Chapter 11 Flashcards
Define accounting
A comprehensive information system in analyzing, collecting, and communicating financial information. Measures business performance, translating them into info for management decisions
Bookkeeping
Process of keeping records of transactions such as taxes paid, incomes and expenses.
Accounting information system (AIS)
Ensuring that financial information is reliable and consistent, so that they can be used in accounting statements and management reports.
Controller (Chief accounting officer)
Ensures the AIS provides the correct reports for planning, decision-making, and other management activities
Which group does the financial accounting system serve?
External groups, such as consumers, unions, stockholders, and government agencies
Which group does the managerial accounting serve?
Internal users, such as managers, employees, salespeople, and purchasing agents
Which three accounting organizations in Canada help to certify accounting professionals? (united to make which group?)
Chartered accountant (CA)
Certified management accountant (CMA)
Certified general accountant (CGA)
(Chartered professional accountant (CPA))
What do chartered accountants (CA) do?
Half work in CA firms, half work in government/industry.
Certify the validity of a company’s financial information for external parties (stakeholders, lenders, etc)
What do certified general accountant (CGA) do?
Most work in private firms, few working CGA/CA firms.
Also on external financial reporting, emphasizing the use of computers.
What do certified management accountant (CMA) do?
Work in all types of organizations.
Combines and analyze both financial and non-financial info to help companies stay competitive. Bring accountants into the planning and overall strategy process of the firm.
Audit
One of the services accountants provide
Making sure a company’s AIS is following certain accounting rules.
Generally accepted accounting principles (GAAP)
Standard set of accounting rules that each nation had its own version of
International financial reporting standards (IFRS)
To accommodate the globalizing economy, more than 140 countries adopted this “global GAAP”
Forensic accountants
“detective accountants”, assist in the investigation of business and financial issues that may conflict to a court of law.
Tax services
One of the services accountants provide
Preparing tax returns and assisting with tax planning
Management consulting services
One of the services accountants provide
Range from personal financial planning to planning corporate mergers
Private accountants
Salaried employees that deal with day-to-day company accounting needs.
Large businesses require several for specialized areas, while smaller firms can have one deal with all of the work
What is the accounting equation
Assets = Liabilities +Owners’ equity
Asset & Liability
Asset: any economic resource that is expected to benefit a firm/individual that owns it
Liability: debt that the firm owes to an outside party
Owner’s equity
Amount of money that owner would receive if they sold all the company’s assets and paid of its liabilities
Two sources that make up Owner’s equity
- Amount the owner originally invested
2. Profits earned by and reinvested in the company
What are the three important financial statements?
Balance sheets
Income statements
Statements of cash flows
Balance sheets
Supplies detailed info about assets, liabilities, and owners’ equity
Current assets (liquidity)
Cash, and assets that can be converted into cash within a year. (The ease of converting assets into cash)
Fixed assets
Assets of long term use or value. i.e., land, buildings, and equipment.
Depreciation
Determining an asset’s useful life in years, dividing its worth by that many years, and then subtracting the resulting amount each year
Intangible assets
Cost of obtaining rights or privileges such as patents, trademarks, copyrights, and 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
Long-term liabilities
Debts that are not due for at least one year
Retained earning
Profits, which could have been distributed to shareholders, are kept instead for the use by the company
Income statement
Describes revenues and expenses in a way that it results in a figure showing the firm’s annual profit or loss
(three major categories: revenues, cost of goods sold, and operating expenses)
Revenues & Revenue recognition
Funds that flow into a business from the sale of goods or services
Formal recording and reporting of revenues in financial statements
Cost of goods sold
Costs of obtaining materials to make the products sold during the year
Calculating gross profit (or gross margin)
Revenues - cost of goods sold
Operating expenses
Resources that must flow out of a company for it to earn revenues
- Selling expenses
2. General and administrative expenses
- activities related to selling the firm’s goods or services (i.e., salaries for the sales force, delivery costs, etc)
- expenses related to the general management of the company, such as management salaries, insurance, etc.
Operating income (Net income)
Income before tax, calculated by comparing gross profit against operating expenses (Operating income-income taxes)
Statement of cash flows
Describes a company’s yearly cash receipts and cash payments
Three cash flow activities
- Cash flow from operations
- Cash flow from investing
- Cash flow from financing
Budget
Detailed report on estimated receipts and expenditures for a future period, usually a year. Only shared within the company, carrying an “internal financial statement” title.
