accounting Flashcards
managerial vs. financial accounting
managerial (internal): fin info managers inside org use to evaluate and make decisions about current and future operations. shows how well marketing strats are working, plans future work in production/manufacturing
financial (external): external reports used by outsiders, ppl w/ interest in business but aren’t in company’s management. used by lenders, suppliers, investors, etc. to assess fin. strength of business
annual report
yearly doc describing firm’s financial status
- includes bal sheet, income statement, statement of cash flows
uses GAAP, so record/data all accounted similarly
provides users (shareholders/potential investors) w/ info about company’s operations and financial performance
accounting equation
assets = liabilities + owner’s equity
balance sheet
summarize firm’s financial position at specific point in time
reports assets, liabilities, owner’s equity
assets reported in liquidity
types of assets
current: can or will be converted to cash within next year (includes cash, marketable securities - temporary investments of excess cash that can be readily converted to cash), accounts receivable, inventory)
fixed: long term used by firms for 1+ year. used for production, wear over time and decrease in value (depreciation)
intangible: long term w/ no physical existence
types of liabilities
current: due within year of date of balance sheet. includes accounts payable, notes payable (short term loans from banks), accrued expenses (wages/taxes expenses), income tax payable (taxes owed), current portion of long term debt
long term: due 1+ year after date on bal sheet. ex: mortgage, bank loans
income statement
summarize firm’s revenues and expenses, shows total profit and loss over a period of time
revenues
$ amount of sales plus any income from interest, dividends, rents.
determined w/ gross sales: total $ amount of a company’s sales
net sales: amount left after deducting sales discounts, returns, allowances from gross sales
expenses
costs of generating revenue
types:
cost of goods sold: expense of buying/producing firm’s goods and services
gross profit: amount earned after paying to product buy before operation expenses
operating expenses: expense of running business not directly related to producing or buying its products
selling expenses: market/distributing products
general/administrative expenses: business; can’t be linked to cost of goods sold or sales
statement of cash flows
summary of money flowing in and out of firm; assess sources and uses of cash
divides cash flows into groups
operating activities: related to production of firm’s goods/services
investment activities: sales/purchase of fixed assets
financing activities: debt/equity financing
ratio analysis
calculate and interpret fin. ratios using data from firm’s financial statements
- shows relation between fin. data on percentage basis
- highlights potential problems
- important to firm’s present/prospective leaders
- can be classified by what they measure: liquidity, profitability, activity, debt
types of liquidity ratios
liquidity ratios: measure firm’s ability to pay its short term debts as they come due
current ratio: ratios of total current assets to total current liabilities
acid test ratios: current but excludes inventory
net working capital: measure firm’s overall liquidity
types of profitability ratios
profitability ratios: how well firm using resources to generate profit, how well its being managed
net profit margin: return on sales, measure percentage of each sales dollar remaining after all expenses have been deducted
return on equity: measure return that owners receive on their investment in firm
earnings per share: ratio of net profit to number of shares by common stock outstanding
types of activity ratios
measure how well firm uses its assets; reflects speed resources converted to cash or sales
inventory turnover ratio: measure speed inventory moves through the firm and is turned to sales. divide cost of goods sold by average inventory.
types of debt ratios
debt ratio: measure degree and effect of firm’s use of borrowed funds to finance its operations
debt to equity ratios: measure relation between amount of debt financing and amount of equity financing. divide total liabilities by owner’s equity
