Chapter: 15 understand accounting and financial statements Flashcards
define accounting
- interpreting and measuring financial info
- helps make informed buisness decisions.
Types of accounting
- financial accounting: prepare finance info for users outside organization.
- management accounting: prepare data for managers within organization.
what is a financial plan
- documents outlining funds needed for a certain period of time, sources and intended use of those of funds.
private vs public accounts
- private: in-house accountant or corporate accounts
- businesses, government agencies and non-for profits. - Public accountants: work independently of the buisness they serve.
- need a certified public accountants license
Fundamental accounting principles
- assets: what is owned
- liabilities: what they owe
- Owners equity:
ASSETS-LIABILITIES=OWNERS EQUITY
Accrual vs Cash basis
- Accrual–> revenue is recorded when sale is made
- expense is recorded when it is incurred - cash basis–> revenue is recorded when it is received,
Components in a balance sheet
- picture of a firms financial position on a particular date
- shows what company owns (assets) and what they owe (liabilities), and owners stake in company (equity)
what is an audit
- evaluate fairness and reliability of financial statements
define Generally accepted accounting principles (GAAP)
Standards and practices that are used by the public corporations in the US in preparation of financial statements
what are external auditors
- independent accounting firms that provide auditing services for public companies.
define International financial reporting standards (IFRS)
According to standards used in many countries outside the US.
define Sarbanes Oxley
legislation designed to
improve the integrity and accountability of
financial information
what does the double entry bookeeping mean
- two accounts are affected
- always balanced
define depreciation
- spreading cost of tangible assets over estimated useful life.
Define income statement
- revenues, expenses, profits over a given period of time.
parts in a income statement
Cost of goods sold: cost of producing a good
Gross profit: net sales- cost of goods sold
Operating expenses: all costs of operation that are not included under cost of goods sold
EBITDA→ earnings before interest, tax depreciation and amortisation
describe cash-flow statement
- tracks cash coming in and the cash coming out
- operating activities–> selling products or services
- investing activities–> cash flow from buying or selling assets (equipments or investments)
- financial activities–> cash flow for borrowing or repaying loans, shares.
describe how financial statements are analysed
- trend analysis: compare financial data from year to year
- ratio analysis:
Types of financial ratios
- profitability ratios
- return on sales : Net income/net sales
- return on equity: Net income/total owners equity
- earnings per share: net income/ average number of sales - Liquidity
- current ratio: current assets/current liabilities
- quick ratio: current assets-inventory/current liabilities
Activity: - Inventory turnover ratio
- cost of goods sold/inventory - accounts receivable turnover ratio
- net sales/average accounts receivable
Leverage - debt-to equity rartio: total liabilities/total equity
- debt-to assets ratio: total liabities/total assets
define distributed ledger
- method of recording transactions that replace the individual ledger.
define blockchain
- new transactions captured in blocks
benefits:
- low costs
- less errors
- fast transactions
what are the uses of blockchain
- Financial services
Chain management
Human resources
