AFM 132 - Chp 12: Accounting Flashcards
why is accounting the language of business
financial statements can tell the story of how a company is doing, providing a comprehensive view into their operations and performance
what’s Accounting?
involves the process of recording, summarizing, and analyzing financial transactions to report financial information to various decision makers
what are some common business activities that would be recorded?
buying supplies - include the money spent, value of supplies purchased
paying employees - payroll expense, cash paid to employees
obtaining a loan from the bank - money received, what is owed to the bank
selling a product - revenue earned, cash collected
what are the 3 steps to the accounting information system
inputs - “paper trail” (documentation) to support each transaction
processing - recording + categorizing the details from the inputs where AIS can provide a glimpse into specific totals
outputs - reports + statements created that summarize financial transactions in a meaningful way to various stakeholders
how has technology benefited the accounting world?
more efficiency, accurate and tiemly finanical records,
what’s the role of accountatns?
use their professional judgement and interpret he numbers while considering the qualitative factors impacting the business over time - analyzing, interpreting, and making recommendations to grow the company for the future
who are some internal statkeholders
marketing personnel - to set a price for a product through assessing costs
operations personnel - monitoring product costs
human resources personnel - manage various costs of employees
who are some external stakeholders
investors - to grow their wealth
analysts - make recommendations to investors on potential investment opportunities
lenders - want assurance that they can be repaid in a timely manner
government - CRA for tax purposes
what are some immediate tasks related to AFM when starting a business
set up for operations -set up bank accounts + signing authorities, tracking inventory, record keeping, designing a process to send and receive invoices
business planning - cash flow management, forecasting
tax compliance - sales tax, payroll tax, knowing tax
define a cash burn rate
assess how quickly they are burning through cash - calculated by taking cash _ dividing it by monthly operating expenses
define managerial accounting
preparing financial infor for decision-makers inside a company with a focus on optimizing business areas
define financial accounting
financial info prepared for disclosure to stakeholders outside of a company for their decision-making purposes
define private accountants
work in industry within a single company, government, or non-profit organization
define public accountants
provide professional services for a fee - involved in external audits to review if the financial statements are fairly presented and share an accurate story of a company’s position
what’s the relationship between financial statement and accounting standards
financial statements are prepared based on a set of professional accounting standards followed by a company
what’s the purpose of accounting standards
to ensure consistent reporting and disclosure of financial information - to enhance comparability and usefulness of the info provided to external stakeholders
what are the 2 most common GAAP followed?
IFRS or ASPE
IFRA vs ASPE
IFRS - publicly traded companies must use
ASPE - alternative option that is simpler to implement + more relevant/adaptable for private/non-public companies
what’s accounting framework for accounting standards
what info to present - consider the potential users + decision they will make based on the info
the qualitative characteristics of the info presented - relevance + faithful representation, comparability, verifiability, timeliness, understandability
quantifying financial statement elements - recognition, measurement
what’s the point of a balance sheet
shows what a company owns and owes at a specific point in time - provides a snapshot of the business at a given moment
what’s the purpose of a income statement
shows earnings and expenses over a specific period of time - shows the company’s profitability
what’s the purpose of a cash flow statement
shows cash inflows and outflows over a specific period of time
why does a balance sheet balance?
balances bc of double-entry bookkeeping
define an asset
owned economic resources that have value - generally recorded if controlled by a company as a result of a past transaction and result in future benefit to the company - usually listed by liquidity on the balance sheet
define current assets, long-term assets, intangible asset
current asset: can convert to cash within a year
long-term assets - used in operations for more than 1 year and are generally owned to maintain/grow operations and generate revenue
intangible assets - not physical in nature, have value that should be recognized
define liabilities, current liabilities, long-term liabilities
liabilities: amounts that a company owes to others - generally recorded if they are a present debt obligation of the company, as a result of a past transaction, and result in a future cost to the company
current liabilities: obligations due within 1 year
long-term liabilities: obligations due beyond 1 year
define owners equity, common stock, retained earnings, contributed surplus
owners equity: represents what has been invested by owners plus the accumulated earnings that remain in the company
common stock: what’s invested by shareholders
retained earnings: accumulated earnings from operations retained and not paid out to shareholders
contributed surplus: earnings generated outside of operations
define revenue, COGS, expenses
revenue: represents the money received for goods/services sold
COGS: represents the direct costs of making a product
expenses: the cost involved in running the company, and are resources used with no residual economic value to recognize
calculate gross margin
revenue - COGS
what are some common expenses for a business?
selling expenses, general expenses, administration expenses
define operating activities, investing activities, financing activities
operating: cash transaction in day-to-day operations
investing: cash used to buy long-term assets
financing: cash used to finance the business with debt and equity
what’s the point of ratio analysis
used to assess the performance and financial condition of a company
help to examine the relationships between various accounts and activities - help to identify strengths + weaknesses in a company
how to compare results of ratios for meaningful info?
comparing to prior year figures/competitors/industry averages
define liquidity ratios and importance
evaluate how fast assets can be converted into cash (with emphasis on an ability to pay short term debts that may come due) - liquidity ratios help gauge whether a company has immediate resources to pay short-term obligations
what’s the current ratio?
current ratio = current assets/current liabilities
compares current assets to current liabilities
what does it mean for a current ratio of greater than 1, and what’s the general rule of thumb
when greater than 1, a company is financially secure + can easily cover their current liabilities - lenders feel safe if it’s high bc they can be paid back right away with current assets on hand
general rule of thumb is 2:1 (2 assets for every 1 liability)
what’s the quick (acid-test) ratio? what’s the ideal ratio
quick ratio asset test = (Current assets - inventory - prepaid expenses)/(current liability)
measures immediate short-term liquidity
the ideal ratio is 1:1 as it demonstrates that a company can completely pay off its current liabilities without having to sell its inventory
what’s a leverage ratio
evaluates how much a company uses borrowed funds in their operations compared to investments made by owners - the more debt a company has, the more “levered” they are
what’s the debt to asset ratio
debt to asset ratio: (total liabilities)/(total assets)
highlights the percentage of assets financed by debt
what’s the debt to equity ratio
debt to equity ratio = (total liabilities)/(owners’ equity)
anything over 1 means that the company has more debt than equity - not unusual for companies to manage some level of debt to increase/expand their operations
some high debt levels may be more acceptable/common in some industries that others
what’s the profitability ratio
evaluate how effectively a company uses its resources to achieve profits - used to assess management performance
what’s earnings per share
EPS = net income/ average number of common shares
considers how much net income is earned per share
growing EPS = sign that a company can continue to grow
define a return on sales (operating profit margin)?
what does it mean if a return on sales if increasing over time?
return on sales = net income/net sales
examines operating performance - indirectly looks at how well costs/expenses are managed - if return on sales increases over time, it signals that a company is managing its costs effectively and retaining more earnings
define a return on equity? what does a increasing growth in ROE mean?
return on equity = net income/average owners’ equity
measure profitability of an owner’s investment by showing how much is earned for each dollar invested
year over year growth in ROE, shows that investors’ funds are being used effectively to grow the business
define activity ratios
evaluated how effectively assets are managed to generate returns
