Foundations Of Business Exam 1 - Chapter 17

Accounting — The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested the information they need to make good decisions. Accounting Cycle — A six-step procedure that results in the preparation and analysis of the major financial statements. Bookkeeper’s Role Bookkeeping — The recording of business transactions. Bookkeepers divide a firm’s transactions into meaningful categories and post them into a record book or computer program called a journal. Double-entry bookkeeping — The practice of writing every business transaction in two places; done so they can check one list of transactions against the other for accuracy. Bookkeeper’s Tools Ledger — A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place. Trial balance — A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. Financial statement — A summary of all the transactions that have occurred over a particular period. Key financial statements of business are: Balance sheet, Income statement, Statement of cash flows. The Fundamental Accounting Equation- The basis for the balance sheet. It must always be balanced Assets = Liabilities + Owners Equity Balance sheet — Financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners’ equity. Classifying Assets Assets — Economic resources (things of value) owned by a firm; items can be tangible or intangible. Liquidity — The ease with which an asset can be converted into cash. Classifying Assets. Three categories: Current assets — Items that can or will be converted into cash within one year. Fixed assets — Assets that are relatively permanent, such as land, buildings, and equipment. Intangible assets — Long-term assets (e.g., patents, trademarks, copyrights) that have no physical form but do have value. Liabilities — What the business owes to others (debts). Common liability accounts: Accounts payable — Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for. Notes payable — Short-term or long-term liabilities that a business promises to pay by a certain date. Bonds payable — Long-term liabilities that represent money lent to the firm that must be paid back. Owners’ equity — The amount of the business that belongs to the owners minus any liabilities owed by the business. (L + OE). Retained earnings — The accumulated earnings from a firm’s profitable operations that were reinvested in the business and not paid out to stockholders in dividends. Income statement — The financial statement that shows a firm’s profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss. Net income or net loss — Revenue left over after all costs and expenses, including taxes, are paid. The Income Statement. The formula: Revenue-Cost of goods sold= Gross profit (gross margin) Revenue-Operating expenses= Net income before taxes Revenue-Taxes= Net income or (loss) Revenue(sales) is the monetary value a firm received for goods sold, services rendered, or other payments. Cost of goods sold (or manufactured) — A measures of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale. Gross profit (or gross margin) — How much a firm earned by buying (or making) and selling merchandise. Operating expenses — Costs involved in operating a business, such as rent, utilities, and salaries. Depreciation — The systematic write-off of the cost of a tangible asset over its estimated useful life. Statement of cash flows — Financial statement that reports cash receipts and disbursements related to a firm’s three major activities. Three major activities of a firm: Operations, Investments, Financing. Cash flow — The difference between cash coming in and cash going out of a business. Managing cash flow is a key consideration of a business. Ratio Analysis — The assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statements. (Important to compare the ratios to those of other firms). Key ratios include: -Liquidity ratios measure a firm’s ability to turn assets into cash to pay its short-term debts. Key ratios include: -Current ratio: current assets/current liabilities -Acid-test ratio: current assets – inventory/current liabilities -Leverage (debt) ratios measure the degree to which a firm relies on borrowed funds in its o perations. Key ratios include: Debt to owner’s equity ratio - total liabilities/owner’s equity -Profitability (performance) ratios measure how effectively a firm’s managers are using the firm’s various resources to achieve profits. Key ratios include: -Earnings per share (EPS): NI/common shares outstanding. -Return on sales (Profit Margin): NI/sales. -Return on equity: NI/equity. Profitability ratios are very closely watched as measurements of growth and management performance. How effectively is the company using what it has to generate profits -Activity ratios measure how effectively management is turning over inventory. Key ratios include: Inventory turnover ratio: COGS/average inventory. Rates of inventory turnover vary from industry to industry. Financial accounting — Accounting information and analyses prepared for people outside the organization. Annual report — A yearly statement of the financial condition, progress, and expectations of an organization. Key things to watch for and read: Management’s discussion and analysis of operations, Balance sheet, Income statement, Statement of cash flows, Auditor’s opinion. Financial Accounting continued Private accountant — An accountant who works for a single firm, government agency, or nonprofit organization. Public accountant — An accountant who provides accounting services to individuals or businesses on a fee basis. Certified public accountant (CPA) — An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA). -Prohibits accounting firms from providing certain nonauditing work to companies they audit. -Strengthens the protection for whistleblowers who report wrongful actions of company officers. -Requires company CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation of securities reporting. -Prohibits corporate loans to directors and executives of the company. -Establishes the five-member Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) to oversee the accounting industry. -Stipulates that altering or destroying key audit documents will result in felony charges and significant criminal penalties. Managerial accounting — Accounting used to provide information and analyses to managers within the organization to assist them in decision making. It is involved with: Costs of production, Costs of marketing, Preparation and control of budgets, Minimizing tax liabilities. Auditing — The job of reviewing and evaluating the information used to prepare a company’s financial statements. Independent audit — An evaluation and unbiased opinion about the accuracy of a company’s financial statements. Tax accountants — An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies. Government and not-for-profit accounting — Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.