Accounting Basics Flashcards
What are four fundamental characteristics of accounting?
Quantitative: numbers
Financial: Money
Useful: practical, not theoretical
Decisions : Use the past to change the future.
How old is accounting?
7,000 year old clay tokens inventorying possessions have been found.
What are the four kinds of accounting?
1 Bookkeeping 2 Financial accounting, summaries for outsiders 3 Managerial accounting for insiders 4 Tax accounting
Define bookkeeping
Bookkeeping is the preservation of a systematic, quantitative record of an activity.
What is financial accounting?
Reporting results to people outside of the business or organization. Summaries for outsiders.
What are the fundamental reports give to outsiders by a company to raise money from strangers?
Balance sheet and income statement
What is managerial accounting?
Detailed data for use by insiders on a daily basis. Often confidential. It is data to evaluate different parts of the company..
How can accounting be a competitive tool?
Good data allows more informed marketing, better pricing, budgeting, performance evaluation.
How many sets of books do companies keep?
Three
- Financial
- Managerial
- Tax reporting
What is a quick way to define bookkeeping?
Organizing raw data
Who are the key users of financial accounting?
Lenders and investors
How do strangers gain confidence to lone money to other strangers?
Through studying financial accounting reports
What are you buying when you are an investor?
You are buying the future of the company, based on an analysis of the past records to determine potential.
What do lenders want to know?
Will the loan be repaid? What is: Current income Existing obligations Existing assets
What do investors want to know?
Is the business profitable now?
What is the potential for the future?
Who else besides lenders and investors use financial data?
Suppliers Customers Employees Competitors Government agencies Politicians The Press John Klauder
What is a balance sheet?
A listing of an organizations assets and liabilities
What are assets?
Economic resources
What are liabilities?
Economic obligations
What is income statement?
How much money did you make?
What is statement of cash flow?
Say it slowly
What is the accounting equation?
Assets = Liabilities + Equity
In the accounting equation, what do the liabilities and equity represent?
They represent where you got the money to buy assets. Was it borrowed (a liability) or paid for (from equity)?
What is an asset?
Resources, either owned or controlled by a company that will likely provide future benefit.
What are liabilities?
Liabilities are obligations that may require sacrifice of future economic benefit in the form of transferring assets or providing services.
What is owners equity?
Owners Equity is the amount the owners originally invested in the business plus how much profit they have left in the business; ownership interest in the company’s assets.
What are other names for owners’ equity?
Paid in Capital
= Capital Stock
= Capital Contributions
Retained Earnings
What are retained earnings?
Profits kept in business to used to buy assets.
What are the limitations of the balance sheet?
Often report original costs, not current value.
Some economic assets are not reported in balance sheet.
Intangible Assets: Co. Name & Logo, Loyal customers
Are intangible assets recorded well on a balance sheet?
NO
Is the book value of a company equal to the market value of a company?
Not necessarily
Explain balance sheets and income statements in terms of time.
A balance sheet describes a point in time and an income statement describes a period in time.
What two items does an income statement list?
Revenues and Expenses
What is the income statement equation?
Revenues - expenses = income
What are revenues?
Amount of assets created from the sale of goods or services.
What are expenses?
Amount of assets consumed in generating revenues; caused when liabilities are created in generating revenues.
What is net income?
Overall measure of a company’s economic performance during a period; the difference between revenues and expenses for that period.
What is earnings per share (EPS)?
Net income
divided by
Outstanding number of shares of stock
What is the most common way of valuing company?
Earnings per share (EPS)
What is another term for net income?
Income from continuing operations
What are the top and bottom lines?
Top line is sales on an income statement
Bottom line is net income on an income statement
What are the three categories in a statement of cash flows?
Operating
Investing
Financing
What is a cash cow?
A company that can pay all investing costs needed and still have cash left over.
What is most important number in Statement of Cash Flows?
Net cash provided by operating activities
top line
What does financial accounting focus on?
Providing information to people outside the company.
Who is the primary audience for financial accounting?
lenders and investors
What are the three reports in financial accounting?
balance sheet
income statement
statement of cash flows
What are the three kinds of cash flows?
operating activities
investing activities
financing activities
What is managerial accounting about?
communicating financial information to people inside the company
In managerial accounting what are the two basic kinds of costs?
Direct
(materials, labor)
Overhead
(building, taxes etc.)
What is a benefit of break even analysis?
Tempers the optimism of entrepreneurs
Why Budget?
To identify and solve problems in advance
What are benefits of cash budget?
- Advance arrangements
- Realistic targets
- Hope
- Identify and solve problems in advance
What do you need to be careful of in performance evaluation?
What you measure
What must you remember in performance evaluation?
You get exactly what you measure.
What is a balanced scorecard?
A way of measuring all of your internal business details.
What is the importance of a mission statement?
It establishes what is important to us.
What do mission statements show?
Where the accounting measures should be pointing to.
What is average tax rate?
The percentage of tax you pay on your total income.
What is marginal tax rate?
The percentage of tax you will pay on the next dollar you make.
Why is some income not taxed.
All systems recognize that there is a fixed cost of living which should not be taxed.
Why is a sales tax regressive?
The lower your income, the higher your tax spending.
What are tax deductions?
Expenditures that the government favors and encourages.
What are personal and business deductions?
Personal = charity, IRA, mortgage interest
Business = legitimate expenses
How are tax deductions useful?
They reduce taxable income.
What is difference between tax deduction and tax credit?
Tax credit results in lower tax. It is deducted from total tax. Tax deduction is deducted from total taxable income.
What are kinds of income?
Ordinary income
Capital gains income
What are rationales for taxing capital gains at a lower rate?
Governments want to encourage investment
Taxes have already been paid on the money invested.
What is a tax shelter?
A structure so income can be classified as capital gains income.
What is the objective in tax accounting?
Follow the rules to comply with the law.
