Chapter 15 Flashcards
Accounting
Measuring, interpreting, and communicating financial information to support internal and external decision-making
Financial accounting
The area of accounting concerned with preparing financial information for users outside the organization
Management accounting
The area of accounting concerned with preparing data for use by managers within the organization
Bookkeeping
Recordkeeping; recording ithe economic activites of a business
Private accountants
In-house accountants employed by organizations and businesses other than public accounting firm; also called corporate accountants
Controller
The highest-ranking accountant in a company; responsible for overseeing all accounting functions
Certified public accountants (CPA)
Professionally licensed accountants who meet certain requirements fro education and experience and who pass a comprehensive examination
Public accountants
Professionals who provide accounting services to other businesses and individuals for a fee
Audit
Formal evaluation of the fairness and reliability if a client’s financial statements
Generally accepted accounting principles
Standards and practices used by publicly held corporations in the U.S. in the preparation of financial statements
External auditors
Independent accounting firms that provide auditing services for public companies
International financial reporting standards
Accounting standards and practices used in many countries outside the U.S.
Sarbanes-Oxley (SOX)
The informal name of comprehensive legislation designed to improve the integrity and accountability of financial information
Assets
Any things of value owned or leased by a business
Liabilities
Claims against a firm’s assets by creditors
Owner’s equity
The portion of a company’s assets that belongs to the owners after obligations to all creditors have been met
Accounting equation
The equation stating that assets equal liabilities plus owners’ equity
Double-entry bookkeeping
A method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance
Matching principle
The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenue they generate during an accounting period
Accrual basis
An accounting method in which revenue is recorded when a sale is made and an expense record when it is incurred
Cash basis
An accounting method in which revenue is recorded when payment is received and an expense is recorded when cash is paid
Depreciation
An accounting procedure for systematically spreading the cost of tangible asset over its estimated useful life
Closing the books
Transferring net revenue and expense account balances to retained earnings for the period
Balance sheet
A statement of a firm’s financial position on a particular date; also known as a statement of financial position.
calendar year
A 12-month accounting period that begins on January 1 and ends on December 31
fiscal year
Any 12 consecutive months used as an accounting period.
current assets
Cash and items that can be turned into cash within one year.
fixed assets
Assets retained for long-term use, such as land, buildings, machinery, and equipment; also referred to as property, plant, and equipment.
current liabilities
Obligations that must be met within a year.
long-term liabilities
Obligations that fall due more than a year from the date of the balance sheet.
retained earnings
The portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends.
income statement
A financial record of a company’s revenues, expenses, and profits over a given period of time; also known as a profit-and-loss statement.
expenses
Costs created in the process of generating revenues.
net income
Profit (or loss) incurred by a firm, determined by subtracting expenses from revenues; casually referred to as the bottom line.
cost of goods sold
The cost of producing or acquiring a company’s products for sale during a given period.
gross profit
The amount remaining when the cost of goods sold is deducted from net sales; also known as gross margin.
operating expenses
All costs of operation that are not included under cost of goods sold.
EBITDA
earnings before interest, taxes, depreciation, and amortization.
statement of cash flows
A statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash.
return on sales
The ratio between net income after taxes and net sales; also known as the profit margin.
return on equity
The ratio between net income after taxes and total owners’ equity.
earnings per share
A measure of a firm’s profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding.
working capital
Current assets minus current liabilities.
current ratio
A measure of a firm’s short-term liquidity, calculated by dividing current assets by current liabilities.
quick ratio
A measure of a firm’s short-term liquidity, calculated by adding cash, marketable securities, and receivables and then dividing that sum by current liabilities; also known as the acid-test ratio.
Profitability ratio
Measure firm’s ability to generate profits
Leverage ratios
Measure firm’s ability to pay long-term obligations
liquidity ratio
Measure firm’s ability to pay short-term debt
inventory turnover ratio
A measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period.
accounts receivable turnover ratio
A measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period.
debt-to-equity ratio
A measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity.
debt-to-assets ratio
A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets.
distributed ledger
Method of verifying and recording transactions that replaces the individual ledgers of market participants with a shared ledger that everyone can access.
blockchain
a type of distributed ledger in which each new transaction is captured in a “block,” which is then appended to the previous block in a continuous chain.
