Chapter 17: Understanding Accounting and Financial Information

Acid-test Ratio

(Cash + Accounts Receivable + Short-term Investments) / Current Liabilities

Basic Earnings per Share

(Net income - Dividends on Preffered Stocks) / Average oustanding Shares

Accounting Cycle

1. Analyze source documents (sales slips, travel records, etc.) 2. Record transactions in journals 3. Transfer (post) journal entries to ledger 4. Take a trial balance 5. Prepare financial statements (balance sheets, income statement, statement of cash flow) 6. Analyze financial statements

Accounting System

1. Inputs (Accounting documents, sales documents, purchasing documents, shipping documents, payroll documents) 2. Processing: 1) Entries are made into journals (Recording) 2) Effect of these journal entries are transferred/posted into ledgers (Classifying) 3) All accounts are summarized 3. Outputs (Financial statements, balance sheet, income statement, statement of cash flows, annual reports)

Ledger

A specialized accounting book or program where all information is in one place.

Trial Balance

A summary of all the information of the account ledgers.

Financial Statement

A summary of all the transactions that have occurred over a particular period. (Income sheet, Balance sheet, Statement of cash flows)

Annual Report

A yearly statement of the financial condition, progress, and expectations of an organization.

Tax Accountants

Accountants trained in tax law and is responsible for preparing tax returns or developing tax strategies.

Certified Public Accountant (CPA)

Accountants who have passed a series of examinations established by the AICPA and met a states requirements for education and experience.

Retained Earnings

Accumulated earnings from the firm's profitable operations that are reinvested in the business.

Independent Audit

An evaluation and unbiased opinion about the accuracy of a company's financial statements.

Double-Entry Bookkeeping

Bookkeepers record all transactions in two places so they can check one list of transactions against the other for accuracy.

Operating Expenses

Cost involved in operating a business, such as rent, salaries, and supplies.

Current Ratio

Current Assets / Current Liabilities

Accounts Payable

Current liabilities a firm owes for merchandise or services purchased on credit.

Liquidity

Ease with which assets can be converted into cash.

Assets

Economic resources owned by a firm. Items can be tangible or intangible.

Gross Profit (or Gross Margin)

How much a firm earned by buying (or making) and selling merchandise.

Dodd Frank Act

Increased financial regulation by increasing the power of the Public Company Accounting Oversight Board.

Financial Accounting

Information and analysis for people primarily OUTSIDE the organization. (Is the organization profitable? Is it able to pay its bills? How much debt does is owe?)

Current Assets

Items that can or will be converted into cash within one year.

Fixed Assets

Long-term assets that are relatively permanent such as land, buildings, or equipment.

Intangible Assets

Long-term assets that have no physical form but do have value such as patients, trademarks, and goodwill.

Bonds Payable

Long-term liabilities that the firm must pay back.

Liquidity Ratios

Measure a firm's ability to turn assets into cash to pay its short-term debts. (Current ratio, Acid-test ratio)

Profitable Ratio

Measure how effectively a firm's managers are using the firm's various resources to achieve profits. (Basic earnings per share, Return on Sales, Return on Equity)

Activity Ratios

Measure how effectively management is turning over inventory. (Inventory Turnover Ratio)

Leverage Ratio

Measure the degree to which a firm relies on borrowed funds in its operations. (Debt to owners' equity ratio)

Costs of Goods Sold

Measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale.

Return on Sales

Net Income (before interest + tax) / Sales

Return on Equity

Net Income / Shareholders Equity

Public Accountants

Provide accounting services to individuals or businesses.

Managerial Accounting

Provides information and analysis to managers INSIDE the organization to assist them in decision making. Involved with: Cost production, costs of marketing, preparation and control of budgets, minimizing tax liabilities

Accounting

Recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operations.

Statement of Cash Flows

Reports cash receipts and cash disbursements related to the 3 major activities 1. Operations 2. Investments 3. Financing

Auditing

Reviewing and evaluating information used to prepare a company's financial statements.

Inventory Turnover Ratio

Sales / Inventory

Notes Payable

Short or long-term liabilities a business promises to pay back by a certain date.

Government and Not-for-Profit Accounting

Support for organizations whose purpose is not generating a profit, but serving others according to a duly approved budget.

Owners' Equity

The amount of the business that belongs to the owners minus any liabilities of the owners.

Ratio Analysis

The assessment of a firm's financial condition using calculations and financial ratios developed from the firm's financial statements.

Fundamental Accounting Equation

The basis for the balance sheet. Assets = Liabilities + Owners Equity

Cash Flow

The difference between cash coming in and cash going out of a business.

Balance Sheet

The financial statement that reports a firm's financial condition at a specific time.

Income Statement

The financial statement that shows a firm's bottom line - that is, its profit after costs, expenses, and taxes.

Bookkeeping

The recording of business transactions. Bookkeepers divide a firm's transactions into meaningful categories and post them into a record book or computer program called a JOURNAL.

Net income/ Net loss

The revenue left over after costs and expenses.

Depreciation

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Debt to Owners' Equity Ratio

Total Liabilities / Shareholders Equity

Liabilities

What the business owes to other - its debts.

Private Accountants

Work in a single firm, government agency, or nonprofit organization.