intro to business chapter 14
Dodd-Frank Act
- a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage - gave FRB the task of implanting the legislation - this legislation limits the type software assets commercial banks can buy, the amount of capital they must maintain and the use of derivative instruments scubas options, futures, and structured investment products
Sarbanes-Oxley Act
- after accounting scandal of Enron and world com congress passed this - required firms to be more rigorous in their accounting and reporting practices - made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail time for inaccurate misleading or illegal accounting statements
- each country - international financial reporting standards
- blank has a different set of rules that the businesses within that country are required to use for their accounting process and financial statements - but a number of countries have adapted a set of accounting principles known as blank
the big four
- ernst and young - KPMG - Deloitte - price water- housecoopers
booking keeping
- very narrow and very mechanical - typically limited to the routine, day to day recording of business transactions
Ledger
a book or computer file with separate sections for each account
financial map
a budget is like a blank, showing how the company expects to move form point a to point b over a specific period of time
not using its assets productively - a key managerial failing
a company with a low return on assets is probably blank
income statement
a financial report that shows an organizations profitability over a period of time - month quarter or year
assets
a firm's economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things
Current Liabilities
a firm's financial obligations to short-term creditors, which must be repaid within one year, while long term liabilities have longer repayment terms
great efficiency but also lost of sales due to insufficient stock levels
a high inventory turnover ratio may indicate blank but may also indicate the possibility of blank
low stockholder returns and may indicate a need for immediate managerial attention
a low return on equity means blank
financial straits
a low times interest earned ratio indicates that even a small decrease in earnings may lead a company into blank
a business is selling off existing long term assets and reducing its capacity for the future so a negative number in this category isn't always good
a positive number for investing activities means a business is blank
debt to total assets ratio
a ratio indicating how much of the firm is financed by debt and how much by owners' equity
Quick Ratio (Acid Test)
a stringent measure of liquidity that eliminates inventory
trial balance
a summary of the balances of all the accounts in the general ledger
double-entry bookkeeping
a system of recording and classifying business transactions that maintains the balance of the accounting equation
journal
a time-ordered list of account transactions
- assets - liabilities - owners equity
accountants are concerned with reporting an organizations blank (3)
private accountants
accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements
financial statements
accountants summarize the info for a firms business transactions in various blank - for a variety of stakeholders including managers, investors, creditors, and government agencies
four or five year college
accountants unlike bookkeepers usually complete course work beyond blank
examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements
accounting cycle steps
financial language
accounting is the blank that organizations use to record, measure, and interpret all of their financial transactions and records and is very important in business
- filing income taxes - obtaining credit form lenders - reporting results to the firms stockholders
accounting statements are used for what three tings
Forensic Accounting
accounting that is fit for legal review and involves analyzing financial documents in search of fraudulent entries of financial misconduct - function much like detectives
an allowance for bad debts that management doesn't expect to be paid back.
accounts receivable usually include an allowance for blank
net receivables
accounts receivables, less allowance for bad debts; represents the amount of money the business expects to receive from its customers
inappropriate accounting practices (banks failed to understand their health: many developed questionable lending practices and investments based on subprime mortgages made to individuals who had poor credit)
after 5 years of the Sarbanes Oxley act being passed, the world experienced a financial crisis in 2008 part of which was due to excessive risk taking and blank
liquidity
all asset accounts are listed in descending order of blank - that is how quickly each could be turned into cash
use the language of accounting
all business from small to large use blank to take their use of funds, measure profitability, and budget for future expenditures
assets liabilities or owners equity
all business transactions are classified as what three things
current assets
also called short term assets, are those that are used or converted into cash whiting the course of a colander year
second tier accounting firms that are much smaller than the big four
also, many public accountants work for one of the blank
certified public accountant
an individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records
budget
an internal financial plan that forecasts expenses and income over a set period of time
balance sheet assets to sales which are found in the income statement
asset utilization ratios retail to balance sheet blank which are found where
broken down into specific categories: cash equipment invents then on other side debts to suppliers loans and equity
assets liabilities and owners equity are blank by most organizations to provide more specified info about the transaction
retained earnings
at the end of each accounting period the dollar amounts in all the revenue accounts and expense accounts are moved into an account called blank - one of the owners equity accounts
- traditional format: placed the organizations assets of the left side and its liabilities and owners equity on the right side - vertical forma: with assets on top followed by liabilities and owners equity
balance sheets are often presented into different formats: (the second is the most new)
look at financial statements to determine a companies ability to meet current and future debt obligations if a loan or credit is granted
banks and other lends look at financial statements to determine ...
