Module 1 Flashcards
What is Accounting?
system for collecting, analyzing, and communicating financial information
Accounting equation
Assets = Liabilities + Owners’ Equity
Calculation of the income statement
Net income = Revenues – expenses
Asset
Any resource that is expected to benefit a firm or individual (ex. Land, buildings, equipment, inventories, and payments due to the company
Liabilities
a debt that a firm owes to an outside party
Owners Equity
is the amount of money owners would receive if they sold all of a companys assets and paid all of its liabilities.
Types of Accountant
Private Accountant,Management AccountantCertifiedPublicAccountant(
Audit
Systematic examination of a company’s accounting system to determine whether its financial reports are in accordance with GAAP, including reliably representing its operations
Balance Sheet
financial statement that supplies detailed information about a firm’s assets, liabilities, and owners’ equity
income Statement (Profit-and-Loss Statement, Statement of Operations)
financial statement listing a firm’s annual or quarterly revenues and expenses so that the bottom line shows the period’s profit or loss
– Profit is also known as income or earnings
Statement of Cash Flows
– Financial statement describing a firm’s yearly or quarterly cash receipts and cash payments
– Made up of
• Operating cash flows from earnings (usually positive)
• Investing cash flows to buy new assets (usually negative)
• Financing cash flows from/to the investors (varies)
REVENUE is recorded when?
– When goods are supplied or delivered to the customer
Basic Economics
Supply, Demand and Price Discovery
Inflation
Inflation occurs when the price of goods in an economy increases
Fiscal Policies
– policies used by a government regarding how it collects and spends revenue
– Tax compared to spending
– Decided politically by Congress
– Managed by the Treasury
– Bond operations executed by the Bureau of the Fiscal Service
Monetary Policies
– policies used by a government to control the size of its money supply
– Management of money supply and interest rates
– Managed by the Federal Reserve
– Operates under more of a political consensus
CurrentAsset
– asset that can or will be converted into cash within a year
Liquidity
– ease with which an asset can be converted into cash
FixedAsset
– asset with long-term use or value, such as land, buildings, and equipment
Depreciation
– accounting method for distributing the cost of an asset over its useful life
Current Liability
– debt that must be paid within one year
Accounts Payable (Payables)
– current liability consisting of bills owed to suppliers
Long-Term Liability
– debt that is not due for at least one year
Retained Earnings
– earnings retained by a firm for its use rather than paid out as dividends
Intangible Asset
nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit
Goodwill
– amount paid for an existing business above the value of its other assets
current ratio equation
Current ratio = current assets/current liabilities
Revenues
– net assets that flow into a business from the sale of goods or services
Operating Expenses
costs, other than the cost of sales,
Gross Profit
– preliminary, quick-to-calculate profit figure calculated from the firm’s revenues minus its cost of revenues (the direct costs of getting the revenues)
Operating Income
– gross profit minus operating expenses
Net Income (Net Profit, Net Earnings)
– gross profit minus operating expenses and income taxes
Return on equity or RoE equation
RoE = Annual net income / stockholders’ equity
“DuPont Formula”
RoE = Net Profit Margin X Asset Turnover X Financial Leverage
Profit Margin equation
Profit Margin =Net Income/Net Sales
Asset Turnover equation
Asset Turnover =Net Sales/Total Assets
Financial Leverage equation
Financial Leverage =Total Assets/Stockholders Equity
What is difference between fixed and variable costs?
Fixed: costs set in stone… ex. rent , hourly pay
Variable: changing costs… ex. ingredients, supplies
Secured Loan (Asset-Backed Loan)
– Loan to finance an asset, backed by the borrower
Collateral
– Asset pledged for the fulfillment of repaying a loan – Examples of collateral • Land • Property (fixed assets • Accounts receivable (financial asset)
