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130 Cards in this Set
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Accounting |
the process of measuring, interpreting, and communicating financial information to enable people inside and outside the firm to make informed decisions |
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Owners, stockholders, potential investors, and creditors use accounting to ________________ |
to evaluate operations of the firm to make investment decisions |
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Management uses accounting to _____________ |
to plan and control the firm |
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Employees/ Union officials use accounting to _______________ |
to use in contract negotiations |
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Lenders/suppliers use accounting to ____________ |
to evaluate credit ratings |
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Government agencies, economic planners and consumer groups use accounting to _________________ |
to evaluate tax liabilities and to approve new issues of stocks and bonds |
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open book management |
allowing employees to view financial information helps them better understand how their work contributes to the company's success, which ultimately benefits them |
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Three main types of accounting professionals |
1. Public accountant 2. Management accountants 3. government/ not-for-profit accountants |
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Public accountants |
- accountants who provide accounting services to individuals or business firms for a fee - auditing (examining) financial records, tax preparation and planning, and management consulting - usually self employed the "big four": Deloitte, PricewaterhouseCoopers, Ernst & Young, KPMG - issue is potential conflict of interest with different tasks |
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Management accountants |
- an accountant employed by a business other than a public accounting firm - collects and provides accurate financial statements that executives can use to further the business - cost accountant, internal auditor, and tax accountant are all examples |
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Government and not-for-profit |
- similar to management accountants - focus mainly on determining how efficiently the organizations accomplish their objectives - non - profit is the fastest growing because are keen on watching how money is raised and spent |
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GAAP |
"generally accepted accounting principles" - principles that encompass the conventions, rules and procedures for determining acceptable accounting and financial reporting practices at a particular time Four basic principles: 1. consistency 2. relevance 3. reliability 4. comparability |
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FASB |
"financial accounting standards board" - an organization responsible for evaluating, setting or modifying the GAAP in the US |
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accounting cycle |
set of activities involved in converting information and individual transactions into financial statements |
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asset |
anything of value owned or leased by a business |
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liability |
anything owned to creditors - the claims of a firm's creditors - wages and salaries owed to employees are also liabilities (known as wages payable or accrued wages) |
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owner's equity |
the owner's initial investment in the business plus profits that were not paid out to owners over time in the form of cash dividends |
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accounting equation: |
liabilities + owner's equity = assets |
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double-entry bookkeeping |
process by which accounting transactions are recorded; each transaction must have an offsetting transaction ex: if you start with 1 Mil $ in liabilities and 2 mil $ in owner's equity, then there. If you take out another loan for 1 Mil $ (another 1 Mil to liabilities), then the assets will also increase by 1 Mil $ |
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How computers and internet affect the accounting process |
- accounting software allows instant up-to-date financial statements and ratios - can access info anywhere with smartphones and have stronger ties between firm and client - meet specific user needs - global accounting systems - "going green" |
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Four types of financial statements |
1. balance sheet 2. income statement 3. statement of owner's equity 4. state of cash flows |
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Balance sheet |
- the statement of a firm's financial position on a particular date or time - only statement that actually has the accounting equation in it - used by employees, managers and other internal parties on the daily - basically a picture of a firm's financial situation at that given moment |
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Income statement |
- financial record summarizing a firm's financial performance in terms of revenues, expenses, and profits over a given time period (usually a quarter or a year) - shows a flow of resources that reflect a lengthy performance - resembles a video rather than a picture - used to manage and plan for covering costs etc. |
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Balance sheet order from top to bottom: |
1. Currents assets 2. Plant, property and equipment 3. value of assets such as patents and trademarks 4. current liabilities 5. long-term debt 6. owner's (shareholders) equity |
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income statement order from top to bottom (subtracting until net income) |
1. sales 2. cost of goods sold 3. operating expenses 4. depreciation 5. net income |
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statement of owner's (shareholders) equity |
- record of the change in owner's equity from the end of one fiscal period to the end of the next - uses things from the balance sheet and income statement |
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statement of owner's equity order |
1. shareholder's equity at end of last year 2. add net income, subtract cash dividends, add sale of new shares, subtract repurchase of existing shares 3. equals shareholders equity (end of year) |
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Statement of cash flows |
- statement showing the sources and uses of cash during a period of time - sources of cash in day-today- business activity are increases in accounts receivable and inventory or increases in accruals and accounts payables |
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statement of cash flows order: |
1. operating activities (day-to-day business activities) 2. investing activities 3. financing activities 4. net cash flow (the sum of cash flow) |
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accrual accounting |
accounting method that records revenues and expenses when they occur, not necessarily when cash actually changes hands |
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the fact that ____________ is the lifeblood of every organization is evidenced by the business failure rate |