lower
bc some assets may have been financed with debt not contributed by the owners, the value of the owners equity is usually considerably blank than the total value of the firms assets
balance
because assets= liabilities plus owners equity - when ana records 325 on both sides of account the account increases the same on both sides and remains in blank
Contributed Capital
because each stock type issued by an organization represents a different claim on the organization, each must be represented by a separate owners equity account called blank
riskier than equity
because the use of debt carries an interest charge that must be paid regularly regardless of profitability, debt financing is much more blank
"Top-down" master budgets
begin at the upper management level and filter down to the individual department level (budget)
individuals and businesses
blank and blank can hire public accountants
revenues and expenses
blank increases owners equity accounts while blank decreases the account
long term or fixed assets
blank represent a commitment of organizational funds of at least one year.
- less training
book keeps generally require less blank than accountants
obtaining and recording the info that accountants require to analyze a firms financial position
bookkeepers are responsible for blank and blank the information that accountants require to analyze a firms financial position
ratio analysis
calculations that measure an organization's financial health
operating revenues
cash inflows in the form of payments from customers
expected operating expenses
cash outflows, such as wages materials costs and taxes
express officially an unbiased opinion regarding the accuracy of clients financial statements
certification gives a public accountant the right to blank
Association of Certified Fraud Examiners (ACFE)
certifies accounting professionals as certified fraud examiners
profit margin, return on assets, and return on equity
common profitability ratios include what three things
revenue and expense accounts during accounting period
companies record their operational activities in what two account during accounting period
higher returns
companies using their assets more productively have blank returns on assets than their less efficient counter parts
Owner's Equity
contains all the money that has ever been contributed to the company that never has to be paid back - funds can come from investors who have given money or assets to the company or it can come from past profitable operations
beginning inventory + interim purchases - ending inventory
cost of goods sold =
Curren ratio
current assets / current liabilities
debts(assets - equity)/total assets
debt to total assets formula
Liabilities
debts that firm owes to others
receivable turnover
demonstrates how quickly a firm is able to collect payments on its credit sales - no payments = no no profits
- begins cycle by gathering and examining source documents (checks, credit card receipts, sales, slips, and other related evidence concerning specific transactions)
describe examining source documents
- info from trial balance is also used to prepare the companys financial statements - CPA must attest or certify that the organization followed generally accepted accounting principles in preparing the financial statements - when these statements are completed the organizations books are closed and the accounting cycle begins anew for the next accounting period
describe financial statements as last step in accounting cycle
- transfers information from her journal into a ledger - price is known as posting - at the end of accounting period (usually yearly but occasionally quarterly or monthly) you prepare a trial balance - if upon totaling, trial balance doesn't balance, you or her accountant must look for mistakes but if trial balance is correct the accountant can prepare financial statements
describe post transactions
- records financial transactions in a journal - while most businesses keep a general journal in which all transactions are recorded some classify transactions into specialized journals for specific types of transaction accounts
describe recording transactions
trip wire or feedback loop
deviations between expected operating expenses and revenues serve as a blank or blank to launch more detailed financial analysis in an effort to pinpoint trouble spots and opportunities
sale of stock
during any period of time the owners equity account may change because the blank (or contributions withdrawals by owners), the net income or loss or the dividends paid
Owner's Equity
equals assets minus liabilities and reflects historical values
third
expenses is the blank category on an income statement
understand interpret and even develop the accounting system necessary to classify and analyze complex financial info
extra school years allow accountants to blank
performance
