Week 2 Ch. 15: Economics, Accounting and Organizations Flashcards
Assets
any things of value owned or leased by a business
Liabilities
claims against a firm’s assets by creditors
Owners’ equity
the portion of a company’s assets that belongs to the owners after obligations to all creditors have been met
Accounting equation
Assets - Liabilities = Owners’ equity
Double-entry bookkeeping
a method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance
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
• a documentation of transaction even tho the money has not been received yet
• 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
• a way to write off large purchases over time (years)
ex. factory that would last 20 years
Balance sheet
• a statement of a firm’s financial position on a particular date
• also known as a statement of financial position
Fiscal year
any 12 consecutive months used as an accounting period
The Accounting Cycle
- Perform transactions
- Analyze and record transactions in a journal
- Post journal entries to the ledger
- Prepare a trial balance
- Make adjusting entries, as needed
- Prepare an adjusted trial balance
- Prepare financial statements
- Close the books for the accounting period
Current assets
cash and items that can be turned into cash 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 a year
Long-term liabilities
obligations that fall due more than a year from the date of the balance sheet
Retained earnings
the portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends
Using Financial Statements: Income and Cash Flow Statements
- Income statement
- Expenses
- Net income
- Cost of goods sold
- Gross profit
- Operating expenses
- EBITDA
Income statement
• a financial record of a company’s revenues, expenses, and profits over a given period of time
• also known as a profit and loss statement
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
• a.k.a. the bottom line
• net income ≠ cash flow (bc of accrual bases)
Cost of goods sold
the cost of producing or acquiring a company’s products for sale during a given period
Gross profit
• the amount remaining when the cost of goods sold is deducted from net sales
• also known as gross margin
Operating expenses
all costs of operation that are not included under cost of goods sold
EBITDA
earnings before interest, taxes, depreciation, and amortization
Statement of cash flows
a statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash
Profitability Ratios
• Return on sales
• Return on equity
• Earnings per share
Return on sales
• the ratio between net income after taxes and net sales
• also known as the profit margin
Return on equity
the ratio between net income after taxes and total owners’ equity
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
Liquidity Ratios
• Working capital
• Current ratio
• Quick ratio
Working capital
current assets minus current liabilities
Current ratio
a measure of a firm’s short-term liquidity, calculated by
dividing current assets by current liabilities
Quick ratio
a measure of a firm’s short-term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities
Activity Ratios
• Inventory turnover ratio
• Accounts receivable turnover ratio
Inventory turnover ratio
a measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period
Accounts receivable turnover ratio
a measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period
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
Debt-to-assets ratio
a measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets
