business operations -can't know how business is doing without it

Why accounting matters

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

expense

a decrease in owner's equity caused by consuming your product or service

Financial Accounting

a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators

financial strength

ability of a business to survive adverse financial events

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

Pro forma

indicates estimated or hypothetical information

liquidity

measure of how quickly a company can raise money through internal sources by converting assets to cash

Depreciation

regular and systematic reduction in income that transfers asset value to expense over time

asset

something the business owns that will have value in the future

retained earnings

sum of all profits and losses, less all dividends paid since the beginning of the business

Investing activities

the purchase and sale of land, buildings, equipment, and securities