financial ratios are used to weigh and evaluate a firms blank
return on stockholders investments and overall quality of he firms management team
financial statements evaluate the blank
audited
financial statements that attest an accurate reflecting of the underlying financial condition of the firm are blank
excess of 50 percent
firms in verystable and or regulated indicts scubas electric utilities are able to carry debt ratios well in blank
has little inventory that is physical but instead downloads it
for Microsoft a high inventory turnover means
cost of goods sold
for most manufacturing and retail concerns, the next major item after revenues included in the income statement is blank
net income after taxes
for profitability ratios the numerator is always blank
income statement and balance sheet
for return on assets computation it requires data from both the blank and blank
it satisfies a performance obligation by transferring a promised good to service to a customer
generally accepted practice is that firms should book revenue when blank
operating income and earnings before interest and taxes
generally, accountants divide profits into individual sections such as blank and blank
ground up
generally, the larger and more rapidly growing an organization the greater the change it will build its master budget from blank
revenues - cost of goods sold required to generate revenues
gross income or profit equation
PCAOB
has the ability to file a disciplinary order against a firm or individual that either temporarily or permanently prohibits that firm or individual from practicing accounting
creditors need for safety
high liquid ratios may satisfy a credits need for blank
a short term lender examines a firms cash inflow to assess its ability to repay a loan quickly with cash generated from sales a longer term lender is more interested in the comp nays profitability and indebtedness to other lenders
how do banks and lenders determine a company's ability to meet current and future debt obligations? short term lender vs longer term
doesn't mean you can't use it
if a machine as a zero value on the firms balance sheet when it fully depreciates doesn't mean blank
previous two years income statement to permit comparison of performance form one period to another
like most companies, Microsoft, presents not only the current years results but also the blank
high turnover ratios imply that cash is flowing through an organization very quickly - situation that reduces need for the type of reserves measured by liquidity ratios
liquidity ratios are generally beset examined in conjunction with asset utilization bc why
efficiently
liquidity ratios that are too high may indicate the organization is not using its current assets blank
outsiders
managers also use accounting statements to report the business financial performance to blank
1- to aid in internal planning and control 2- for external purposes such as reporting to the internal revenue services, stock holders, creditors, customers, employees, and other interested parties
managers and owners use financial statements for what two things
inefficiency in their operations
managers can use asset utilization ratios to pinpoint blank
below 50 percent
managers of most firms tend to keep debt to asset levels below blank
forensic
many auditing firms are partly adding or expanding blank or fraud detection services
financial stamens
many business failures can be linked to ignorance of the information hidden in the blank
two three or even more
many corporations issue blank different classes of common and preferred stock each with different dividend payments and or voting rights
cooked books for
many forensic accountants root out evidence of blank for federal agencies like the federal bureau of investigation or the internal revenue services
self employed or members of large public accounting firms
many public accountants are either blank or members of blank
assets on hand
microsofts current ratio indicates that for every one dollar of current liabilities the firm has 2.35 of current blank on hand
diluted earnings per share
net income / number of shares outstanding (diluted)
Return on Equity
net income divide by owners equity also called return on investments ROI
earnings per share
net income or profit divided by the number of stock shares outstanding
they use their funds to meet their state objectives
nonbusiness organizations such as charities and governments also use accounting to demonstrate to donors and taxpayers how well they use their blank to meet their stated objectives
- donations from individuals or grants from governments and private foundations
nonbusiness organizations typically obtains revenues through blank
temporary investments, accounts receivable, and inventory
on the balance sheet: cash is followed by what things in order?
when a business should recognize revenue- during a projector after the project is completed?
