Financial Information and Accounting Concepts Flashcards
What is accounting?
Measuring, interpreting, and communicating financial information to support internal and external decision-making.
Bookkeeping
Repetitive, mechanical process of recording financial transactions and keeping financial records
Accounting
Goals include the analysis, interpretation, and use of information
Includes design of an information system to meet users’ needs
Bookkeeping is a small part of accounting
GAAP (Generally Accepted Accounting Principles)
Standards and practices used by public corporations in the US when preparing financial statements
- Overseen in the US by the Financial Accounting Standards Board (FASB)
- Publicly traded companies in the US must follow GAAP
- Privately held companies may choose to not implement GAAP
International Financial Reporting Standards (IFRS)
Accounting standards and practices used in many countries outside the US
External Auditors
Independent accounting firms that provide auditing services to evaluate if financial statements were prepared according to GAAP
Sarbanes-Oxley
The informal name of comprehensive legislation designed to improve integrity and accountability of financial information
Financial Statements (and their accompanying notes) can …
explain a company’s past performance and current conditions. They also provide us with a glimpse into the company’s possible future performance.
Financial Statements such as the Balance Sheet, Income Statement, and Statement of Cash Flows tell us…
a story about an organization
Assets
Any thing (tangible or intangible) of material value owned or leased by a business
Liabilities
Claims against a firm’s assets by creditors/lenders
Owners’ Equity
The portion of a company’s assets that belongs to the owners after obligations to all creditors have been met
The Accounting Equation (the basis for the Balance sheet)
Assets = Liabilities + Stockholders Equity
Balance Sheet
A statement of a firm’s financial position on a particular date; also known as a statement of financial position
Made up of assets, liabilities and owner’s equity
Fiscal Year
Any 12 consecutive months used as an accounting period
What does the Balance Sheet provide?
it provides a snapshot of the firm’s financial position at a specific point in time.
It also describes the company’s resources and claims against those resources through the: Fundamental Accounting Equation
Current Assets
Cash and items that can be turned into cash at or near current values 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 one year
Long-Term Liabilities
Long-Term Liabilities
Obligations that fall due more than one year from the date of the balance sheet
Retained Earnings
profits that your firm has reinvested back into itself (earnings not distributed to shareholders in the form of dividends).
The Matching Principle
The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period.
Accrual Basis (US GAAP)
An accounting method in which revenue is recorded when a sale is made, and an expense is recorded 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 a tangible asset over its estimated useful life (represents the allocation of the cost of a tangible long-term asset over a time period)`
What is the significance of the Income Statement?
It measures the amount of profits generated by the firm over a given period of time.
Net Income/Net Earnings equation
Net income = Revenues Income/Loss - Expenses
Cost of Goods Sold
The cost of producing or acquiring a company’s products for sale during a given period
Gross Profit (or Gross Margin)
The amount remaining when the cost of goods sold is deducted from sales
in MB Gross Margin in is how much your firm earned this year by making bikes and selling them. It excludes all other costs of operating your firm, except the manufacturing costs of the bikes you sold, e.g. it does not include advertising.
Operating Expenses
All costs of operation that are not included under cost of goods sold
What is EBITDA and what does it stand for?
This is another measure of profitability and it stands for: Earnings before interest, taxes, depreciation, and amortization
Expenses
Costs created in the process of generating revenues
Net Income
Profit earned or loss incurred by a firm, determined by subtracting expenses from revenues
Referred to as the bottom line
Statement of Cash Flows
Provides a summary of money coming into and money going out of a firm in a given time period.
Earnings Per Share (EPS)
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
Average # of shares
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
Total Equity
Profit Margin
The ratio between net income after taxes and net sales
Net Sales
Return on Equity
The ratio between net income after taxes and total owners’ equity
Total Owners’ Equity
Profit Margins and Returns on Equity are both Profitability ratios that show…
the state of the company’s financial performance or how well it generates profits
Current Ratio
A measure of a firm’s short-term liquidity, calculated by dividing current assets (CA) by current liabilities (CL)
CL
Quick Ratio
A measure of a firm’s short-term liquidity,
Also known as the acid-test ratio
(Cash + Marketable Securities + Receivables)
——————————————————————————–Current Liabilities
Current Ratios and Quick Ratios are both liquidity ratios that measure…
a firm’s ability to pay its short-term obligations
Inventory Turnover Ratio
A measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold (COGS) by the average value of inventory for a period
COGS -------------------------- Average inventory
Inventory Turnover Ratio is an Activity Ratio which analyzes…
how well a company is managing and making use if its assets.
Debt-to-Assets Ratio
A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets
Total Assets
