Chapter 5 Flashcards
the process of collecting, recording, classifying, summarizing, reporting, and analyzing
financial activities
Accounting
accounting that focuses on preparing external financial reports that are used by outsiders such as lenders, suppliers, investors, and government agencies to assess the financial strength of a
business
Financial accounting
accounting that provides financial information that managers can use to evaluate and make decisions about current and future operations
Managerial accounting
the financial accounting standards followed by accountants in
the United States when preparing financial statements
GAAP
Generally accepted accounting principles
GAAP are set and enforced by
financial accounting standards board (FASB) and the securities exchange
commission (SEC)
the concept that all transactions are recorded in the period in which they occur, instead of when the cash flow occurred
Accrual principle
the concept that accounting methods used by a company will be used consistently throughout the financial accounting process
Consistency pricipal
the concept that companies should record investments, assets, and liabilities at the original
purchase cost
Cost principal
the concept that the transactions of an organization will be separate from those of any other company or of the company’s ownership
Economic entity principles
accountants should disclose all details about business operations and financial recordings, including information that might not be flattering
Full disclosure principles
Accounting equation
Assets = Liabilities + Owners’ Equity
is a document that describes a firm’s financial status and usually discusses the firm’s activities during the past year and its prospects for the future
Annual report
An annual report includes:
a. Executive summary
b. Discussion and analysis
c. Future Goals
d. Management
e. Financials
It is a comprehensive summary of the firm’s financial health, its strategic vision, the extent to which it is/is not
meeting its goals, and what the plan is for the firm going forward
standard documents that summarize the financial health of a business
Financial statements
a financial statement that summarizes a firm’s financial position at a specific point in time
balance sheet
Assets that can or will be converted into cash within the next year
Current assets
long-term assets used for more than a year
Fixed assets
long-term assets with no physical existence
Intangible assets
the speed with which an asset can be converted to cash
liquidity
a financial statement that summarizes a firm’s revenues and expenses and shows its total profit or loss over a period of time
Income statement
the total expense of buying or producing a firm’s good or service
cost of goods sold
any expenses related to running the business not directly related to
producing or buying its products or services
operating expenses
the amount a company earns after paying to produce or buy its products but before deducting operating expenses
Gross profit
Gross Profit = Net Sales - Costs of Goods Sold
Source of funds that cover all the firm’s other expenses
the amount obtained by subtracting all of a firm’s expenses from its revenues, when the revenues are more than the expenses
Net profit/net loss
To calculate net profit/loss, subtract all expenses from all revenues
a financial statement that provides a summary of the money flowing into and out of a firm during a certain period, typically one year
Statement of cash flow
Statement of cash flow includes cash flow from these three activities
- Cash flow from operating activities: related to production of goods and services
- Cash flow from investment activities: related to purchase and sale of fixed assets
- Cash flow from financing activities: related to debt and equity financing
is the calculation and interpretation of financial ratios using data taken from the firm’s financial statements in order to assess its condition and performance
Ratio analysis-Comparing current numbers to previous numbers or numbers of other companies in the same industry
ratios that measure a firm’s ability to pay its short-term debts as they come due
Liquidity ratios
the ratio of total current assets to total current liabilities; used to measure a firm’s liquidity
Current ratio= Total Current Assets / Total Current Liabilities
the ratio of total current assets excluding inventory to total current liabilities; used
to measure a firm’s liquidity
Acid test/ quick ratio
Quick Ratio = (Total Current Assets - Inventory) / Total Current Liabilities
the amount obtained by subtracting total current liabilities from total current assets; used to measure a firm’s liquidity
Net Working Capital = Total Current Assets - Total Current Liabilities
ratios that measure how well a firm is using resources to generate profit and how efficiently the firm is being managed
Profitability ratios
the ratio of net profit to net sales
Net Profit Margin = (Net Profit / Net Sales) × 100
the ratio of net profit to total owners’ equity
Net Profit / Total Owners’ Equity × 100
the ratio of net profit to the number of shares of common stock outstanding
Earnings Per Share = (Net Income - Preferred Dividends) / Average Outstanding Common Shares
ratios that measure how well a firm uses its assets
Activity ratios
Function: captures the speed with which resources are converted into cash or sales
the ratio of goods sold to average inventory; it measures the speed with which inventory moves through the firm and is turned into sales
Inventory Turnover ratio = Cost of Goods Sold / Average Inventory
ratios that measure the degree and effect of the firm’s use of borrowed funds to finance operations
debt ratio
the ratio of total liabilities to owner’s equity; measures the relationship between the amount of debt financing and the amount of equity financing
Debt-to-Equity = Total Liabilities / Total Owners’ Equity
The total amount of investment in a business after subtracting any liabilities
owners’ equity/net worth
The total dollar amount of a company’s sales
gross sales
The amount of a company’s sales left after deducting discounts, returns, and allowances from gross sales
net sales
The cost of generating revenues
expenses
