Chapter 12,13,14
Accounting Equation
The statement that assets equals liabilities(how much you owe others) plus owners' equity(How much the owner invested in it). Assets= Liabilities plus Equity
Retained Earnings
The sum of all profits and losses that the business experiences from formation. It can also be a balance sheet in the owners' equity that reflects the wealth created by the business from its formation.
Cash-to-Cash Cycle
The time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale
Variable Costs
Those costs that change with each unit produced.
Financial Risk
Uncertainty of returns; the probability of losing money.
Bootstrapping
Using low-cost or free techniques to minimize your cost of doing business
Gaming the Payment Process
Using methods to appear to be paying bills on time, when in fact payment is being delayed or avoided
Gift
Valuable assets or services donated to the business without any obligation to repay or give up any ownership interest.
Where does gift financing come from?
Virtually all gift financing comes from the government or private foundations.
Financial accounting is primarily intended for:
bankers, investors, and regulators.
Regular and systematic reduction in income that transfers asset value to expense over time is called _____.
depreciation
Cash flow management is not:
obtaining all cash from business operations.
Financial Flexibility
A business' ability to manage cash flows in such a manner that the company can responds appropriately to unexpected opportunities and needs.
Business Entity Concept
The concept is 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 Analysis
The process of determining the effect of price and quantity changes on revenues and expenses
Expense
A decrease in owner's equity by consuming your product or service.
Growth Trap
A financial crisis that is caused by a business growing faster than it can be financed
Tax Abation
A legal reduction in taxes by a government.
Overdraft
A negative balance in a depositor's bank account
Charge Back
A reduction in the bank account of a merchant by a credit card company
Financial Management
A set of theories and techniques used to optimize the receipt and use of capital assets.
Budget cycle
A term applied to the schedule and the process for setting the schedule for making purchases by an individual or an organization.
A(n) _____ is a legal obligation to pay money in the future.
Debt
Dept Capital
Money borrowed for the purposes of investment in a business.
Equity Capital
Money contributed to the businesses in return for part ownership of the business
Cash Flow Management
Planning and tracking the amounts and timing of money to be received and paid during the business cycle
Profit, Profitability
The amount that revenues exceed expenses
Four Cs of borrowing
1. Character of the managers of the business. (Personal Credit history 2. Capacity to repay both principal and interest on time. (Capacity is measured by probability and cash flow from operations) 3. Conditions on the industry and economy in which the firm operates. (Technology, Competition, and Economic Growth) 4. Collateral used to secure the loan(Estimated Market value for tangible assets)
3 primary reasons to use outside equity
1. No increased Interest 2. Reduce exposure to financial loss 3. Outside investors can re-energize the business by adding new ideas, changing processes, and providing new procedures.
Interest
A charge for the use of money, usually as a percentage of the principle.
Royalty Financing
A method of raising capital financing where investors provide money to a business in return for a guaranteed percentage of revenues.
Discounts for Prompt Payment
A reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner
Revenue
An increase in owner's equity by selling your product or service.
Tax Credit
Direct reduction in the amount of taxes that must be paid, dependent on meeting some legal criteria.
Debt
Is a claim on the business's asset but unlike equity, debts are legally enforceable to pay back.
Outside Equity
Money from selling part of your business to people who are not and will not be involved in the management of the business. Only possible if business is a corporation, partnership, or LLC
Demand Deposits
Money held in checking and savings accounts.
_____ is money from selling part of a business to people who are not and will not be involved in the management of the business.
Outside Equity
Owner's Equity
Owner's Equity=Assets-Liabilities.
What is the number one source of financing?
Owners
The number one source of financing for small businesses is from _____.
Owners themselves
Dividends
Payments of profit to the owners of corporations.
Marketable Securities
Stocks and bonds that are traded on an open market
True or False. You'll have to provide reports to financial investors and they have the right to inspect accounting records anytime they choose.
TRUE
Clearinghouse
The entity that processes checks and electronic fund transfers for banks and other financial organizations.
Robert owns a successful business called Great Car-Hire. He plans to sell it to Richard. Richard assumes that he can keep up the high revenues if he can plan and execute the mission of the business well. Which of the following basic accounting concepts is reflected in Richard's assumption?
The going concern expectation
Going Concern Expectation
The going concern principle is the assumption that a business will continue to exist in the near future, in other words, that it will not liquidate or be forced out of business.
Going concern concept
The idea that the business is expected to continue on in its existence for the foreseeable future
Risk
The level of probability that an investment will not produce expected gains.
Cost of Capital
The percentage cost of obtaining future funds.
Credit Reporting Agency (CRA)
A business that collects, collates, and reports information concerning an entity's use of debt
Cash Budget
A cash budget identifies when, how, and why cash is expected to come into the business, and when, how, and why it is expected to leave.
Budget
A financial plan from the single level of operations; a quantative expression of the use of resources necessary to achieve a business' strategic goals.
Financial Accounting
A formal, rule based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators.
