Business 14

statement of cash flows

A financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year.

balance sheet

A financial statement that summarizes a firm's financial position at a specific point in time.

income statement

A financial statement that summarizes a firm's revenues and expenses and shows its total profit or loss over a period of time.

certified management accountant (CMA)

A managerial accountant who has completed a professional certification program, including passing an examination.

double-entry bookkeeping

A method of accounting in which each transaction is recorded as two entries so that two accounts or records are changed.

annual report

A yearly document that describes a firm's financial status and usually discusses the firm's activities during the past year and its prospects for the future.

certified public accountant (CPA)

An accountant who has completed an approved bachelor's degree program, passed a test prepared by the American Institute of CPAs, and met state requirements. Only a CPA can issue an auditor's opinion on a firm's financial statements.

current assets

Assets that can or will be converted to cash within the next 12 months.

Financial Accounting Standards Board (FASB)

The private organization that is responsible for establishing financial accounting standards in the United States.

accounting

The process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities.

auditing

The process of reviewing the records used to prepare financial statements and issuing a formal auditor's opinion indicating whether the statements have been prepared in accordance with accepted accounting rules.

inventory turnover ratio

The ratio of cost of goods sold to average inventory; measures the speed with which inventory moves through a firm and is turned into sales.

liquidity

The speed with which an asset can be converted to cash.

owners' equity

The total amount of investment in the firm minus any liabilities; also called net worth.

gross sales

The total dollar amount of a company's sales.

depreciation

The allocation of an asset's original cost to the years in which it is expected to produce revenues.

net sales

The amount left after deducting sales discounts and returns and allowances from gross sales.

Assets

Things of value owned by a firm.

liabilities

What a firm owes to its creditors; also called debts.

debt ratios

Ratios that measure the degree and effect of a firm's use of borrowed funds (debt) to finance its operations.

cost of goods sold

The total expense of buying or producing a firm's goods or services.

current ratio

The ratio of total current assets to total current liabilities; used to measure a firm's liquidity.

debt-to-equity ratio

The ratio of total liabilities to owners' equity; measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner's funds).

private accountants often perform ___ audits while public accountants also conduct _____ audits

Accountants who are employed to serve one particular organization.

financial accounting

Accounting that focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a business.

managerial accounting

Accounting that provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations.

long-term liabilities

Claims that come due more than one year after the date of the balance sheet.

How can ratio analysis be used to identify a firm's financial strengths and weaknesses? Ratio analysis is a way to use financial statements to gain insight into a firm's operations, profitability, and overall financial condition. The four main types of ratios are liquidity ratios, profitability ratios, activity ratios, and debt ratios. Comparing a firm's ratios over several years and comparing them to ratios of other firms in the same industry or to industry averages can indicate trends and highlight financial strengths and weaknesses.

How can ratio analysis be used to identify a firm's financial strengths and weaknesses? Ratio analysis is a way to use financial statements to gain insight into a firm's operations, profitability, and overall financial condition. The four main types of ratios are liquidity ratios, profitability ratios, activity ratios, and debt ratios. Comparing a firm's ratios over several years and comparing them to ratios of other firms in the same industry or to industry averages can indicate trends and highlight financial strengths and weaknesses.

public accountants

Independent accountants who serve organizations and individuals on a fee basis.

fixed assets

Long-term assets used by a firm for more than a year such as land, buildings, and machinery.

liquidity ratios

Ratios that measure a firm's ability to pay its short-term debts as they come due.

profitability ratios

Ratios that measure how well a firm is using its resources to generate profit and how efficiently it is being managed.

activity ratios

Ratios that measure how well a firm uses its assets.

How does the income statement report a firm's profitability? The income statement is a summary of the firm's operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative expenses), taxes, and net profit or loss.How does the income statement report a firm's profitability? The income statement is a summary of the firm's operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative How does the income statement report a firm's profitability? The income statement is a summary of the firm's operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative expenses), taxes, and net profit or loss.), taxes, and net profit or loss.How does the income statement report a firm's profitability? The income statement is a summary of the firm's operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative expenses), taxes, and net profit or loss.

