RATIOS & TERMS Flashcards
ABC (activity based costing):
Arelatively new scheme for allocating indirect overhead costs. Overhead costs provide various support functions in a business. The ABC approach classifies overhead costs into separate categories of support activities that are needed in manufacturing operations and in other areas of the business organization (such as a sales territoryu). Cost drivers are developed for each support activity to measure the extent of usage of that support. The annual cost of each support activity is allocated to manufacturing and other areas according to how many cost driver units are used.
Accelerataed Depreciation:
Accelerated Depreciaton is one of two basic methods for allocating the cost of a fixed asset over its useful life and for estimating its useful life. Accelerated depreciation allocates greater amounts of depreciation in early years and lower amount in later years and also uses short life estimates. For comparison, see also “straight-line depreciation.
Acconting:
The methods and procedures for analyzing, recording, accumulating, and storing financial information about the activities of an entity, and preparing summary reports of these activities internally for managers and externally for those entitled to receive financial reports about the entity. The managers of a business and the investors in the business, as well as lenders to the business, depend on acconting reports called financial statements to to the business, depend on acconting reports called financial statements to make informed decisions. Accounting also encompasses preparing tax retuns tht mst be filed with government tax authorities by the entity.
Accounting Equation:
Assets = Liabilities + Owners Equity
Accounts Payable:
One main type of the short-term liabilities of a business, representing the amounts owed to vendors or supplieers for the purchase of products, various supplies, parts, and services that were bought on credit; these do not bear interest (unless the business takes too long to pay).
Accounts Receivable:
The short-term asset representing the amout owed to the business from sales of products and services on credit to its customers. Customers are not normally charged interst, unless they do not pay their bills when due.
Acid-test Ratio:
Acid-test Ratio is also know as Quick Ratio: The number calculated by dividing the total of cash, accounts receivable, and marketable securities (if any), by total current liabilities. This ratio measures the capability of a business to pay off its current short-term labilities with its cash and ear-cahs assets. Note that inventory and prepaid expenses, the other two current assets, are excluded from assets in this ratio. (Also called the acid-test ratio.)
Accrued Expenses Payable:
On maintype of short-term liabilities of a business that arise from the gradual buildup of unpaid expenses, such as vacation pay eqrned by employees or profit-based bonus plans that aren’t paid until the following period. Caution: The specific titles of this liability vary fro business to business; ;you may see accrued liabilities, accrued expenses, or some other similar acount name.
Accumulated depreciation:
The total cumulative amount of depreciation expense that has been recorded since the fixed assets being depreciated were acquired. In the balance sheet the amount in this account is deducted from the costof fixed assets. (Thus it is soeties referred to as a contra account.) The purpose is to report ow much of the total cost has been depreciated over the years. The balance of cost less accumulated depreciation is included in the total assets of a business - which is known as the “book value” of the assets.
Accrual-Bases Accounting:
Unfortunately, “accrual” is not a familiar term to most people. A better term would be “full-basis,” or “complete-basis” accounting. From the profit accounting point of view this refers to recording revenue at the time sales are made (rather than when cash is actually received from customers), and recording expenses to match with sales revenue or in the period benefited (rather than when costs are paid). From the financial condition point of view this refers to recording several assets, such as reeivables fro sutomers, cost of inventory (products not yet sold), and cost of long-term assets (fixed assets) - and, recording several liabilities in addition to debt (borrowed money), such as payables to vendors and payables for unpaid expenses.
Annualized Rat of Interst and Rate of Return:
The result of taking a rate of interst or a rate of return on investment for a period shorter than one year and converting it into an equivalent rate for the entire year. Suppose yhou earn 2.00 percent interst rate every quarter (three months). You annualized rae on finterst (as if you received interst once a year at the end of the year) equals 8.24 percent rounded - which is not simply 4 times the 2.00 percent quarterly rate. (The annualized rate equals [1=.02] raised to the fourth power minus one.) This is also called the effective annual rate, although it would make as much sense to call it the equivalent annual rate. See also compound interest.
Asset Turnover Ratio:
A measure of how effectively assets were used during a period, usually one year. To find the asset turnover ratio, divide annual sales revenue either by total assets for by net operating assets, which equals total assets less short-term, non-interest-bearing liabilities.
Audit Report:
A one page statement issued by a CPA, after having examined a company’s accounting system, records, and supporting evidence, that gives an opinion whether the company’s fiancial statements and footnotes are presented fairly in conformity with generally accepted accounting principles. Annual audits are required of publicly-owned corporations; many privately held businesses also have audis. The CPA auditor must be independent of the business. Instead of a clean opinion, which means that the auditor has no material objections tothe financial statements prpared by the business, the auditor may render a qualified opinion in which the CPA takes exception to one or more aspects of the company’s financial statements and footnotes. A CPA auditor expresses doubts about the financial viability of a business if it is in dire financial straits.
Bad Debts:
The particular expense that arises from a customer’s failure to pay the amount owed to the business form a prior credit sale. When the credit sale was recorded the accounts receivable asset account was increased. jWhen it jbecomes clear that this debt owed to the business will not be collected the asset account is written-off and the amount is charged to bad debts exppense.
Balance Sheet:
The fianncial sttement that summarizes the assets, liabilities, and owners’ equity of a business at an instant moment in time. Prepared at the end of every profit period, and whenever needed, the balance sheet shows a company’s overall financial situation and condition.
