Business 1.0-Chapter 17-Understanding Accounting and Financial Information
Depreciation
The systematic write-off of the cost of a tangible asset over its estimated useful life
Financial Accounting Standards Board (FASB)
defines the generally accepted accounting principles (GAAP) that accountants must follow
Cost of goods sold (or cost of goods manufactured)
A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale
Fundamental Accounting Equation
Assets=Liabilities+Owners' equity This is the basis for the balance sheet
Current Ratio=
Current Assets/currents liabilities
Long-term liabilities
Debts not due for one year or more
Equity=
assets-liabilities
Acid-test=
(Cash+Accounts receivable+Marketable securities)/Current liabilities
Inventory Turnover
(Cost of goods sold)/(Average Inventory)
Return on equity
(Net income after tax)/Total owners' equity indirectly measures risk by telling us how much a firm earned for each dollar
Basic Earnings per share=
(Net income after taxes)/(Number of common stock shares outstanding)
Return on Sales=
(Net income)/(Net sales)
3 major activities of a firm:
-Operations: cash transactions associated with running the business -Investments: Cash used in or provided by the firm's investment activities -Financing: Cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends
Common Liability accounts recorded on a balance sheet:
1) Accounts Payable: current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for 2) Notes Payable: short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date 3) Bonds Payable: Long-term liabilities; money lent to the firm that it must pay back
3 Categories of assets
1) Current Assets: items that can or will be converted into cash within one year (cash, accounts receivable, and inventory) 2) Fixed Assets: long-term assets that are relatively permanent such as land, buildings, and equipment 3) Intangible Assets: Long-term assets that have no physical form but do have value (patents, trademarks, copyrights, goodwill)
Five Key areas of the accounting profession
1) Managerial Accounting 2) Financial Accounting 3) Auditing 4) Tax Accounting 5) Governmental Not-for-Profit Accounting
Key Financial Statements:
1) The balance sheet 2) The income statement 3) The statement of cash flows
Certified Management Accountant (CMA)
A professional accountant who has met certain educational and experience requirements, passed a qualifying exam, and been certified by the Institute of Certified Management Accountants
Accounting Cycle
A six-step procedure that results in the preparation and analysis of the major financial statements 1) Analyze source documents 2) Record transactions in journals 3) Transfer (post) journal entries to ledger 4) Take a trial balance 5) Prepare financial statements: balance sheet, income statement, statement of cash flows 6) Analyze financial statements
Ledger
A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place
Trial Balance
A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced
Financial Statement
A summary of all the transactions that have occurred over a particular period
Annual Report
A yearly statement of the financial condition, progress, and expectations of an organization
Financial Accounting
Accounting information and analyses prepared for people outside the organization
Government and Not-for-Profit Accouting
Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget
Managerial Accounting
Accounting used to provide information and analyses to managers inside the organization to assist them in decision making
Tax Accountant
An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies
Certified Internal Auditor (CIA)
An accountant who has a bachelor's degree and two years of experience in internal auditing, and who has passed an exam administered by the Institute of Internal Auditors
Certified Public Accountant (CPA)
An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA)
Public Accountant
An accountant who provides accounting services to individuals or businesses on a fee basis
Private Accountant
An accountant who works for a single firm, government agency, or nonprofit organization
Accounts Receivable
An amount of money owed to the firm that it expects to receive within one year
Independent Audit
An evaluation and unbiased opinion about the accuracy of a company's financial statements
Operating Expenses
Costs involved in operating a business, such as rent, utilities, and salaries
Assets
Economic resources (things of value) owned by a firm
Gross Profit (or gross margin)
How much a firm earned by buying (or making) and selling merchandise
Sarbanes-Oxley Act (Sarbox)
Legislation that created new government reporting standards for publicly traded companies
Income statement
Summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm (expenses), and the resulting net income or net loss
Inventory Turnover Ratio
Measures the speed with which inventory moves through the firm and gets converted in to sales
Bottom Line
Net income (or perhaps net loss)-sales returns, costs, expenses, and taxes over a period of time
Income Statement
Summarizes revenues, cost of goods, and expenses (including taxes), for a specific period and highlights the total profit or loss the firm experienced during that period -Shows profit or loss over a specific period of time
Statement of cash flows
Provides a summary of money coming into and going out of the firm. Tracks a company's cash receipts and cash payments -Highlights the difference between cash coming in and cash coming out of a business
Balance Sheet
Reports the firm's financial condition on a specific date/time -Details what the company owns and owes on a specific day -Composed of 3 major accounts: assets, liabilities, and owners' equity
Net income or Net Loss
Revenue left over or depleted after all costs and expenses, including taxes, are paid
Retained Earnings
The accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends
Owners' Equity
The amount of the business that belongs to the owners minus any liabilities owed by the business
Ratio Analysis
The assessment of a firm's financial condition using calculations and interpretations or financial ratios developed from the firm's financial statements
Cash Flows
The difference between cash coming in and cash going out of business
Liquidity
The ease with which an asset can be converted into cash
Auditing
The job of reviewing and evaluating the information used to prepare a company's financial statements
Accounting Systems
The method we use to record and summarize accounting data into reports
Double-entry Bookkeeping
The practice of writing every business transaction in two places
Journal
The record book or computer program where accounting data are first entered
Bookkeeping
The recording of business transactions
Accounting
The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions
Stockholders' equity/shareholders' equity=
The value of what stockholders own in a firm-liabilities
Liabilities
What the business owes to others (debts)
Debt to owners' equity ratio=
total liabilities/owners' equity