Chapter 13: Management of Financial Resources Flashcards
7 Groups of Users of Financial Statements
- Owners
- Boards of directors
- Managers
- Creditors
- Employees
- Governmental agencies
- Financial analysts
Auditing
An area of accounting concerned with an independent review of accounting records. An audit involves examination of records that support financial reports and formulation of an opinion regarding the fairness and reliability of these reports.
Cost Accounting
Involves the determination and control of cost. It focuses on assembling and interpreting cost data for use by management in controlling current operations and planning for the future.
Financial Accounting
Concerned with the reporting of transactions for an organization and the periodic preparation of various reports from these records.
Managerial Accounting
Uses historical and estimated financial data to assist management in daily operations and in planning future operations.
Business Entity Concept
Assumes that a business enterprise is separate from the person or persons who supply its assets, and the financial records of each are distinct. Without this distinction, determining the organization’s true performance and current status would be impossible.
The Fundamental Equation
Assets = Liabilities + Owner’s Equity. This is the fundamental accounting equation. For accounting records to be in balance, each increase in assets must be accompanied by a corresponding decrease in another asset or an increase in liabilities or owner’s equity.
Going-Concern Concept
Implies that the value of a company’s assets is its ability to generate revenue rather than the value the assets would bring in liquidation.
Money as a Unit of Measure
Money is the basis for business transactions and is the unit of measure commonly referred to as revenues. To lend uniformity to financial data, all business transactions are recorded as dollar amounts, Using this concept, only information that can be stated in monetary terms is included on a company’s financial statement.
Cost Principle
Involves recording transactions or valuing assets in terms of dollars at the time of the transaction. Cost is the amount measured in dollars expended for goods or services.
Cash Basis of Accounting
Recognizes a transaction at the time of cash inflow or outflow.
The Accrual Basis
Used in most organizations, recognizes revenues when earned (regardless of when the actual cash is received) and expenses when incurred (regardless of when cash is dispersed).
Matching Revenues and Expenses
The matching concept involves matching revenues with all applicable expenses during the accounting period in which they occur. For example, a restaurant owner may purchase food in one accounting period and sell it in the following period. If the matching concept is not used, the cost of the food would be recorded in the accounting period prior to when the sale was recorded, thereby overstating cost in the first period and profit in the next. This matching concept is the basis for the accrual basis of accounting.
Depreciation
Depreciation, an aspect of accrual accounting, is a systematic means by which costs associated with the acquisition and installation of a fixed asset are allocated over the estimated useful life of the asset. Because some assets frequently decline in value faster during the first few years, accelerated depreciation methods may be used, which give larger amounts of depreciation in the early years and less amounts in the later years.
Adequate Disclosure
Financial statements and their accompanying footnotes or other explanatory materials should contain full information on all data believed essential to a reader’s understanding of the financial statement. Such disclosures might include accounting methods used, changes in accounting methods, and any unusual or nonrecurring issues pertinent to accurate interpretation of the financial statement.
Consistency Principle
The consistency principle states that once an organization chooses an accounting method, it should be used from one period to another to make financial data comparable. Without consistent methods, financial statements could be interpreted incorrectly.
Materiality Principle
The materiality principle means that events or information must be accounted for if they “make a difference” to the user of financial statements. Generally, an item is considered as material if its inclusion or omission would change or influence the judgment of a reasonable person.
Conservatism
Conservatism refers to the concept of moderation in recording transactions and assigning values. Historically, accountants have tended to be conservative, favoring the method or procedure that yielded the lesser amount of net income or of asset value.
Balance Sheet
Statement of assets, liabilities or debts, and capital or owner’s equity at a given time or at the end of the accounting period. Considered a static statement because it presents the financial position at a specific date or time.
Income Statement
Financial report that presents the net income or profit of an organization for the accounting period. Considered a flow or dynamic statement because operating results over time are presented.
Assets
Resources of a company. Categorized as current or fixed.
Liabilities
Debts of a company. Categorized as current and long term.
Uniform Systems of Accounts
Is standard methods of accounting and presenting financial statements. The uniform systems of accounts within a particular industry provide for the uniform classification, organization, and presentation or revenues, expenses, assets, liabilities, and equity. They include a standardized format for financial statements, which permits comparability of financial data within an industry.
Current Assets
Include cash and all assets that will be converted into cash in a short period of time, generally 1 year. Other current assets include accounts receivable, inventory, prepaid expenses, and entrance fees receivable.
Fixed Assets
Assets of a permanent nature, most of which are acquired to generate revenues for the business. Fixed assets are not intended for sale and include land, buildings, furniture, fixtures, and equipment, in addition to small equipment such as china, glassware, and silver.
Current Liabilities
Represent those that must be paid within a period of 1 year, including such items as accounts payable for merchandise, accrued expenses, and annual mortgage payment.
Accrued Expenses
Are due but not paid at the end of the accounting period, such as salaries, wages, and interest.
Fixed or Long Term Liabilities
Obligations that will not be paid within the current year. An example of a long-term liability is a mortgage for building and land; annual mortgage payments due during the current year are current liabilities and reduce the long-term mortgage liability.
Owner’s Equity
Money value of a company in excess of its debts that is held by the owners. This section of the balance sheet represents that portion of the business that is the ownership interest, along with earnings retained i the business from operations.
