Ch11 Flashcards
accounting
comprehensive system for collecting, analyzing, and communicating financial information
bookkeeping
recording accounting transactions
accounting information system (AIS)
organized procedure for identifying, measuring, recording, and retaining financial information so it can be used in accounting statements and management reports
who uses accounting informatioN?
business managers – set goals and develop plans
employees and unions – to get paid and to plan for/receive benefits (retirement, health care, etc)
investors – to estimate return to stockholders, company’s growth prospects
tax authorities – to plan for tax inflows and ensure payments are made on time
government regulatory agencies – to fulfill duties )ensurepotential investors have valid info)
controller
person who manages all of the firm’s accounting activities
financial accounting system
process whereby interested groups outside of the company (such as stockholders, unions, etc) are kept informed about the financial condition of the firm
managerial accounting
internal procedures that allow managers to spot problems and help them plan and make decisions
three types professional accounting organizations in canada
Chartered Accountants, Certified Management Accountants, and Certified General Accountants
Chartered Professional Accountant
designation used to unify the accounting profession in Canada
chartered accountant
person who has the experience and education requirements (university degree and an educational program) and has passed a licensing examination
- acts as an outside accountant for other firms or for individuals
- typically provide audit, tax, and management services
certified general accountant
individual who has completed an education program and passed a national exam
- works in private industry or a CGA firm
- focus on external financial reporting
certified management accountant
designation given by the society of management accountants of canada
- individual must complete a university degree, pass a two-part national exam, and complete a strategic leadership program
- focus on strategic management and resource deployment and planning overall strategy for the firm
audit
accountant/s examination of a company’s financial records to determine if it used proper procedure to prepare its financial reports
generally accepted accounting principles (gaap)
standard rules and methods used by accountants in preparing financial reports
International Financial Reporting Standards (ifrs)
global gaap created by International Accounting Standards Boards
forensic accountant
accountants who track down hidden fnds in business firms
management consulting services
- range from personal financial planning to corporate financial planning
- specialized accounting services to help managers resolve problems in finance, production scheduling, etc
accounting cycle
- analyze transaction documents
- record transactions to journal
- transfer entries from journal to a ledger
- do a trial balance
- prepare financial statements
- analyze financial statements
private accountant
accountant hired as a salaried employee to deal with company’s day-to-day accounting needs
accounting equation
assets = liabilities + owners’ equity
- formula used by accountants to balance data for firm’s financial transactions
asset
anything of economic value owned by a firm or individual
liability
any debt owed by a firm or individual to others
owners’ equity
any positive difference btwn a firm’s assets and its liabilities (what would remain for a firm’s owners if the company were liquidated, all assets sold, and all its debts were paid)
double-entry accounting systems
bookkeeping system that requires every transaction to be entered in two ways – how it affects assets and how it affects liabilities and owners’ equity – so that the accounting equation is always in balance
financial statements
any of several types of broad reports regarding a company’s financial status (ex. balance sheets, income statements, and/or statements of cash flow)
balance sheet
type of financial statement that summarizes a firm’s financial position on a particular date in terms of its assets, liabilities, and owners’ equity
three types of assets
current, fixed, and intangible
current assets
cash and other assets that can be converted to cash within a year (ex cash, merchandise inventory, prepaid expenses)
liquidity
the ease and speed with which an asset can be converted to cash (cash is perfectly liquid)
non-liquid assets
accounts receivable, merchandise inventory, and prepaid expenses
accounts receivable
amounts due to the firm from customers who have purchased goods or services on credit
merchandise inventory
cost of merchandise that has been acquired for sale to customers but it still on hand
prepaid expenses
supplies on hand and rent paid for the period to come
fixed assets
assets that have long-term use or value to the firm (ex land, buildings, machinery)
depreciation
distributing the cost of a major asset over the years in which it produces revenues – calculated each year by subtracting the asset’s original value divided by the number of years in its productive life
intangible assets
non-physical assets that have economic value but whose precise value is difficult to calculate (such as patents, trademarks, copyrights, franchise fees)
goodwill
amount paid for an existing business beyond the value of its other assets
current liabilities
debts that must be paid within one year (include accounts payable)
accounts payable
amounts due from the firm to its suppliers for goods and/or services purchased on credit
long-term liabilities
debts that are not due for at least one year (normally borrowed funds on which company must pay interest)
paid-in capital
additional money invested in firm by the owners (owners’ equity)
three parts of owners’ equity
common stock, paid-in capital, and retained earnings
retained earnings
company’s net profits less any dividend payments to shareholders
income statement (profit-and-loss statement)
type of financial statement that describes a firm’s revenues and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period
revenue
money received by a firm as a result of selling a good or service or from other sources such as interest, rent, and licensing fees
revenue recognition
formal recording and reporting of revenues in financial statements
matching principle
expenses should be matched with revenues to determine net income for an accounting period
cost of goods sold
expenses directly involved in the producing or selling of a good or service during a given time
gross profit (gross margin)
firm’s revenues minus its cost of goods sold
operating expenses
costs incurred by a firm other than those included in cost of goods sold (ex. salaries, insurance, maintenance costs, etc)
operating income
compares gross profit from business operations against operating expenses
net income (net profit)
firm’s gross profit minus operating expenses and income taxes
statement of cash flow
financial statement that describes a firm’s generation and use of cash during a given period
- shows the effects on cash from 3 types of business activity:
- cash flow from operations (transactions involved in buying and selling goods/services)
- cash flow from investing (cash used in or provided by investing or buying/selling property and equipment)
- cash flow from financing (reports net cash from all financing activities – borrowing or issuing stock, as well as outflows for payment of dividends and repayment of borrowed money)
budget
detailed financial plan for estimated receipts and expenses for a period of time in the future, usually one year
solvency ratios
ratios that estimate the financial risk in a company
short-term solvency ratios
financial ratio for measuring a company’s ability to pay immediate debts
current ratio
financial ratio for measuring company’s ability to pay current debts out of current assets (current assets divided by current liabilities)
long-term solvency
calculated by dividing debt (total liabilities) by owners; equity
debt-to-equity ratio
form of debt ratio calculated as total liabilities divided by owners’ equity
leverage
using borrowed funds to make purchases, thus increasing the user’s purchasing power, potential rate of return, and risk of loss
profitability ratio
measure of a firm’s overall financial performance in terms of its likely profits
return on equity
form of profitability ratio calculated as net income divided by total owners’ equity (net income earned for each dollar invested)
return on sales
ratio calculated by dividing net income by sales revenue (how much profit for each dollar of sales revenue)
earnings per share
form of profitability ratio calculated as net income divided by the number of common shares outstanding
activity ratio
measure of how efficiently a firm uses its resources
inventory turnover ratio
activity ratio that measures the average number of times inventory is sold and restocked during the year