Timing Purchases
A method of controlling the timing of cash outflows that is invisible to suppliers and vendors
Managerial Accounting
Accounting methods that are specifically to be used by managers to plan, direct, and operate a business. This is mostly used for future/new operations.
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.
Payables
Amounts owed to vendors for merchandise or services purchased on credit
Sophisticated Investor
As defined by the SEC, people who "have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment."
External cost Factors
Aspects of the world outside the business that could cause the business's costs to change.
Which of the following does the accounting equation state?
Assets = Liabilities + Owners' Equity
Cash
Money that is immediately available to be spent.
Which of the following is a drawback to financing with debt?
Payment is expected even if you have no money to make the payment.
Financial Strength
The ability of a business to survive adverse financial events
Operating Income
The amount of income earned by the regular operations of the business
Institutional Gift Financing Forms
The most common form of institutional gift financing is in the form of reduced taxes, either a tax abatement or a credit against tax payables.
Gain of Investment
The percentage amount that the payout of an investment differs from original cost Calculated as (payout − investment + dividends)/ investment.
Barter
The practice of trading goods and services without the use of money.
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.
Investing Activities
The purchase and sale of land, buildings, equipment, and securities.
Limtited Liability Company (LLC)
A legal form of business corperation that is created by filing required documentation with a state government. LLCs have a choice, under federal law, of being taxed as either corporations or partnerships.
Cash Disbursements Budget
A schedule of the amounts and timings of payments of cash out of a business
Cash Reciepts Budget
A schedule of the amounts and timings of the receipt of cash into a business.
Foundation
An institution to which private wealth is contributed and from which private wealth is distributed for public purposes.
Bearer
Any person or business entity who possesses a security
Cash Equivalents
Assets that may be quickly converted to cash
In the context of accounting functions, which of the following is true of accounts receivable?
Provision of credit available to customers
The level of probability that an investment will not produce expected gain is called _____.
Risk
Micolender
SBA-approved partner that offers SBA-guaranteed micoloans to eligible small businesses. These loans require much less paperwork thatn regular SBA or bank loans, and are for amounts under $50,000.
SaaS
SaaS stands for Software as a Service and refers to an Internet-based program that you would use in work or leisure. These are paid for by time frame, project, or some measure of usage.
How does gift-funding work for smaller businesses?
Small businesses can only get a grant if they meet some societal goal. VERY FEW foundations exist to support small businesses and NONE exist to provide start up or working capital funding.
Fair Credit Reporting Act (FCRA)
U.S. federal legislation specifying consumers' rights vis-a-vis credit reporting agencies.
Statement of Cash Flows
A statement of sources and uses of cash in a business for a specific period of time. Also called cash flow statement.
Balance Sheet
A statement of what a business owns(Assets), what it owes to others(Liabilities), and how much the owner has invested in it(Equity).
Income Statement
A statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time.
Angel Investor
A wealth indivual who invests in companies in relatively early stages of development.
Receivables
Amounts that are owed to a business for merchandise that was sold on credit
Money
An accepted medium of exchange.
Reconcile
An accounting process that identifies the causes of all differences between book and bank balances.
Community Development Organization
An organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area.
Short-Term Debt
Any debt that must be paid in less than one year from the date of the financial statement on which it is reported.
Accredited Investor
As defined by the SEC in Title 17, Chapter ll, Part 230, 230.501 of the Code of Federal Regulations (CFR): "Any person who comes within any of the following categories, or who the issuer reasonably believes comes with any of the following categories, at the time of the sale of the securities to that person: banks, business development companies, companies worth more than $5 million, an executive of the firm making the offering, or an individual with a personal net worth of more than $1 million."
Which of the following accounting functions ensures that the employment taxes are kept current?
Payroll records
Trade Discounts
Percentage discounts from gross invoice amounts provided to encourage prompt payment
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 the statement of cash flows.
Small Business Investment Company (SBIC)
Prive business that is authorized to make SBA-insured loans to start-ups and small businesses.
Secured Debt
Provides lender with the right to seize specific assets if loan isn't paid
Asset
Something the business owns that is expected to have value in the future
Permanent Accounts
The accounts of assets, liabilities, and owner's equity, excluding accounts for revenues and expenses.
Optimum Capital Strategy
The ratio of dept to equity that provides the maximum level of profits.
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.
Retained Earnings
The sum of all the profits and losses that the business experiences from formation. A balance sheet in the owner's equity that reflects the wealth created by the business from its formation.
Company Book Balance
The sum of cash inflows and cash outflows recorded in the firm's accounting records
Bank Ledger Balance
The sum of deposits and withdrawals recorded in a bank's accounting records.
Bank Available Balance
The sum of money that has actually been received and paid out of a depositor's account.
Diversity
To invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risks.
Total costs
Total costs are simply the sum of all costs that are incurred within an accounting period. They are the sum of fixed costs and variable costs.
Partnership
Two or more people legally agree to become co-owners of a business
Financial Leverage
A measure of the amount of debt relative to total investment.
