Chapter 17 Flashcards
Accounting
The recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties
Accounting system
Method used to record and summarize accounting data
purposes of accounting
- Help managers make well informed decisions
- To report financial information about the firm to interested stakeholders (employees, owners, creditors, etc)
FASB
The Independent Financial Accounting Standards Board
GAAP
Generally accepted accounting principles
Accounting cycle
A six step procedure that results in the preparation and analysis of the major financial statements
Bookkeeping
The recording of business transactions
Journal
record book or computer program where the day’s transactions are kept by the bookkeeper
Double-entry bookkeeping
The practice of writing every transaction in two places so bookkeepers can check one list of transactions against another to make sure they both add up to the same amount
Ledger
Specialized accounting book or computer program where bookkeepers transfer information from accounting journals into specific categories so manager can find all the information about a single account in one place
Trial balance
A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced
financial statement
A summary of all the financial transactions that have occurred over a particular period. They indicate a firms financial health and stability, and are key factors in management decision making
Key financial statements of a business
- balance Sheet
- income statement
- statement of cashflows
Balance sheet
reports the firms financial condition on a specific date (Assets, liabilities, owner’s equity)
Income Statement
- Shows a firms bottom line (profit)
-Summarizes revenues, cost of goods sold, and expenses (including taxes) for a specific period and highlights the total profit or loss the firm experienced during that period
Statement of cash flows
- provides a summary of money coming into and going out the firm. It tracks a company’s cash receipts and cash payments
- reports cash receipts and disbursements related to the three major actives of a firm (Operations, Investments, Financing)
fundamental accounting equation
Assets = Liabilities + Owner’s equity
Assets
economic resources (things of value) owned by a firm.
- tangible and intangible items
- are measurable and quantifiable
Liquidity
the ease which accountants can convert assets to cash
Current Assets
items that can or will be converted into cash within one year
Fixed Assets
long term assets that are relatively permanent such a land
Intangible Assets
long term assets that have no physical form but do have value like patents, trademarks, copyrights.
Liabilities
what the business owes to others
current liabilities
debts due in one year or less
long term liabilities
debts not due for another year or more
Accounts payable
current liabilities or bills the company owes others fro merchandise or services it purchases on credit that’s not yet paid for
notes payable
can be short or long term that a business promises to pay by a certain date
bonds payable
long term liabilities
retained earning
accumulated earning from the firm’s profits that are reinvested in the business and not paid out to stockholders in distributions of company profits
Revenue
the monetary value of what a firm received for goods sold, services rendered, and other payments,
cost of goods sold
measures the cost of merch the firms sells or the cost of raw materials and supplies it used in producing items for resale
Gross profit
how much a business earned by buying (or making) and selling merchandise
depreciation
the systemic write-off of the cost of a tangible asset over its estimated useful life
cash flow
the difference between cash coming in and going out of a business
steps in the accounting cycle
- analyze source documents
- record transactions in journals
- transfer journal entries to ledger
- take a trial balance
- prepare financial statements
- analyze financial statements
Ratio analysis
- the assessment of a firms financial condition, using calculations and financial ratios developed from the firms financial statements
- provides key insights into how a firm compares to other firms in its industry on liquidity, amount of debt, profitability, and overall business activity
Liquidity ratios
measure a company’s ability to turn assets into cash to pay its short term debts
current ratio
the ratio of a firms current assets to its current liabilities
current ratio = Current assets / current liabilities
acid test / quick ratio
measures the cash, marketable securities (such as stocks or bonds) and receivables of a firm, compared to its current liabilities
cash + accounts receivable + marketable securities / current liabilities
leverage (debt) ratios
measure the degree to which a firm relies on borrowed funds in its operations
debt to owners equity ratio
total liabilities/ owners equity
Profitability (performance) ratios
measure how effectively a firms managers are using its various resources to achieve profits
return on equity
measures risk by telling us how much a firm earned for each dollars invested by its owners equity
activity ratios
tells us how efficiently management is turning their inventory into sales
inventory turnover ratio
measures the speed with which inventory moves through the firms and gets converted into sales
lower than average inventory
often indicates obsolete merchandise on hand or boor buying practices
Financial accounting
generates financial information and analyses for people primarily outside the organization
annual report
a yearly statement pf the financial condition, progress, and expectations of an organization
private accountant
works for a single firm, gov agency, or nonprofit organization
public accountant
provides accounting services to individuals of businesses
CPA
certified public accountant
key provisions of Sarbanes Oxley Act
- prohibits accounting firms from providing certain nonaddicting work to companies they audit
- strengthens the procreation of those who report wrongful actions of company officers
- Requires CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation
- prohibits corporate loans to directors and executives of the company
- establishes PCAOB (Public Company Accounting Oversight Board) under SEC (Securities and Exchange Commissions) to oversee the accounting industry
- altering or destroying key audit docs will result in felony charges
Managerial Accounting
provides information and analysis to managers inside the organization assist them in decision making
Auditing
reviewing and evaluating the info used to prepare a company’s financial statements
Independent Audit
an evaluation and unbiased opinion about the acutance of a company’s financial statements
tax accountants
is trained in tax law and is responsible for preparing tax returns, or developing tax strategies
government and not for profit accounting
supports organizations whose purpose is not generating profit, but serving ratepayers, taxpayers, and others according to a budget
10k part 1
a comprehensive overview of a company’s operation, products, and or services
10k part 2
lists financial statements from the company
10k part 3
details about the company’s senior excecutive team
10k part 4
exhibits
Sustainability reports
the environmental, social and governance issues and impacts caused by the company’s everyday activities
fiscal period
full cycle of business
equity
residual ownership
net operating income
how much did a company make from their core business
