Chapter 14
the balance sheet
a "snapshot" of an organization's financial position at a given moment; assets, liabilities, owners' equity
types of liabilities: current liabilities
a firm's financial obligations to short-term creditors, which must be repaid within a year
quick ratio (acid test)
a stringent measure of liquidity that eliminates inventory
income statement: cost of goods sold
amount of money the firm spent to buy and/or produce the products it sold during accounting period cost of goods sold= beginning inventory + interim purchases - ending inventory
cash from operating activities
calculated by combining the changes in the revenue accounts, expense accounts, current asset accounts, and current liability accounts
cash from financing activties
calculated from changes in the long-term liability accounts and the contributed capital accounts in owners' equity
cash from investing activities
calculated from changes in the long-term or fixed asset accounts
ratio analysis
calculations that measure an organization's financial health
income statement: expenses
costs incurred in the day-to-day operations of an organization
current ratio
current assets divided by current liabilities
balance sheet: assets
current assets: short term assets, used or converted into cash within the course of a calendar year accounts receivable: money owed to the company by its clients/customers who have promised to pay for the products at a later date
per share data
data used by investors to compare the performance of one company with another on an equal, per share basis
liabilities
debts that firm owes to others
Private accountant
employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements
owners' equity
equals assets minus liabilities ; contains all the money that has ever been contributed to the company that never has to be paid back
statement of cash flows
explains how the company's cash changed from the beginning of the accounting period to the end
income statement
financial report that shows an organization's profitability over a time period - month, quarter, or year
external uses of accounting: audit
financial statements meeting the conditions
assets
firm's economic resources or items of value that it owns (cash, inventory, land, equipment, buildings)
the accounting cycle
four-step procedure of an accounting system 1.) examining source documents 2.) record transactions (journal: time-ordered list of account transactions) 3.) post transactions (ledger: book or computer file with separate sections for each account) 4.) prepare financial statements
the primary external users of audited accounting information are:
government agencies, stockholders, potential investors, lenders, suppliers, and employees
Bookkeeping
limited to the routine, day-to-day recording of business transactions; are responsible for obtaining and recording information that accountants require to analyze a firm's financial position
profitability ratios
measure amount of operating income or net income an organization is able to generate
liquidity ratio
measures speed with which a company can turn its assets into cash to meet short-term debt
internal uses of accounting info: cash flow
movement of money through an organization on a daily, weekly, monthly or yearly basis
profit margin
net income divided b y sales
return on assets
net income divided by assets
return on equity
net income divided by owners equity; also called return on investment
earnings per share
net income or profit divided by the number of stock shares outstanding
times interest earned ratio
operating income divided by interest expense
Certified management accountant (CMA)
private accountant who has to pass examination and be certified by the National Association of Accountants and have managerial responsibility
income statement: depreciation
process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods they are expected to be used in
debt utilization ratios
provide info about how much debt an organization is using relative to other sources of capital, such as owners' equity
debt to total assets ratio
ratio indicating how much of the firm is financed by debt and how much by owners' equity
asset utilization ratios
ratios that measure how well a firm uses its assets to generate each $1 of sales
income statement: gross income or profit
revenues minus the cost of goods sold required to generate the revenues
receivable turnover
sales divided by accounts receivable ; indicates how many times a firm collects its accounts receivable in a year
total asset turnover
sales divided by assets; measures how well an organization uses all of its assets in creating sales
inventory turnover
sales divided by total inventory; indicates how many times a firm sells and replaces inventory over a year
external uses of accounting: annual report
summary of a firm's financial information, products, and growth plan for owners and potential investors
double-entry bookkeeping
system of recording and classifying business transactions that maintains the balance of the accounting equation
the relationship among assets, liabilities, and owners' equity is a fundamental concept in accounting known as...
the accounting equation (assets = liabilities + owner's equity)
dividends per share
the actual cash received for each share owned
types of liabilities: accounts payable
the amount a company owes to supplies for goods and services purchased with credit
Accounting
the recording, measurement, and interpretation of financial information
income statement: REVENUE
total amount of money received from sale of goods or services, as well as from business-related activties
income statement: net income
total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings
types of liabilities: accrued expenses
unpaid financial obligations incurred by the organization
Certified public accountant (CPA)
individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to audits of corporate financial records
internal uses of accounting: budget
internal financial plan that forecasts expenses and income over a set period of time
Internal uses of accounting info: Managerial accounting
internal use of accounting statements by managers in planning and directing the organization's activities