one of the controversies in accounting has been when a business should what
times interest earned ratio
operating income divided by interest expenses
wages earned by employees but not yet paid and taxes owed to the government
other liabilities include blank - and these accounts are consolidated into an accrued expenses account
income earned by the organization and retained to finance continued growth
owners equity on a balance sheet includes the owners contributions to the organization along with blank earned by the organization and retained to blank continued growth and development
cash flow
perhaps management greatest single concern is blank
changes in top management
poor performance in financial statements results in blank
CPAS
private accountants can become blank
Certified Management Accountants (CMA)
private accountants who, after rigorous examination, are certified by the National Association of Accountants and who have some managerial responsibility
income statement
profit margin is based solely on the data obtained form the blank
debt utilization ratios
ratios that measure how much debt an organization is using relative to other sources of capital, such as owners' equity
asset utilization ratios
ratios that measure how well a firm uses its assets to generate each $1 of sales
Profitability Ratios
ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners' equity, and sales
liquidity ratio
ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt
relationship, comparison to its competitors, and its state goals
ratios themselves aren't very useful what matter is the blank of the calculate ratio to the previous years performance, blank (2)
Accounts Receivable
refers to money owed the company by its clients or customers who have promised to pay for the products at a later date
cash inflows and outflows
regardless of focus, the principle value of a budget lies in its breakdown of blank
accounts payable
represents amounts owed to suppliers for goods and services purchased with credit
statement of operations
represents future revenues from long term contracts signed to deliver services such as cloud storage
gross income or profit
revenues minus the cost of goods sold required to generate the revenues
general and administrative expenses
salaries of executive and their staff and the costs of owning and maintain the general office
Receivables Turnover
sales divided by accounts receivable
inventory turnover
sales divided by total inventory
research and development costs
scientific engineering and marketing personnel and the equipment and information used to design and build prototypes and samples
Financial Accounting Standards Board (FASB)
setting up the principles and standards of financial accounting and reporting in the private sector since 1973 - its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public - including: issuers, auditors and users of financial information
profit margin
show the over percentage of profits earned by the company
return on equity
shows how much income is generated by each one dollar the owners have invested
bottom up master budget
start at the department or project level and are combined at the chief executives office
return on equity ratio as one of their key performance yardsticks
stockholders are always concerned with how much money they will make on their investments and they frequently use blank as yardstick
trust
strong compliance to accounting principles create blank among stakeholders
annual report
summary of a firm's financial information, products, and growth plans for owners and potential investors
dividends per share
the actual cash received for each share owned
Cost of Goods Sold
the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies
historical collections experience and is diluted from the accounts receivable balance to present a more realistic view of the payments likely to be received in the future called net receivables
the bad debts adjustment is normally based on blank
owns or controls
the balance sheet indicates what eh organization blank or blank and the various sources of the funds used to pay for these assets such as bank debt or owners equity
accounting equation
the balance sheet takes its name from its reliance on the blank - assets MUST equal liabilities plus owners equity
closed out to the owners equity account
the basic accounting equation will not balance until the revenue and expense accounts balances have been moved or blank
- cash from (used for) operating activiites - cash from (used for) investing activities - cash from (used for) financial activities
the change in cash is explained through details in three categories for statement of cash flows such as
expenses
the costs incurred in the day to day operations of an organization
profits
the difference between what it costs to make and sell a product and what a customer pays for it
stock price
the earnings per share ratio is imprint bc yearly changes in earnings per hire in combination with other economy wide factors detmeurine a company's blank
one size does NOT fit all - manufacturing firms service providers and nonprofit organizations each use a different set of accounting principals or rules upon which the cpa has agreed
the fact that different organizations generate income in different ways suggests that when it comes to financial statements blank
funds
the faster a company grows the more blank the company for the future growth or in the case of both companies acquisitions of new technology created by smaller companies
Accounting Cycle
the four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements
the better the cost controls within the company and the higher the return on every dollar of revenue
the higher the profit margin the better the cost blank and the higher the blank
subtracting the firms expenses from its revenues
the income statement indicates the firms profitability or income (the bottom line) by subtracting blank
of the companys overall revenues and the costs incurred in generating those revenues
the income statement offers the clearest possible picture of the companys blank
1- how much did the firm make or lose? 2- who much is the firm presently worth based on historical values found on the balance sheet?
