Chapter 16: Accounting

balance sheet

A financial statement that summarizes a firm's financial position at a specific point in time.

double entry bookkeeping

A method of accounting in which each transaction is recorded as two entries so that two accounts or records are changed.

annual report

A yearly document that describes a firm's financial status. discuss activities from past year and prospects for future. includes the balance sheet, income statement, and statement of cash flows

accounts payable

Amounts the firm owes for credit purchases due within a year

current portion of long-term debt

Any repayment on long-term debt due within the year.

accrued expenses

Expenses, typically for wages and taxes, that have accumulated and must be paid at a specified future date within the year although the firm has not received a bill.

in order of liquidity

How are assets listed on the balance sheet

liabilities due in the short term are listed before those due in the long term.

How are liabilities listed on the balance sheet

a portion is charged to each of the years in which it is expected to provide benefits, to help match the assets cost against the revenues it provides, estimates are used

How is a fixed asset charged?

activity ratios

Ratios that measure how well a firm uses its assets.

profitability ratios

measure how well the firm is using its resources to generate profit and how efficiently it is being managed

liquidity ratios

measures the firm's ability to pay its short-term debts as they come due

Cash flow from financing activities

obtaining (or repaying) debt and equity financing

depreciation: The allocation of the asset's original cost to the years in which it is expected to produce revenues.

other than land, what happens to fixed assets

managerial acounting

provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations

debt ratios

ratios that measure the degree and effect of a firm's use of borrowed funds (debt) to finance its operations.

notes payable

Short-term loans from banks, suppliers, or others that must be repaid within a year.

income taxes payable

Taxes owed for the current operating period but not yet paid. Taxes are often shown separately when they are a large amount.

net loss

The amount obtained by subtracting all of a firm's expenses from its revenues, when the expenses are more than the revenues.

net profit

The amount obtained by subtracting all of a firm's expenses from its revenues, when the revenues are more than the expenses.

revenues

The dollar amount of a firm's sales + other income it received from sources such as interest, dividends, and rents.

inventory turnover ratio

The ratio of cost of goods sold to average inventory; measures the speed with which inventory moves through a firm and is turned into sales.

net profit margin (higher is better)

The ratio of net profit to net sales; also called return on sales. It measures the % of each sales dollar remaining after all expenses, including taxes, have been deducted.

earnings per share

The ratio of net profit to the number of shares of common stock outstanding; measures the number of dollars earned by each share of stock.

Return on Equity ROE

The ratio of net profit to total owners' equity; measures the return that owners receive on their investment in the firm.

Acid-test quick ratio

The ratio of total current assets excluding inventory to total current liabilities; used to measure a firm's liquidity. good for when inventory cannot be easily sold assets (no inventory) : liabilities

debt to equity ratio (lower the better)

The ratio of total liabilities to owners' equity; measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner's funds).

owners equity

The total amount of investment in the firm minus any liabilities; also called net worth.

gross sales

The total dollar amount of a company's sales.

Assets

Things of value owned by a firm. They may be tangible, such as cash, equipment, and buildings, or intangible, such as a patent or trademarked name.

Cash flow from operating activities

Those related to the production of the firm's goods or services.

Cash flow from investment activities:

Those related to the purchase and sale of fixed assets. (ex. building or equipment)

liabilities

What a firm owes to its creditors; also called debts.

resources of a company (assets), companies obligations (liabilities) and the owners equity

What is reported in the balance sheet

Ratio Analysis

calculating and interpreting financial ratios using data taken from the firm's financial statements in order to assess its condition and performance

long term liabiities

come due more than one year after the date of the balance sheet.

operating expenses

expenses of running the business that are not related directly to producing or buying its products

Financial Accounting

focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a business.

pro forma financial statements

future forecasts or projections

Income statement

summarizes the firm's revenues and expenses and shows its total profit or loss over a period of time.

gross profit

the amount a company earns after paying to produce or buy its products but before deducting operating expenses

net sales

the amount left after deducting sales discounts and returns and allowances from gross sales.

retained earnings

the amounts left over from profitable operations since the firm's beginning. Total profit - all dividends paid to stockholders

general and administrative expenses

the business expenses that cannot be linked to either cost of goods sold or sales.

expenses

the costs of generating revenues.

Accounting

the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities.

Auditing

the process of reviewing the records used to prepare financial statements,

current ratio

the ratio of total current assets to total current liabilities. assets : liabilities

cost of goods sold

the total expense of buying or producing the firm's goods or services.

current liabilities

those due within a year of the date of the balance sheet.

selling expenses

those related to marketing and distributing the company's products.

Net working Capital

total current assets - total current liabilities

highlights potential problems, not prove they exist, present and prospective creditors to see if the firm can repay what it borrowed

what does ratio analysis do and who is it important to

Goodwill

when a company pays more for an acquired firm than the value of its tangible assets.

current assets, fixed assets, and intangible assets.

3 asset categories

current ratio, acid test ratio, and net working capital

3 measures of liquidity ratios

revenues, expenses, and net income (or net loss).

3 primary elements of income statement

Cash, marketable securities, and accounts receivable (customers who bought goods on credit) , notes receivable (customers it lent money too), and inventroy

5 current assets

accounts payable, notes payable, accrued expenses, income taxes payable, current portion of long term debt

5 current liabilities

statement of cash flows

A financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year.

fixed assets

Long-term assets used by the firm for more than a year. Ex. land, machinery, buildings

intangable assets

Long-term assets with no physical existence, such as patents, copyrights, trademarks, and goodwill.

Assets-Liabilities= Owners' equity Must be in balance!

accounting equation

a business entities undergoes activities → internal accountants codify information about the activities and for public: - external accountants verify the information is prepared correctly - external decision makers access and use information

accounting flow of information

depreciation

allocation of the asset's original cost to the years in which it is expected to produce revenues

current assets

assets that can or will be converted to cash within the next 12 months.