How does the income statement report a firm's profitability? The income statement is a summary of the firm's operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative expenses), taxes, and net profit or loss.

Sarbanes-Oxley Act

Legislation passed in 2002 that sets new standards for auditor independence, financial disclosure and reporting, and internal controls; establishes an independent oversight board; and restricts the types of non-audit services auditors can provide audit clients.

gross profit

The amount a company earns after paying to produce or buy its products but before deducting operating expenses.

net loss

The amount obtained by subtracting all of a firm's expenses from its revenues, when the expenses are more than the revenues.

net profit (net income)

The amount obtained by subtracting all of a firm's expenses from its revenues, when the revenues are more than the expenses.

net working capital

The amount obtained by subtracting total current liabilities from total current assets; used to measure a firm's liquidity.

retained earnings

The amounts left over from profitable operations since the firm's beginning; equal to total profits minus all dividends paid to stockholders.

ratio analysis

The calculation and interpretation of financial ratios using data taken from the firm's financial statements in order to assess its condition and performance.

expenses

The costs of generating revenues.

revenues

The dollar amount of a firm's sales plus any other income it received from sources such as interest, dividends, and rents.

operating expenses

The expenses of running a business that are not directly related to producing or buying its products.

generally accepted accounting principles (GAAP)

The financial accounting standards followed by accountants in the United States when preparing financial statements.

net profit margin

The ratio of net profit to net sales; also called return on sales. It measures the percentage of each sales dollar remaining after all expenses, including taxes, have been deducted.

earnings per share (EPS)

The ratio of net profit to the number of shares of common stock outstanding; measures the number of dollars earned by each share of stock.

return on equity (ROE)

The ratio of net profit to total owners' equity; measures the return that owners receive on their investment in the firm.

acid-test (quick) ratio

The ratio of total current assets excluding inventory to total current liabilities; used to measure a firm's liquidity.

intangible assets

Long-term assets with no physical existence, such as patents, copyrights, trademarks, and goodwill.

In what terms does the balance sheet describe the financial condition of an organization? The balance sheet represents the financial condition of a firm at one moment in time, in terms of assets, liabilities, and owners' equity. The key categories of assets are current assets, fixed assets, and intangible assets. Liabilities are divided into current and long-term liabilities. Owners' equity, the amount of the owners' investment in the firm after all liabilities have been paid, is the third major category.

In what terms does the balance sheet describe the financial condition of an organization? The balance sheet represents the financial condition of a firm at one moment in time, in terms of assets, liabilities, and owners' equity. The key categories of assets are current assets, fixed assets, and intangible assets. Liabilities are divided into current and long-term liabilities. Owners' equity, the amount of the owners' investment in the firm after all liabilities have been paid, is the third major category.

current liabilities

Short-term claims that are due within a year of the date of the balance sheet.

What are the differences between public and private accountants, and how has federal legislation affected their work? Public accountants work for independent firms that provide accounting services—such as financial report preparation and auditing, tax return preparation, and management consulting—to other organizations on a fee basis. Private accountants are employed to serve one particular organization and may prepare financial statements, tax returns, and management reports. The bankruptcies of companies such as Enron and WorldCom, plus widespread abuses of accounting practices, raised critical issues of auditor independence and the integrity and reliability of financial reports. To set better standards for accounting, auditing, and financial reporting and prevent future accounting irregularities, Congress passed the Sarbanes-Oxley Act in 2002. This Act created an independent board to oversee the accounting profession, set stricter auditing and financial disclosure standards, and placed increased accountability on a company's senior executives and management. In addition, the law restricts auditors from providing certain types of consulting services to clients. Other organizations such as the SEC, the New York Stock Exchange, and accounting industry professional associations issued new regulations and guidelines related to compliance with the Act.

