Chapter 17 Accounting Part of Final Flashcards
What is accounting?
The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.
Who are outside parties that utilize a firm’s accounting information?
- Employees
- Owners
- Creditors
- Unions
- Investors
- Government
What is the accounting cycle?
A six-step procedure that results in the preparation and analysis of the major financial statements.
What is double-entry bookkeeping?
The practice of writing every business transaction in two places to ensure accuracy.
What is a ledger?
A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories.
What is a trial balance?
A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced.
How do computerized accounting programs benefit businesses?
They post information instantly and from remote locations.
List the key financial statements of a business.
- Balance sheet
- Income statement
- Statement of cash flows
What is the fundamental accounting equation?
Assets = Liabilities + Owners Equity
What does a balance sheet report?
A firm’s financial condition at a specific time, composed of assets, liabilities, and owners’ equity.
Define assets.
Economic resources (things of value) owned by a firm; items can be tangible or intangible.
What are the three categories of assets?
- Current assets
- Fixed assets
- Intangible assets
What are liabilities?
What the business owes to others (debts).
What are examples of common liability accounts?
- Accounts payable
- Notes payable
- Bonds payable
Define owners’ equity.
The amount of the business that belongs to the owners minus any liabilities owed by the business.
What is retained earnings?
The accumulated earnings from a firm’s profitable operations that were reinvested in the business.
What does an income statement show?
A firm’s profit after costs, expenses, and taxes.
What is net income?
Revenue left over after all costs and expenses, including taxes, are paid.
What is cost of goods sold?
A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.
What is depreciation?
The systematic write-off of the cost of a tangible asset over its estimated useful life.
What does the statement of cash flows report?
Cash receipts and disbursements related to a firm’s three major activities.
List the three major activities of a firm.
- Operations
- Investments
- Financing
What is cash flow?
The difference between cash coming in and cash going out of a business.
What is ratio analysis?
The assessment of a firm’s financial condition using calculations and interpretations of financial ratios.
What are key ratios in ratio analysis?
- Liquidity ratios
- Leverage (debt) ratios
- Profitability (performance) ratios
- Activity ratios
What do liquidity ratios measure?
A firm’s ability to turn assets into cash to pay its short-term debts.
What do leverage ratios measure?
The degree to which a firm relies on borrowed funds in its operations.
What do profitability ratios measure?
How effectively a firm’s managers are using the firm’s various resources to achieve profits.
What do activity ratios measure?
How effectively management is turning over inventory.
Define financial accounting.
Accounting information and analyses prepared for people outside the organization.
What is the purpose of an annual report?
A yearly statement of the financial condition, progress, and expectations of an organization.
What is a private accountant?
An accountant who works for a single firm, government agency, or nonprofit organization.
What is a certified public accountant (CPA)?
An accountant who passes a series of examinations established by the AICPA.
What is managerial accounting?
Accounting used to provide information and analyses to managers within the organization.
What is the purpose of auditing?
To review and evaluate the information used to prepare a company’s financial statements.
Define tax accounting.
An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.
What is government and not-for-profit accounting?
An accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others.
5 Key Working Areas in the Accounting Profession:
- Financial accounting
- Auditing
- Government & not for profit
- Managerial accounting
- Tax accounting
