Ch 12 - Small business accounting: projecting and evaluating performance

tax accounting

an accounting approach based on specific accounting requirements set by governmental taxing agencies

costs of goods sold

an expense recognized at the time of a sale of merchandise in the amount of the cost of the merchandise to the seller

asset

something the business owns that is expected to have economic value in the future

total cost

sum of fixed cost and variable costs

financial strength

the ability of a business to survive adverse financial events

going concern concept

the accounting concept that a business is expected to continue in existence for the foreseeable future

operating income

the amount of income earned by the regular operations of the business

accounting equation

the statement that assets equal liabilities plus owner's equity Assets = liabilities + owner's equity

articulate

the concept that information flows from the income statement through statements of retained earnings and owner's equity to the balance sheet

owner's equity

the difference between assets and liabilities of a business

income statement

the primary source of information about a business' profitability

profit planning

the process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes

variance analysis

the process of determining the effect of price and quantity changes on revenues and expenses

budget cycle process

the schedule and process for setting the schedule for making purchases by an individual or an organization

financial accounting

a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, and regulators

investment

an asset that is acquired for the purpose of either generating future incomes and cash flows or appreciating in value to provide an increase in future wealth

financial accounting

Which type of accounting follows a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators?

financial, managerial, and tax accounting

3 types of accounting in small businesses

cost-volume-profit analysis

This is a managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales to maximize profits:

pro forma

What term is used to describe financial statements that consist of estimated or hypothetical information?

income statement

Which financial statement will tell you if your small business made a profit or a loss for a particular period of time?

account

a chronological list of all additions to and subtractions from a single type of asset (cash receivables, loans outstanding)

expense

a decrease in owner's equity caused by consuming your product or service

budget

a financial plan for the future based on a single level or operations; a quantitative expression of the use of resources necessary to achieve a business' strategic goals

managerial accounting

accounting methods that are specifically intended to be used by managers for planning, directing, and controlling a business

operating activities

activities involved in producing and selling goods and services

internal factors

aspects of or choices within the business that could cause the business; costs to change

external factors

aspects of the world outside the business that could cause the business' costs to change

cash flow statement

computed to see the sources and uses of cash by the business

outsourcing

contracting with people or companies outside your business to do work for your business

fixed costs

costs that remain constant regardless of quantity of output. Ex: rent

liabilities

legal obligations to give up things of value in the future

on account

merchandise purchased or sold with payment due in the future, usually within one month

accounts receivable

money owed your business by consumers

revenues - expenses

net income=

pro forma financial statements

planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows

retained earnings

(1) the sum of all the profits and losses that the business experiences from formation. (2) a balance sheet item in owner's equity that reflects the wealth created by the business from its formation

True

(T/F) The accounting equation states that assets must always equal liabilities plus owners' equity.

balance sheet

(also called Statement of Financial Position)- presents a "snapshot" of the financial holdings and liabilities at the close of business on a specified date

Cost-Volume-Profit Analysis

a method for planning operations necessary to attain a specific profit goal. Break-even analysis is a specific application of cost-profit-volume analysis

financing activities

activities through which cash is obtained from and paid to lenders, owners, and investors

variable costs

the costs that change with each unit produced. Ex: raw materials

net present value (NPV)

the difference between the present value of cash inflows and the present value of cash outflows over a specified period of time

variance

(1) the difference between an actual and budgeted revenue or cost. (2) permission from a government organization to act differently than the laws state

liquidity

a measure of how quickly a company can raise money through internal sources by converting assets to cash

standard budgeting

a method for business forecasting and control in which specific expected volumes and prices per unit are used

statement of cash flows

a statement of the sources and uses of cash in a business for a specific period of time.

income statement

a statement that lists revenues and expenses and shows the amount profit a business makes for a specific period of time

balance sheet

a statements of what a business owns (assets). What it owes to others (liabilities), and how much value the owners have invested in it (equity)

revenue

an increase in owner's equity caused by selling your product or service

permanent accounts

the accounts of assets, liabilities, and owner's equity, excluding accounts for revenues and expenses

business entity concept

the concept that a business has an existence separate from that of its owners

investing activities

the purchase and sale of land, buildings, equipment, and securities

Generally accepted accounting principles (GAAP)

the standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accounting reports to the government

current ratio

the value of current assets divided by current liabilities

customer preferences

Which of the following is typically NOT an accounting function that will be part of an accounting system that you setup for your small business?

financial flexiility

a business' ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs -Includes (1) the ability to sell non-operating assets, (2) the ability to obtain loans or to sell additional stock, and (3) the ability to increase efficiency and to lower costs of operation