Chapter 14 Flashcards
Financial Information
central to every organization; essential for decision-making
Accounting
the process of collecting, recording classifying, summarizing, reporting, and analyzing financial activities
Internal Reports
used within the organization
Managerial Accounting (Internal)
provides financial information that managers inside the organization use to evaluate and make decisions about current or future operations
Sales Reports (Internal)
show how well marketing strategies are working as well as the # of units sold during a specific time period
Production Costs Reports (Internal)
can help departments track and control costs, as a well as zero in on the amount of labor needed
External Reports
used outside of the organization
Financial Accounting (External)
focuses on preparing external financial reports that are used by outsiders
Generally Accepted Accounting Principles (GAAP)
principles used by accountants to ensure accuracy and consistency in the way financial information reported
Financial Accounting Standards Board (FASB)
a private organization that is responsible for establishing financial accounting standards used in the US
IASB
International Accounting Standards Board
IFRS
International Financial Reporting Standards
MOU
Memorandum of Understanding
Annual Report
a yearly document that describes a firm’s financial status; includes balance sheet, income statement, and statement of cash flow
Public Accountant
independent accounts who serve organizations and individuals on a fee basis
Auditing
process of reviewing the records used to prepare financial statements
Auditor’s Opinion
indicates whether the statements have been prepared in accordance with accepted accounting rules; important to annual reports
CPA
Certified Public Accountants; the only ones allowed to issue an auditor’s opinion; must be certified through AICPA
Private Accountants
accountants employed to serve one particular organization
CMA
Certified Management Accountant; only need to pass an exam
Sarbanes-Oxley Act
2002, clarifies auditor-independence issues, places increased accountability on a company’s senior executives and management, strengthens disclosure of insider’s transactions, and prohibits loans to executives
Public Company Accounting Oversight Board (PCAOB)
independent 5-member board that has the authority to set and amend auditing, quality control, ethics, independence, and other standards for audit reports
Accountants
develop and manage financial systems and help plan the firm’s financial strategy
Assets
things of value owned by a firm; Liabilities + Owner’s Equity = Assets
Liabilities (debts)
are what a firm owes to its creditors
Owner’s Equity
total amount of investment in the firm minus liabilities; also called net worth; Assets - Liabilities = Owner’s Equity
Double-Entry Bookkeeping
every transaction must be recorded as 2 entries, to keep the accounting equation balanced
Accounting Cycle
the process of generating financial statements, beginning with a business transaction and ending with the preparation of the report; 6 steps
Data Analytics
the process of examining numerous data sets (big data) to draw conclusions about the information they contain, with the assistance of specialized systems and software
Balance Sheet
summarizes a firm’s financial position at a specific point in time
Liquidity
how fast they can be converted to cash
Current Assets (CA)
assets that can or will be converted into cash within the next 12 months
Marketable Securities (CA)
temporary investments of excess cash that can be converted to cash, readily
Account Receivable (CA)
amounts owed to the firm by customers who bought goods/services on credit
Notes Receivable (CA)
amounts owed by customers or others to whom the firm lent money
Inventory
stock of goods being held for production or for sale to customers
Fixed Assets
long-term assets used by the firm for more than 1 year
Depreciation
the allocation of the asset’s original cost to the year in which it is expected to produce revenues
Intangible Assets
long-term assets with no physical existance
Patents & Copyrights
shield a firm from direct competition, so their benefits are more protective than productive
Trademarks
registered names that can be sold or licensed to others
Goodwill
when a company pays more for an acquired firm than the value of its tangible assets
Current Liabilities (CL)
those due within a year of the date of the balance sheet
Accounts Payable (CL)
amounts the firm owes for credit purchases due within a year and counterpart of account receivable
Notes Payable (CL)
short-term loans from banks, suppliers, or others that must be repayed within a year
Accrued Expenses (CL)
expenses, typically for wages/taxes, that have accumulated and must be paid at a specific future date within the year although the firm has not received a bill
Income Taxes Payable (CL)
taxes owed for the current operating period but not yet paid, larger amounts are often shown separately
Current Portion of Long-Term Debt (CL)
any replacement on long-term debt due within a year
Long-Term Liabilities
come due more than 1 year after the due date of the balance sheet
Retained Earnings
the amount left over from profitable operations since the firm’s beginning; total profits - all dividends paid to stockholders = retained earnings
Income Statement
summarizes the firm’s revenue and expenses and shows its total profits or loss over a period of time
Revenues
the dollar amount of sale plus any other income received from sources such as interest, dividends, and rent
Gross Sales
the total amount of a company’s sals
Sales Discounts
price reductions given to customer that pay their bills early
Returns & Allowances
dollar amount of merchandise reformed by customers because they didn’t like the product or it was damaged or defective
Net Sales
the amount left after deducting sales discounts and returns and allowances from gross sales
Expenses
the costs of generating revenue; the following are recorded in the income statement: costs of goods sold & operating expenses
Costs of Goods Sold
the total expense of buying or producing the firm’s goods or services
Gross Profit
the amount a company earns after paying to produce/buy its products but before deducting operating expenses; net sales - costs of goods sold = gross profit
Operating Expenses
the expenses of running a business that is not related directly to producing or buying its products
Selling Expenses
related to marketing and distributing the company’s products
General & Administrative Expenses
the business expenses that cannot be linked to either cost of goods sold or sales
Net Profit/Net Income/Net Loss
final figure - bottom line - of an income statement; revenues>expenses = net profit; revenues<expenses = net loss
Statement of Cash Flows
a summary of the money flowing into and out of a firm
Ratio Analysis
involves calculating and interpreting financial ratios using data taken from the firm’s financial statements in order to assess its condition and performance
Financial Ratio
states the relationship between financial data on a percentage basis
Liquidity Ratio
measures the firm’s ability to pay its short term debts as they come due
Current Ratio
the ratio of total current assets to total current liabilities; divide; a 2 is better
Acid-Test (Quick) Ratio
like the current ratio but excludes inventory from the current asset; ratio of 1 is preferred
Networking Capitol
used to measure a firm’s overall liquidity; total current assets - total current liabilities = networking capitol
Profitability Ratios
measure how well the firm is using its resources to generate profit and how efficiently it is being managed
Net Profit Margin (Return On Sales)
measures the percentage of each sales dollar remaining after all expenses, including taxes, have been deducted; net profit / net sales = net profit margin
Return on Equity (ROE)
measures the return that owners receive on their investment in the firm; the major reason for investing in stocks; can be compared to past values to see how the company is performing over time; net profit / total owner’s equity = ROE
Earnings Per Share (EPS)
measures the # of dollars earned by each share of stock; indicates a firm’s ability to pay dividends; net profit / # of shares of common stock outstanding
Activity Ratios
measure how well a firm uses its assets; reflect the speed with which resources are converted to cash or sales
Inventory Turnover Ratio
measures the speed with which inventory moves through the firm and is turned into sales; cost of goods sold / average inventory = inventory turnover ratio; average inventory = beginning inventory + ending inventory / 2
Debt Ratios
measure the degree and the effect of the firm’s use of borrowed funds (debt) to finance its operations
Debt-to-Equity Ratio
measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner’s funds); the lower the ratio, the better; total liabilities / owner’s equity = debt-to-equity ratio
Cloud Based Accounting
firms add 5x more clients than traditional accounting firms
Automation
in auditing services, will help generate complete sets of data and will improve the overall details of the auditing process
Staffing
a change in approach to advisory services will have an impact on the type of experienced employees accountants hire in the future