Cosignment
The practice of accepting goods for resale, without taking ownership of them and without being responsible to pay prior to their being sold.
Fixed costs
Those costs that remain constant regardless of quantity of output, for example, rent.
Corporation
A legal "artificial" entity that is formed by filing specific documents with state government
________ provides a lender with the right to seize specific assets if the loan is not paid back as specified in the loan contract.
Secured Debt
Operating Cycle
See cash-to-cash cycle
Tax accounting
An accounting approach based on specific accounting requirements set by governmental taxing agencies
Cost of goods sold
An expense recognized at the time of sale of merchandise in the amount of cost of the merchandise to the seller.
Nonsufficient Funds (NSF)
A situation that occurs when a check is returned to a depositor because the writer of the check did not have a bank available balance equal to or greater than the amount of the check.
Collateral
Something of value given or pledged as security for payment of a loan; collateral may consist of financial instruments, such as stocks, bonds, and negotiable paper, or of physical goods, such as trucks, machinery, land, or buildings.
Standard Budgeting
A method for business forecasting and control in which specific expected volumes and prices per unit are used.
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.
Liquidity
A measure of how quickly a company can raise money through internal sources by converting assets to cash.
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.
Requirements of Personal Gifts
•Put your agreement into writing. •If it is a gift, have the agreement specifically say so. •If it is a loan, have the agreement specify the exact interest and payment terms. •If it is an equity investment, consider non-voting stock. Gifts from crowdfunding have two models: non equity and equity.
Currency
(1) A concept in public importance that alludes to a degree to which the issue is immediate to its impact (2) The bills and coins printed by the government to represent money
Factoring Receivables
Borrowing money secured by a firm's accounts receivable
A financial plan for the future based on a single level of operations is called a(n):
Budget
Gift Capital
Capital resources that neither provide any ownership nor require any repayment to the giver.
Deposits and Progress Payments
Cash payments received before product is completed or delivered
Comprehensive Budget
Comprehensive budgets, also often referred to as master budgets, are sets of budgets that detail all projected receipts and spending for the budget period.
Outsourcing
Contracting with people or companies outside your business to do work for your business
Current Ratio
Currents Assets/ Current Liabilities
Financial Statements
Formal summaries of the content of an accounting system's records of transactions.
Types of Personal gifts
Forms include: cash, picking up the tab, accelerated cash-outs, free use, free work or unpaid labor, overpayment, favored status or sweetheart deals, forgiveness, deferrals, or piggybacking.
Grant
Gift of money made to a business for a specific purpose.
In the context of accounting functions, which of the following is true of accounts receivable?
It records provision of credit to customers.
Unsecured Debt
Lender doesn't have the right to seize specific assets if loan isn't paid. They'll have to use court action to collect unpaid unsecured debt.
Modified Accelerated Cost Recovery System
Lets taxpayers depreciate more of the cost earlier in the life of a capital expense.
On account
Merchandise purchased or sold with payment due in the future, usually one month
On account
Merchandise purchased or sold with payment due in the future, usually within one month.
Commerical Paper
Notes issued by creditworthy corporations.
Accelerator
Organizations that offer a range of support services and funding opportunities for startups.
Harvest
Recover value through a sale of a firm or its assets
Depreciation
Regular and systemic reduction in income that transfers asset value to expense over time.
Noncore Projects
Revenue-producing tasks and activities related to, but not part of, the primary strategy of a business.
Noncash Incentives
Rewards that do not require payment of cash, such as stock options, compensating time off, or added vacation days.
Variance
The difference between the actual and budgeted revenue or cost. Permission from the government organization to act differently than the laws state.
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.
Weighted Average Cost of Capital (WACC)
The expected average future cost of funds.
Orion Inc. was started as a small organization with five employees. After the first year's profits were made, the owners decided to invest the profits in expanding the business. This is an example of financing the business using _____.
bootstrapping
A(n)_____ identifies when, how, and why money is expected to come into the business, and when, how, and why it is expected to leave.
cash budget
Approximately 90 percent of small businesses that fail do so because of ________.
cash flow problems
Harry is talented at plumbing but lacks the cash flow management skills required to run a business. He opens his business, Harry's Plumbing Supplies, with the help of his nephew John- a business major. Smith purchases a faucet from Harry using a credit card. He notices a crack in the faucet and returns it to Harry. Smith contacts the credit card service provider for a refund. The credit card company removes the sale amount from Harry's account which is referred to as a(n) _____.
charge back
Jason is a talented chef but like Harry in the previous example lacks the cash flow management skills required to run a business. With some help from Harry's nephew he opens his restaurant. Within a few months, the sales increase exponentially which results in a shortage of cash needed to expand his business. This crisis is termed _____.
growth trap
Factoring
is a method of borrowing against receivables. Factoring allows a business to obtain immediate capital or money based on the future income attributed to a particular amount due on an account receivable or a business invoice.
Liabilities
legal obligation to give things up in the future
A negative balance in a depositor's bank account is referred as a(n) _____.
overdraft
