Ch 13 Small Business Accounting: Projecting and Evaluating Performance

Expense

A decrease in owners' equity caused by consuming your product or service.

Budget

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

Financial Accounting

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

Income Statement

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

Information from accounting

To produce information that is useful to you for managing your business To meet legal or contractual requirements

Asset

something the business owns that will have value in the future

Master Budget

(Aka Comprehensive Budget) Consists of sets of budgets that detail all projected receipts and spending for the budgeted period.

Financial Flexibility

A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs.

Favorable/Unfavorable Variance

A label applied to variances to indicate their effect upon the income statement; favorable variances would result in profits being greater than budgeted, all other things being equal; unfavorable variances would result in profits being less than budgeted, all other things being equal.

Cost-Volume-Profit Analysis

A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits.

Liquidity

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

Cost of Goods Sold

A schedule that shows the predicted cost of product actually sold during the accounting period.

Cash Flow Statement

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

Balance Sheet

A statement of what a business owns, what it owes to others, and how much value the owners have invested in it.

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.

Financial Activities

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

MACRS rate

An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System. The MACRS approach lets taxpayers depreciate more of the cost earlier in the life of a capital expense.

Tax Accounting

An accounting approach based on specific accounting requirements by governmental taxing agencies.

Activity-Based Cost Estimates

An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.

Internal (cost) factors

Aspects of or choices within the business which could cause the business's costs to change.

External (cost) factors

Aspects of the world outside the business which could cause the business's costs to change.

Financial Statements

Formal summaries of the content of an accounting system's records of transactions.

GAAP

Generally Accepted Accounting Principles are the standardized rules for accounting procedures set out by the Financial Account Standards Board and used in all audits and submissions of accounting reports to the government.

Pro Forma

Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information.

Liabilities

Legal obligations to give up things of value in the future.

Why Accounting Matters

Proves what your business did financially Shows how much your business is worth Banks, creditors, development agencies, and investors require it Provides easy-to-understand plans for business operations You can't know how your business is doing without it

Depreciation

Regular and systematic reduction in income that transfers asset value to expense over time.

Financial Strengths

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.

Business Entity Concept

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

Articulate

The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet.

Variance

The difference between an actual and budgeted revenue or cost.

Owners' Equity

The difference between assets and liabilities of a business.

Economy of Scales

The idea that it is cheaper to make many of an item than few.

Breakeven Point

The point at which total cost equal gross revenue.

Variance Analysis

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

Investing Activities

The purchase and sale of land, buildings, equipment, and securities.

Accounting Equation

The statement that assets equal liabilities plus owners' equity (assets = liabilities + owner's equity)

Retained Earnings

The sum of all profits and losses, less all dividends paid since the beginning of the business.

Cost

The value given up to obtain something that you want.

Current Ratio

The value of current assets divided by current liabilities.

Variable Costs

Those costs that change with each unit produced, for example, raw materials.

Fixed Costs

Those costs that remain constant regardless of quantity of output, for example, rent.