business chapter 17

independent audit

an evaluation and unbiased opinion about the accuracy of a company's financial statement. often include an auditor's unbiased written opinion.

fundamental accounting equation

assets= liabilities + owner's equity. The basis for the balance sheet,

journal

bookkeepers then record financial data from the original transaction documents into a record book or computer program called______.

Activity ratios

converting the firm's inventory to profits is a key function of management. tell us how effectively management is turning over inventory.

operating expenses

costs involved in operating a business, such as rent, utilities, and salaries.

accounts payable

current liabilities or bills the company owe others for merchandise or services it purchased on credit but has not yet paid for.

current liabilities

debts due in one year or less.

long term liabilities

debts not due for one year or more.

Assets

economic resources owned by a firm. divided into 3 categories based to how quickly they can be turned into cash: 1. current assets 2. fixed assets 3. intangible assets

inventory turnover ratio

measure the speed with which inventory moves through the firm and gets converted into sales. inventory turnover= costs of goods sold/ average inventory.

profitability (performance) ratios

measures how effectively a firm's managers are using its various resources to achieve profits. three keys: 1. earning per share (EPS) 2. return on sales 3. return on equity.

acid-test ratio

measures the cash, marketable securities, and receivables of a firm, compared to its current liabilities. acid-test ratio= cash+ accounts receivable + marketable securities/ current liabilities.

cost of goods are sold/ costs of goods manufactured

measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale.

statement of cash flows

provides a summery of money coming into and going out of the firm. it tracks a company's cash receipts and cash payments related to firm's operation, investment, and financing.

public accountant

provides accounting services to individuals or businesses. such services can include designing an accounting system, helping select the correct software to run the system, and analyzing an organization's financial performance.

managerial accounting

provides information and analysis to managers inside the organization to assist them in decision making.

certified management accountant (CMA)

a professional accountant who has met certain educational and experience requirement, passed a qualifying exam,, and been certified by the Institute of Certified Management Accountant.

trial balance

a summary of all the financial data in the account ledger that ensure the figures are correct and balanced.

annual report

a yearly statement of the financial condition, progress, and expectations of an organization.

retained earnings

accumulated earning from the firm's profitable operations that are reinvested in the business and not paid out to stockholders in distributions of company profits.

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.

financial accounting

differs from managerial accounting in that financial information and analyses it generates are for people primarily outside the organization

leverage (debt) ratios

measures the degree to which a firm relies on borrows funds in its operations debts to owners' equity ratio= total liabilities/ owners' equity.

earning per share (EPS)

a revealing ratio because earnings help stimulate the firm's growth and provide for stockholders' dividends. basic earnings per share= net income after taxes/ number of common stock shares outstanding.

accounting cycle

a six step procedure that results in the preparation and analysis of the major financial statements. 1. analyze source document 2. record transaction in journals 3. transfer post journal entries to ledger 4. take a trial balance 5. prepare financial statement 6. analyze financial statement

ledger

a specific bookkeeping tool. a specialized accounting book or computer program bookkeepers use to transfer information from accounting journals into specific categories so managers can find all information about a single account.

financial statement

a summery of all the financial transactions that have occurred over a particular period. Include: 1. balance sheet 2. income statement 3. statement of cash flows

certified public accountant (CPA)

an accountant who passes a series of examinations established by the American Institute of Certified Public Accountant (AICPA)

fixed assets

long term assets that are relatively permanent such as land, buildings, and equipment.

intangible assets

long term assets that have no physical form but do have value. patents, trademarks, copyrights, and goodwill are intangible.

bonds payable

long term liabilities; money lent to the firm that it must pay back.

liquidity ratio

measures a company's ability to turn assets into cash to pay its short term debts. two key liquidity ratio: 1. current ratio 2. acid-test ratio

current ratio

the ratio of a firm's current assets to its current liabilities. current ratio= current assets/ current liabilities.

bookkeeping

the recording of business transactions, is a basic part of financial reporting.

depreciation

the systematic write-off of the cost of a tangible asset over its estimated useful life.

tax accountant

trained in tax law and is responsible for preparing tax returns or developing tax strategies.

liabilities

what business owes to others- its debts.

return on sales

tells wether the firm is doing as well as its competitors in generating income from sales. return on sales= net income/ net sales

owner's equity

the amount of the business that belongs to the owners, minus any liabilities the business owes. the value of what stockholders own in a firm (minus liabilities) is called stockholders' equity to shareholders' equity.

ratio analysis

the assessment of a firm's financial condition, using calculations and financial ratios developed from the firm's financial statement.

cash flow

the difference between cash coming in and cash going out of a business.

liquidity

the ease with which an asset can be converted into cash.

double entry bookkeeping

the practice of writing every transaction in two places

gross profit/gross margin

how much a firm earned by buying or making and selling merchandise. A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale. To calculate gross profit: examine the income statement, take the revenue and subtract the cost of goods sold. Also called "gross margin" and "gross income".

private accountant

in order to keep accurate financial information. he works for a single firm, government agency, or non-profit organization.

return on equity

indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners. return on equity= net income after tax/ total owners' equity.

current assets

items that can or will be converted into cash within one year. they include cash, accounts receivable, and inventory.

accounting

recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation.

balance sheet

reports the firm's financial condition on a specific date. assets = liability + owner's equity, assets- liabiltiy= networth

net income or net loss

revenue left over after all costs and expenses, including taxes, are paid.This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share. loss occurs when expenses exceed the income or total revenue produced for a given period of time.

auditing

reviewing and evaluating the information used to prepare a company's financial statement.

notes payable

short term or long rem liabilities that a business promises to repay by a certain date.

income statement

summarizes revenues, cost of goods, and expenses, including taxes for a specific period and highlights the total profit or loss of the firm experienced during that period.

Government and Not-For-Profit accounting

supports organizations who's purpose is not generating a profit, but serving ratepayers, taxpayers, and others according to a duly approved budget.