the income statement shows a copays profit or loss, while the balance sheet itemizes the value of its assets liabilities and owners equity. together the two statements provide the means of answering two critical questions:
managerial accounting
the internal use of accounting statements by managers in planning and directing the organization's activities
cash flow
the movement of money through an organization over a daily, weekly, monthly, or yearly basis
organization to organization
the number and type of expense accounts vary from blank to blank
- government agencies - stockholders and potential investors, lenders, suppliers, and employees
the primary external use of audited accounting information are blank
bc it eliminated inventory the least liquid current asset
the quick ratio or acid test is far more stringent of liquidity bc it blank
accounting
the recording, measurement, and interpretation of financial information
accounting equation
the relationship among assets, liabilities and owners equity is a fundamental concept in accounting and is known as the blank
net income
the resulting changes in the owners equity account is exactly equal to the blank
balance sheet
the second basic financial statement is the blank - a snapshot of an organizations financial position at a. given moment
signature of a certified public accountant
the single most important component of an annual report is the blank
next
the statement of cash flows takes the cash balance from ones years balance sheet and compares it with the blank while provide detail about how the firm used the cash
statement of cash flows
the third primary financial statement is called blank - which explains how the companys cash changed from beginning of the accounting period to the end - investors look at this who want more info about cash flowing into and out of the firm than is provided onto balance sheet in order to better understand the company's financial heath
revenue
the total amount of money received from the sale of goods or services, as well as from related business activities
net income
the total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings
- accounting equations - double entry bookkeeping system
these two concepts are the starting point for all currently accepted accounting principles
1: selling, general, and administrative expenses 2: research, development, and engineering expenses 3: interest expenses (the costs directly attributable to selling goods or searches are included in the costs of goods sold)
three common expense accounts listed on the income statement
income before interest and taxes/ interest
times interest earned
two separate accounts
to keep the accounting equations in balance, each business transaction must be recorded in blank
government bailed out some of the USAs largest banks and congress passed the Dodd frank act
to prevent a depression from the 2008 financial crisis what did the government do
liabilities or owners equity
total assets must be financed either through borrowing (blank) or through owner investment (blank)
posting
transferring information from journal into a ledger
result of transactions completed over a specified accounting period - accumulation of all financial transactions conducted by an organization since its founding
unlike the income statement, the balance sheet does not represent the result of blank. instead the balance sheet is by definition an accumulation of blank
fourth
usually net income is the blank written on the income statement
- counters - refrigerator display cases - flowers - decorations - goodwill = anas reputation for preparing and delivering beautiful floral arrangements on a timely bases
what are five assets for ants flowershop
- loan from the small business and money owed to flower suppliers and other creditors for items purchased
what are liability in anas flow shop
- profit and loss statement - operating statement
what are other names for the income statement
- study the financial statements in a firms annual report to determine whether the company meets its investment requirements and whether the returns form a given firm are likely to *compare favorably with other similar companies*
what are potential investors concerned with financial stamtents
large cash balance on balance sheet
what could be cause of a low total asset turnover
forensic accounting
what is a growing area for public accountants
if you have a BP credit card the purchase represents and account payable for you and an account receivable for the company.
