Chapter 14

the balance sheet

a "snapshot" of an organization's financial position at a given moment; assets, liabilities, owners' equity

types of liabilities: current liabilities

a firm's financial obligations to short-term creditors, which must be repaid within a year

quick ratio (acid test)

a stringent measure of liquidity that eliminates inventory

income statement: cost of goods sold

amount of money the firm spent to buy and/or produce the products it sold during accounting period cost of goods sold= beginning inventory + interim purchases - ending inventory

cash from operating activities

calculated by combining the changes in the revenue accounts, expense accounts, current asset accounts, and current liability accounts

cash from financing activties

calculated from changes in the long-term liability accounts and the contributed capital accounts in owners' equity

cash from investing activities

calculated from changes in the long-term or fixed asset accounts

ratio analysis

calculations that measure an organization's financial health

income statement: expenses

costs incurred in the day-to-day operations of an organization

current ratio

current assets divided by current liabilities

balance sheet: assets

current assets: short term assets, used or converted into cash within the course of a calendar year accounts receivable: money owed to the company by its clients/customers who have promised to pay for the products at a later date

per share data

data used by investors to compare the performance of one company with another on an equal, per share basis

liabilities

debts that firm owes to others

Private accountant

employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements

owners' equity

equals assets minus liabilities ; contains all the money that has ever been contributed to the company that never has to be paid back

statement of cash flows

explains how the company's cash changed from the beginning of the accounting period to the end

income statement

financial report that shows an organization's profitability over a time period - month, quarter, or year

external uses of accounting: audit

financial statements meeting the conditions

assets

firm's economic resources or items of value that it owns (cash, inventory, land, equipment, buildings)

the accounting cycle

four-step procedure of an accounting system 1.) examining source documents 2.) record transactions (journal: time-ordered list of account transactions) 3.) post transactions (ledger: book or computer file with separate sections for each account) 4.) prepare financial statements

the primary external users of audited accounting information are:

government agencies, stockholders, potential investors, lenders, suppliers, and employees

Bookkeeping

limited to the routine, day-to-day recording of business transactions; are responsible for obtaining and recording information that accountants require to analyze a firm's financial position

profitability ratios

measure amount of operating income or net income an organization is able to generate

liquidity ratio

measures speed with which a company can turn its assets into cash to meet short-term debt

internal uses of accounting info: cash flow

movement of money through an organization on a daily, weekly, monthly or yearly basis

profit margin

net income divided b y sales

return on assets

net income divided by assets

return on equity

net income divided by owners equity; also called return on investment

earnings per share

net income or profit divided by the number of stock shares outstanding

times interest earned ratio

operating income divided by interest expense

Certified management accountant (CMA)

private accountant who has to pass examination and be certified by the National Association of Accountants and have managerial responsibility

income statement: depreciation

process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods they are expected to be used in

debt utilization ratios

provide info about how much debt an organization is using relative to other sources of capital, such as owners' equity

debt to total assets ratio

ratio indicating how much of the firm is financed by debt and how much by owners' equity

asset utilization ratios

ratios that measure how well a firm uses its assets to generate each $1 of sales

income statement: gross income or profit

revenues minus the cost of goods sold required to generate the revenues

receivable turnover

sales divided by accounts receivable ; indicates how many times a firm collects its accounts receivable in a year

total asset turnover

sales divided by assets; measures how well an organization uses all of its assets in creating sales

inventory turnover

sales divided by total inventory; indicates how many times a firm sells and replaces inventory over a year

external uses of accounting: annual report

summary of a firm's financial information, products, and growth plan for owners and potential investors

double-entry bookkeeping

system of recording and classifying business transactions that maintains the balance of the accounting equation

the relationship among assets, liabilities, and owners' equity is a fundamental concept in accounting known as...

the accounting equation (assets = liabilities + owner's equity)

dividends per share

the actual cash received for each share owned

types of liabilities: accounts payable

the amount a company owes to supplies for goods and services purchased with credit

Accounting

the recording, measurement, and interpretation of financial information

income statement: REVENUE

total amount of money received from sale of goods or services, as well as from business-related activties

income statement: net income

total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings

types of liabilities: accrued expenses

unpaid financial obligations incurred by the organization

Certified public accountant (CPA)

individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to audits of corporate financial records

internal uses of accounting: budget

internal financial plan that forecasts expenses and income over a set period of time

Internal uses of accounting info: Managerial accounting

internal use of accounting statements by managers in planning and directing the organization's activities