What are the differences between public and private accountants, and how has federal legislation affected their work? Public accountants work for independent firms that provide accounting services—such as financial report preparation and auditing, tax return preparation, and management consulting—to other organizations on a fee basis. Private accountants are employed to serve one particular organization and may prepare financial statements, tax returns, and management reports. The bankruptcies of companies such as Enron and WorldCom, plus widespread abuses of accounting practices, raised critical issues of auditor independence and the integrity and reliability of financial reports. To set better standards for accounting, auditing, and financial reporting and prevent future accounting irregularities, Congress passed the Sarbanes-Oxley Act in 2002. This Act created an independent board to oversee the accounting profession, set stricter auditing and financial disclosure standards, and placed increased accountability on a company's senior executives and management. In addition, the law restricts auditors from providing certain types of consulting services to clients. Other organizations such as the SEC, the New York Stock Exchange, and accounting industry professional associations issued new regulations and guidelines related to compliance with the Act.

What are the six steps in the accounting cycle? The accounting cycle refers to the process of generating financial statements. It begins with analyzing business transactions, recording them in journals, and posting them to ledgers. Ledger totals are then summarized in a trial balance that confirms the accuracy of the figures. Next the accountant prepares the financial statements and reports. The final step involves analyzing these reports and making decisions. Computers have simplified many of these labor-intensive tasks.

What are the six steps in the accounting cycle? The accounting cycle refers to the process of generating financial statements. It begins with analyzing business transactions, recording them in journals, and posting them to ledgers. Ledger totals are then summarized in a trial balance that confirms the accuracy of the figures. Next the accountant prepares the financial statements and reports. The final step involves analyzing these reports and making decisions. Computers have simplified many of these labor-intensive tasks.

What major trends affect the accounting industry today? The post-SOX business environment has brought many changes to the accounting profession, including higher standards for audit procedures. In addition, the FASB has made slow but steady progress in making changes related to GAAP; however, the implementation of global accounting standards may not occur anytime soon. Several important trends will continue to impact the accounting industry going forward, including cloud-based services, automation, and staffing challenges, as accountants shift the focus of their practice to one incorporating technological advances and a more comprehensive approach to their companies' and clients' overall business environment.

What major trends affect the accounting industry today? The post-SOX business environment has brought many changes to the accounting profession, including higher standards for audit procedures. In addition, the FASB has made slow but steady progress in making changes related to GAAP; however, the implementation of global accounting standards may not occur anytime soon. Several important trends will continue to impact the accounting industry going forward, including cloud-based services, automation, and staffing challenges, as accountants shift the focus of their practice to one incorporating technological advances and a more comprehensive approach to their companies' and clients' overall business environment.

Why are financial reports and accounting information important, and who uses them? Accounting involves collecting, recording, classifying, summarizing, reporting, and analyzing a firm's financial activities according to a standard set of procedures. The financial reports resulting from the accounting process give managers, employees, investors, customers, suppliers, creditors, and government agencies a way to analyze a company's past, current, and future performance. Financial accounting is concerned with the preparation of financial reports using generally accepted accounting principles. Managerial accounting provides financial information that management can use to make decisions about the firm's operations.

Why are financial reports and accounting information important, and who uses them? Accounting involves collecting, recording, classifying, summarizing, reporting, and analyzing a firm's financial activities according to a standard set of procedures. The financial reports resulting from the accounting process give managers, employees, investors, customers, suppliers, creditors, and government agencies a way to analyze a company's past, current, and future performance. Financial accounting is concerned with the preparation of financial reports using generally accepted accounting principles. Managerial accounting provides financial information that management can use to make decisions about the firm's operations.

Why is the statement of cash flows an important source of information? The statement of cash flows summarizes the firm's sources and uses of cash during a financial-reporting period. It breaks the firm's cash flows into those from operating, investment, and financing activities. It shows the net change during the period in the firm's cash and marketable securities.

Why is the statement of cash flows an important source of information? The statement of cash flows summarizes the firm's sources and uses of cash during a financial-reporting period. It breaks the firm's cash flows into those from operating, investment, and financing activities. It shows the net change during the period in the firm's cash and marketable securities.