what is an example of an accounts payable
assets= liabilities + owners equity
what is the accounting equation
5,000 + 4,000 - 5,500 = 3,500
what is the cost of goods sold: - if ana started the accounting period with an inventory of goods for which it paid $5,000. during that period, ana bought $4,000 worth of goods - at the end of the accounting period, anas inventory was worth $5,500 the cost of goods sold during the accounting period would be
revenues
what is typically listed first on the income statement
whats the bottom line? - where the bottom line shows the overall profits or loss of the company after taxes
what question is derived from the income statement
- income statement - balance sheet - statement of cash flows
what three things are the best known financial statements that are provided to stockholders and potential investors in a firms annual report as well as to tother relevant outsiders such as creditors government agencies and the internal revenue services
gross profit, earnings before interest and taxes, and net income
what three things are the results of calculations made from the revenues and expenses accounts - they are not actual accounts
when many accounting firms failed to abide by GAAP
what what the cause of government taking greater role in making rules, requirements, and policies for accounting firms and businesses through the *securities and exchange commissions and public company accounting oversight board*
decreases
when a corporation elects to pay dividends it blank the cash account (in the assets category on the balance sheet) as well as the capital count (in the owners equity part of the balance sheet)
master budgets
while most companies provide blank for the entire firm, many also prepare budgets for smaller segments of the organizations such as divisions, departments, product lines, or projects
so little inventory
why is Microsofts quick ratio almost the same as its Current ratio
because if the organization were to sell off all of its assets and pay off all of its liabilities any remaining funds would be owners equity
why would account listed on a balance sheet as owners equity differ drastically from company to company?
- controller - tax accountant - internal auditor
with titles such as blank(3) private accountants are deeply involved in many of the most imprint financial decisions of the organizations of which they work
to count how much it has sold and how may expenses have been incurred during a period of time
zeroing out the balances allows the company to do what
reasonable expectations for salary and other benefit requests
labor unions and employees use financial statements to establish blank
cash from operating activities
Calculated by combining the changes in the revenue, expense, current assets and current liability accounts - includes all the accounts on the balance sheet that relate to computing revenues and expenses for the accounting period
cash from financing activities
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
profit margin
Net Income/Sales
return on assets
Net Income/Total Assets
accrued expenses
Representing all unpaid financial obligations incurred by the organization
Total Asset Turnover
Sales/Total Assets
reduced 10k
if a manufacturer purchases a 100k machine expected to last 10 years - rather than writing the expense as 100k in the first year and no expense for that equipment over the next nine years - they can report deprecations expenses of 10k per year for the next ten years - because that better matches the cost of the machine to the years of the machine is used: each time this depreciating is written off as an expense, the book value of the machine is also reduce blank
she records 325 in liability or a debt to a supplier but at the same time she has to record the money as an asset in inventory
if ana busy 325 dollars worth of roses on credit from a creditor to fill a wedding order what does she have to do when she records this? (double entry bookkeeping)
10,000 - 3,500 = 6500
if ana had total revenues of 10,000 over the same period of time, and the cost of goods sold was 3500 what is the gross income or profit
likely paying off longer term debt or returning contributed capital to investors
if cash from financing activities is negative the company is blank
we can see that the company bought land, investments, equipment (inventory)
if the cash form investing activities is negative we can see that blank
making extra cash that it can use to invest in increase long term capacity or to pay off debt such as loans or bonds
if the cash from operating activities is a positive number then the business is making blank
selling expenses
include advertising and sales salaries
interest expenses
include the direct costs of borrowing money
depreciation
included in the general and administrative category is a special type of expense known as blank, the process of spreading the costs of long lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used
total asset turnover
indicates whether a company is using its assets productively
raw material. work in progress, finished goods ready for delivery
inventory may be held in the form of what three things on the balance sheet
per share data
investors may use blank to compare the performance of one company with another on an equal or per share basis, generally the more shares of stock a company issues the less income is amiable for each share
daily/weekly/monthly/ yearly
it is not unusual for an organization to prepare separate blank(4) budgets
inadequate cashflow
it is not unusual for highly successful and rapidly growing businesses to struggle to make payments to employees, suppliers, and lenders due to balnk
long term investments cut as plants and equipment and intangible assets such as corporate goodwill or reputation as well as patents and trademarks
items classified as fixed include blank
original cost less accumulated depreciation.
items on the balance sheet are listed. on the basis of their original blank rather than their present value