cash flow. (never neglect cash flow) |
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Liquidity ratios |
- measures the firm's ability to meet its short term obligations when they must be paid - two equations used: current ratio and acid-test/ quick ratio |
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current ratio (liquidity) |
used to give executives information about the firm's ability to pay its current debts as they mature current ratio= current assets / current liabilities |
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acid-test or quick ratio (liquidity) |
measures the ability of a firm to meet its debt payments on short notice acid test = (current assets - inventory) / current liabilities |
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activity ratios |
- measure the effectiveness of management's use of the firm's resources - most commonly used activity ratios are the inventory turnover, total asset turnover, and the receivables turnover |
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inventory turnover (activity ratio) |
inventory turnover indicates the number of times merchandise moves through a business
i. t. = cost of goods sold / average inventory |
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receivables turnover (activity ratio) |
receivables turnover is used if a company makes much of its sales on credit r. t. = credit sales / average accounts receivable |
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total asset turnover (activity ratio) |
total asset turnover measures how much in sales each dollar invested in assets generates t. a. t. = sales / average total assets |
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profitability ratios |
- measure the organization's overall financial performance by evaluating its ability to generate revenues in excess of operating costs and expenses - accountants compare the firm's earnings with total sales or investments - over a period of time, profitability ratios may real effectiveness of management in operating the business - three types are gross profit margin, net profit margin and return one quity |
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gross profit margin equation (profitability) |
GPM = gross profit / sales |
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net profit margin equation (profitability) |
NPM = net income / sales |
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return one quity equation (profitability) |
ROQ = net income / average equity |
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leverage ratios |
- measure the extent to which a firm relies on debt financing - they provide particularly interesting information to investor and lenders - helps recognize when operations are relying too heavily on borrowing and may jeopardize future interests - two equations are the debt ratio and long-term debt to equity |
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debt ratio equation (leverage) |
debt ratio = total liabilities / total assets |
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long term debt to equity ratio equation (leverage) |
l.d.e = long-term debt / owner's equity |
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four categories of financial ratios |
1. liquidity 2. activity 3. profitability 4. leverage |
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financial ratios do what |
relate balance sheet and income statement data to one another help management pinpoint a firm's strengths and weaknesses, and indicate areas in need of future investments |
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budget |
a planning and controlling tool that reflects the firm's expected sales revenues, operating expenses and cash receipts and outlays - financial blueprint that estimates expected sales, cash inflows/outflows and costs - becomes the standard for comparison against actual performance |
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budgeting in firms is similar to household budgeting in that its purpose is to.... |
match the income and expenses in a way that accomplishes objectives and correctly times cash inflows and outflows |
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cash budget |
- prepared monthly, track's the firms cash inflow and outflows
- it indicates the months in which the firm may need a temporary loan and how much it will need - produces tangible standard against which to compare actual cash inflows and outflows |
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exchange rate |
- the ratio at which a country's currency can be exchanged for other currencies - currencies can be treated as goods to be bought and sold - like the price of any product, currency prices change daily based off of supply and demand |
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IASB |
"International Accounting Standards Board" - established in 1973 to promote worldwide consistency in financial reporting practices |
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IFRS |
"International Financial Reporting Standards: - standards and interpretations adopted by the IASB |
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Difference between GAAP and IFRS |
GAAP: plant, property and equipment is reported on the balance sheet at the historical host minus depreciation IFRS: plant, property and equipment is shown on the balance sheet at current market value, which gives a better picture of the real value of a firm's assets - many accounting experts believe IFRS is less complicated than GAAP and more transparent |
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business |
all profit-seeking activities and enterprises that provide goods and services necessary to an economic system |
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business drives... |
the economic pulse of the nation |
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profits |
rewards earned by bussinesspeople who take risks involved in blending people, technology and information to create a market want-satisfying goods and services - serve as incentives for people to start companies, expand them and provide constant high-quality competitive goods and services |
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profits equation |
profits = revenue minus expenses |
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not-for-profit organizations |
business-like establishments that have primary objectives other than returning profits to their owners |
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Four main factors of production |
1. natural resources (agricultural land, building sites, forests and mineral deposits) 2. Capital (technology, tools, information, and physical facilities) 3. Human resources (the employees/managers who work, both physical and intellectual labor) 4. entrepreneurship (willingness to take risks to create and operate a business) |
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private enterprise system |
economic system that rewards firms for their ability to identify and serve the needs and demands of consumers (capitalism) |
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competitive differentiation |
unique combination of organizational abilities, products and approaches that sets a company apart from its competitors in the minds of customers |
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basic four rights in a private enterprise system |
