Chapter 15 Accounting

What is a budget?

A budget is a planning and control tool that reflects the company's expected sales revenues, operating expenses, cash receipts, and cash outlays.

What is accounting?

Accounting is the process of measuring, interpreting, and communicating financial information to enable people inside and outside the company to make informed decisions.

Define accrual accounting.

Accrual accounting recognizes revenues and expenses when they occur, not when cash actually changes hands. Most companies use accrual accounting to prepare their financial statements.

Activity ratios

Activity ratios—such as the inventory turnover ratio, accounts receivable turnover ratio, and the total asset turnover ratio—measure how effectively a company uses its resources.

How are financial statements adjusted for exchange rates?

An exchange rate is the ratio at which a country's currency can be exchanged for other currencies. Fluctuations of exchange rates create either gains or losses for particular companies because data about international financial transactions must be translated into the currency of the country in which the parent company is based.

How is the balance sheet organized?

Assets (what a company owns) are shown on one side of the balance sheet and are listed in or- der of convertibility into cash. On the other side of the balance sheet are claims to assets, liabilities (what a company owes), and owners' equity. Claims are listed in the order in which they are due, so liabilities are listed before owners' equity. Assets always equal liabilities plus owners' equity.

Name the levels of professions in the accounting realm

Bookkeeper, accountant, controller, CFO, CPA

How is a cash budget organized?

Cash budgets are generally prepared monthly. Cash receipts are listed first. They include cash sales as well as the collection of past credit sales. Cash outlays are listed next. These include cash purchases, payment of past credit purchases, and operating expenses. The difference between cash receipts and cash outlays is net cash flow.

explain double-entry bookkeeping.

Double-entry bookkeeping is a process by which accounting transactions are recorded. Each transaction must have an offsetting transaction.

financial ratios

Financial ratios help managers and outside evaluators compare a company's current financial information with that of previous years and with results for other companies in the same industry.

GAAP (Generally Accepted Accounting Principles)

GAAP stands for generally accepted accounting principles and is a set of standards or guidelines that accountants follow in recording and reporting financial transactions. They are created by FASB

What are government and not-for-profit accountants?

Government and not-for-profit accountants perform many of the same functions as management ac- countants, but they analyze how effectively the organization or agency is operating, rather than its profits and losses.

Leverage ratios

Leverage ratios, such as the total liabilities to total assets ratio and the long-term debt to equity ratio, measure the extent to which the company relies on debt to finance its operations

Liquidity ratios

Liquidity ratios measure a company's ability to meet short-term ob- ligations. Examples are the current ratio and the quick, or acid-test, ratio.

What are management accountants?

Management accountants collect and record financial transactions, prepare financial statements, and interpret them for managers in their own companies.

Who uses accounting information?

Managers of all types of organizations use accounting information to help them plan, assess performance, and control daily and long-term operations. Outside users of accounting information include government officials, investors, creditors, and donors.

Profitability ratios

Profitability ratios assess the overall financial performance of the business. the gross profit mar- gin, net profit margin, and return on owners' equity are examples of profitability ratios.

What are public accountants?

Public accountants provide accounting services to other companies or individuals for a fee. they are involved in such activities as audit- ing, tax return preparation, management consulting, and accounting system design.

List the four categories of financial ratios.

The four categories of ratios are liquidity, activity, profitability, and leverage.

List the four financial statements.

The four financial statements are the balance sheet, the income statement, the statement of owners' equity, and the statement of cash flows.

What is the role played by the Fasb?

the Financial Accounting Standards Board (FASB) is an independent body made up of accounting professionals and is primarily responsible for evaluating, setting, and modifying GAAP.

What is the purpose of the IASB?

the International Accounting Standards Board (IASB) was established to provide worldwide consistency in financial reporting practices and comparability and uniformity of international accounting rules. the IASB has developed the International Financial reporting Standards (IFrS).

List the steps in the accounting cycle.

the accounting cycle involves the following steps: recording transactions, classifying the transactions, summarizing transactions, and using the summaries to produce financial statements.

What is the accounting equation?

the accounting equation states that assets (what a company owns) must always equal liabili- ties (what a company owes) plus owners' equity. therefore, if assets increase or decrease, there must be an offsetting increase or decrease in liabilities, owners' equity, or both.

Define the following ratios: current ratio, inventory turnover, net profit margin, and debt ratio.

the current ratio equals current assets divided by current liabilities. Inventory turnover equals cost of goods sold divided by average inventory. Net profit margin equals net income divided by sales. the debt ratio equals total liabilities divided by total assets.

What are the four basic requirements to which all accounting rules must adhere?

the four basic requirements to which all accounting rules must adhere are consistency, relevance, reliability, and comparability.

What are the three business activities that involve account- ing?

the three activities involving accounting are financing, investing, and operating activities.

List the three services offered by public accounting firms.

the three services offered by public accounting firms are auditing, tax services, and management consulting.