Lesson 3: Accounting Introduction Flashcards
Accounting
identifying, recording, analyzing, summarizing and communicating financial information. Provides insight into financial status of an organization.
Accounting Cycle
- Analyzing Business Transactions:
- Journalize the Transactions
- Post to Ledger Accounts
- Prepare a Trial Balance
- Journalize and Post Adjusting Entries
- Prepare and Adjust Trial Balance
- Prepare Financial Statements (income statement, retained earnings statement, balance sheet, statement of cashflows)
- Journalize and Post Closing Entries
- Prepare a Post-Closing Trial Balance
Financial Statements
written records that convey the business activies and the financial performance of a company.
Income Statement/P&L Statement/Profit and Loss Statement/Statement of Income/Statement of Operations
shows a company’s revenues and expenses over a period of time and finally it’s net income.
- Date range usually listed in the header.
Cash Flow Statement/Statement of Cash Flows
shows inflows and outflows of cash within a business over a period of time
Balance Sheet/Statement of Financial Position
Shows balance of assets, liabilities, of a company in a point in time. (snapshot of financial information)
Liability
Monetary values which a company owes to others (the state of being responsible for something, especially by law)
Equity
Owner/shareholders claim on the company’s assets after the liabilities have been paid
Assets
Anything a company owns that has a monetary value and is expected to generate future economic benefits for the company
Equation for assets?
LIABILITIES + EQUITY = ASSETS
Current Assets
can be liquidated (converted to cash) in less than 1 year
Current Liabilities
due (and have to be paid back) within 1 year
Long Term Assets
cannot be converted to cash in 1 year
Long Term Liabilities
due in more than 1 year
Indicator of a company’s profitability
Income Statement
Net sales
amount of money a company is pulling in from sales
Cost Of Goods Sold (COGS)
direct costs incurred while producing goods
Material Costs (COGS)
costs of materials used to manufacture a product
Labor Costs (COGS)
amount a company pays to its employees to produce this product
Gross Profit
(equation?)
a company’s profit after deducting the costs associated with producing.
Net sales - Cost of goods sold
revenues > expenses
Profitable company
Operating expenses
expenses of business that aren’t included in COGS
Income Before Taxes equation
Gross Profit - Operating Expenses
Net income + equation
total amount a business earned/lost this period
income before taxes - income tax expense
Three types of cash flows
- Operating services
- Investing activities
- Financing activities
Cash flow from operating services
cash generated or paid out through the core functions of the business
Cash flow from investing activities
investments the business has made such as purchasing or selling plant, property, equipment assets, or marketable securities
Cash flow from financing activities
sources of cash from investors and banks, as well as the way cash is paid to shareholders
Why is cash flow statement important?
→ Harder to manipulate.
→ Positive cash flow indicates that a company’s liquid assets are increasing, this enable it to settle debts, reinvest in its business, return money to shareholders, pay expenses, provide a buffer against future financial challenges.
Annual report
corporate document spread to shareholders that spells out the company’s financial condition and operations over the previous year
