BUSINESS CHAPTER 17 Flashcards
accounting cycle
a six-step procedure that results in the preparation and analysis of the major financial statements
accounting
the record, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions
who makes use of a firm’s accounting information
outside parties- employees, owners, creditors, unions, inventors, and the government
what do bookkeepers do
divide the firm’s transactions into meaningful categories and post them into a record book or computer program called a journal
Bookkeeping
the recording of business transactions
double-entry bookkeeping
the practice of writing every business transaction in two places; done so they can check one list of transactions against the other for accuracy
ledger
a specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place
trial balance
a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced
how is technology used in accounting
-computerized accounting programs post information instantly and from remote locations
-accounting software, such as Intuit’s QuickBooks, address the specific needs of small businesses
financial statements
a summary of all the transactions that have occurred over a particular period
key financial statements of businesses are
-balance sheet
-income statement
-statement of cash flow
fundamental accounting equation
the basis for the balance sheet
assets=liabilites+owners equity
-the equation must always be balanced
balance sheet
financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts; assets, liabilities, and owner’s equity
assets
economic resources (things of value) owned by a firm; items can be tangible or intangible
liquidity
the ease with which an asset can be converted into cash
what are the 3 categories of assets
-current assets
-fixed assets
-intangible assets
current assets
items that can or will be converted into cash within one year
fixed assets
assets that are relatively permanent, such as land, buildings, and equipment
intangible assets
long-term assets (patents & copyrights) that have no physical form but do have value
liabilities
what the business owes to others (debts)
accounts payable
current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid
notes payable
short-term or long-term liabilities that a business promises to pay by a paid-back
bonds payable
long-term liabilities that represent money lent to the firm that must be paid back
owner’s equity
the amount of the business that belongs to the owners minus any liabilities owed by the business
retained earnings
the accumulated earnings from a firm’s profitable operations that were reinvested in the business and not paid out to stockholders in dividends
income statement
the financial statement that shows a firm’s profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss
net income / net loss
revenue left over after all costs and expenses; including taxes, are paid
formula for income statement
revenue-costs of goods sold-gross profit-operating expenses= net income before taxes
- taxes= net income or loss
revenue
the monetary value a firm received for goods sold, services rendered, or other payments
cost of goods sold (or manufactured)
a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale
gross profit (gross margin)
how much a firm earned by buying (or making) and selling merchandise
operating expenses
costs involved in operating a business, such as rent, utilities, and salaries
depreciation
the systematic write-off of the cost of a tangible asset over its estimated useful life
statement of cash flows
financial statement that reports cash receipts and disbursements related to a firm’s three major actives
three major activities of a firm
- operations
- investments
-financing
cash flow
the difference between cash coming in and cash going out of a business
ratio analysis
the assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statement
key financial ratios
- liquidity ratios
-leverage (debt) ratios
-profitability (performance) ratios
-activity ratios
liquidity ratios
measure a firm’s ability to turn assets into cash to pay its short-term debts
liquidity ratios key ratios
-current ratio
-acid-test ratio
where is the information about liquidity ratios found
on the firm’s balance sheet
leverage (debt) ratios
measure the degree to which a firm relies on borrowed funds in its operations
key rations (leverage ratios)
-debt to owner’s equity ratio
profitability ratios
- measure how effectively a firm’s managers are using the firm’s various resources to achieve profits
key ratios (profitability ratios)
- earnings per share (EPS)
- return on sales
- return on equity
activity ratios
measure how effectively management is turning over inventory
key ratios (activity ratios)
inventory turnover ratio
financial accounting
accounting information and analyses prepared for people outside the organization
outside users are interested in what questions? (financial accounting)
-is the organization profitable?
-is it able to pay its bills?
-how much debt does it owe?
annual report
a yearly statement of the financial condition, progress, and expectations of an organization
private accountant
an accountant who works for a single firm, government agency, or nonprofit organization
public account
An accountant who provides accounting services to individuals or businesses on a fee basis.
Certified public accountant (CPA)
An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA).
Managerial accounting
Accounting used to provide information and analyses to managers within the organization to assist them in decision-making.
Managerial accounting is involved with:
-costs of production
-costs of marketing
-preparation and control of budgets
-minimizing tax liabilities
Auditing
The job of reviewing and evaluating the information used to prepare a company’s financial statements.
Independent audit
An evaluation and unbiased opinion about the accuracy of a company’s financial statements.
Tax accountants
An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.
Government and not-for-profit accounting
Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.
what is the difference between a bookkeeper and an accountant?
Bookkeeper’s role is to record transactions and keep you financially organized
Accountants provide consultation, analysis, and are more qualified to advise on tax matters.
What’s the purpose of accounting journals and ledgers?
Accounting journals record the original transaction documents
Ledgers categorize those transactions
Why does the bookkeeper prepare a trial balance?
to ensure the figures are correct and balanced
what are the key financial statements of a business?
- balance sheet
- income statment
- statement of cash flow
What is owner’s equity?
Owner’s equity= assets-liabilies
