Foundations of Accounting (Linkedin Learning) Flashcards
Four basic types of accounting?
Bookkeeping, Financial, Managerial, Income Tax
Def: Bookkeeping
The presentation of a systematic, quantitative record of an activity
Def: Financial Accounting
The summary of results of a business for external audiences
Def: Balance Sheet
Lists an organization’s assets/resources and liabilities/obligations
Def: Managerial Accounting
The summary of detailed, private information used to help an organization plan, control, and evaluate its operations
When is income taxed?
Income is taxed when it is earned (since the person now has the ability to pay)
Accounting Equation
Assets = Liabilities + Equity
Def: Assets
Resources owned or controlled by a company with probably future benefit
Def: Receivables
A contract guaranteeing you will receive money in the future
Def: Liabilities
Obligations that will require future sacrifice, either by paying assets or delivering services
Def: Owner’s Equity
The amount owners have invested in a company
Def: Paid-in-Capitial
Owner’s personal investment in their business (from personal account)
Def: Retained Earnings
Earnings reinvested into the business
Def: Dividends
The amount of profits the owners have removed from the business
Def: Short term
In the accounting sense, less than a year
Def: Accounts Payable
Amount owed to suppliers for inventory that was received but not paid for
What does high accounts payable mean about the trust suppliers have for the company?
Suppliers have high trust that they will settle their accounts payable
Two major limitations of the balance sheet?
1) Reflect the costs at time of acquisition and not current market value
2) Intangible assets are not recorded (name, logo, customer loyalty)
Three key financial reports?
Balance Sheet, Income Statement, Statement of Cash Flows
Balance sheet captures this time period?
It’s a snapshot of a point in time
Income statement captures this time period?
It’s captures a period of time for which is was written (month, quarter, year, etc)
Def: Net Income
Revenue - Expenses
Def: Revenue
Amount of assets created from the sale of goods and services
Def: Expenses
Amount of assets consumed through business operations
Def: Earnings
Earnings is synonymous with net income
Earnings per share (EPS)
Net Income divided by the number of ownership shares
What is Top-line Revenue?
Total Revenue on the Income Statement
What is the bottom line?
Synonymous with Net Income
Profit Margin
Net Income divided by Total Revenue
What does profit margin of 2% mean?
That means on every 100 dollars of revenue the company makes 2 dollars of profit. Or for every dollar of revenue the company makes 2 cents
What is the purpose of the Statement of Cash Flow?
Report the amount of cash collected and cash paid by a company during a period of time.
Three categories of a statement of cash flow?
Operating activities, investing activities, financing activities
Def: Operating Activities
Cash coming in and out of the business due to everyday operations of the business
Def: Investing Activities
Cash coming in and out of the business effecting the productive capacity of the business
Def: Financing Activities
Cash coming in and out of the business raised to pay for the operations and investing activities
Def: Cash Cow
Operating Inflow is much larger than investing outflow
Def: Return on Investment (ROI)
Measurement that combines sales profitability and operational efficiency
Three pieces of product costing?
Direct Materials, Direct Labor, and Overhead Costs
Def: Direct Material
“stuff” a product is made out of
Def: Direct Labor
cost of labor a product takes to produce (amount of time * hourly rate of labor involved)
Def: Overhead costs
cost of infrastructure and utilities used in the production of a product
What is the traditional approach to assigning overhead costs?
assign a proportion based on the amount of labor hours for a product
Def: Break Even Analysis
Analysis of the fixed and variable costs in an operation and the amount of “sales” needed to recoup initial investment
Def: Variable Costs
Costs that fluctuate depending on the quantity of products/services that are delivered
Def: Contribution Margin
Profit per customer after subtracting variable costs
Def: Budgeting
Systematic quantitative plans on paper to predict the future
Why is performance evaluation a part of managerial accounting?
Find the right thing to measure and you will never have to remind your employees
How can mission statements help managerial accounting?
They show you where accounting measures should be directed
Why is it hard for governments to collect income tax?
1) What counts as income?
2) How do you verify this income?
3) What are acceptable deductions?
4) How do you collect it?
What taxes have governments historically relied on instead of income taxes?
Property tax, head taxes, and import/export fees
Def: Average Tax Rate
Taxes Owed divided by the income
Def: Marginal Tax Rate
rate you will pay on the next dollar of income you make
Def: Progressive Tax System
A tax system is progressive when the average tax rate increases as you make more money
Where are tax deductions applied?
Tax deductions reduce your taxable income
Where are tax credits applied?
Tax credits are removed from the amount of taxes owed
Def: Ordinary Income
Wages, salary, and interest on savings
Def: Capital Gains
Income or profits made from an investment
Capital Gain Tax Shelters
These take many forms but they structure your income so it can be classified as capital gains income