1. right to private property (right to own, use, by, sell and bequeath property like land, buildings, machinery, equipment, patents on inventions, and intangible possessions) 2. right to all profits (after taxes) 3. freedom of choice (chose own employment, purchases and investments) 4. fair competition (public sets restrictions like eliminating monopolies and "cut throat" competition) |
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Changes in the workforce (5) |
1. shrinking of the labor pool (aging population) 2. increasingly diverse workforce 3. outsourcing and the changing nature of work (manufacturing -> service economy) 4. flexibility and mobility (no more 9-5, communication through technology) 5. innovation through collaboration (no longer lifetime loyalty to one job. now value partnership with employees) |
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outsourcing |
using outside vendors to produce goods or fulfill services and functions that were previously handled in-house or in-country |
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offshoring |
relocation of business processes to lower-cost locations overseas |
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nearshoring |
outsourcing production or services to locations near a firm's home base |
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economics |
social science that analyzes the choices people and governments make in allocating scarce resources |
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microeconomics |
study of small economic units, such as individual consumers, families and businesses |
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demand vs. supply |
demand: willingness and ability of buyers to purchase goods and services supply: willingness and ability of sellers to provide goods and services |
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demand curve |
- graph of the amount of a product that buyers will purchase at different prices - if the rate of expenses go down, the graph general curves right (aka people consumer in greater quantities because they want to get it cheap) - if the prices rise people begin to be more frugal with their spending and the curve swings left |
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supply curve |
graph that shows the relationship between different prices and the quantities that sellers will offer for sale, regardless of demand - opposite of the demand curve, when the prices lower the curve swings left, showing sellers are less willing to sell their stock in large portions if they don't make as much off of it - if the prices rise, the curve swings right, making their products more available because they will profit more |
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equilibrium price |
the prevailing market price at which you can buy an item, where the supply curve and demand curve meet in the middle |
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macroeconomics |
study of a nation's overall economic issues, such as how an economy maintains and allocates resources and how a governments policies affect the standards of living |
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within a private enterprise system, the four types of market structures are the.... |
1. pure competition 2. monopolistic competition 3. oligopoly 4. regulated monopolies |
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pure competition |
a market in which buyers and sellers exchange homogeneous goods (all the same) where no single participant has a significant input on the price, but rather external influences that decide the market - ex: fisherman who all collect the same clams cant better each other because they're from the same coast, but seasons may change the time of demand for them so the price changes |
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monopolistic competition |
a large market where buyers and sellers exchange heterogeneous goods (differentiated) so everyone has control over their own price whether its based off competing prices or quality Ex: retail industry, forever 21 vs. Abercombie |
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oligopoly |
market situation which relatively few sellers compete in and high state-up costs form barriers to keep out new competitors prices are heavily influenced by competitors, will all stay at same price ex: automobile industry |
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regulated monopoly |
market situation in which a local, state or federal government grants exclusive rights in a certain market to a single firm ex: US Postal Service |
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planned economy |
government controls determine business ownership, profits and resource allocation to accomplish government goals rather than those set by individual firms
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difference between communism and socialism |
socialism: government owns and controls major industries such as health and communications, and small businesses are allowed to be privately owned if deemed not crucial to the social welfare communism: all property is equally shared by the people of the community led by a strong central government |
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mixed economy |
has strong private sectors blends with public enterprises, a mix of people planned and capitalism economies |
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the business cycle |
prosperity, recession (about 6 months), depression, recovery |
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productivity |
the relationship between the number of units produced and the number of human and other production inputs necessary to produce them |
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total productivity equation |
t. p. = output (goods/services produced) / input (human/natural resources, capital) |
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Gross domestic product |
sum of all goods and services produced within a country's boundaries during a specific time period, such as a year total national output / the number of citizens |
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inflation |
the rise of prices causes by a combination of excess consumer demand and increases in the costs of raw materials, component parts, human resources and other factors of production - devalues money as persistent price increases reduce the amount of goods/services people can purchase with a given amount of money |
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core inflation rate |
inflation rate of an economy after energy and food prices are removed |
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hyperinflation |
economic situation characterized by soaring prices. ex: in Zimbabwe prices were doubling every 24 hours |
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deflation |
when prices continue to fall, which can also weaken the economy |
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CPI |
"Consumer Price Index" - measurement of the monthly average change in prices of goods and services |
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unemployment rate |
- percentage of the total workforce actively seeking work but currently unemployed - an indicator of a nation's economic health |
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four types of unemployment |
1. frictional 2. seasonal 3. cyclical 4. structural |
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frictional unemployment |
those who are temporarily not working but looking for jobs ex: new graduates, people who have left their previous jobs for a reason and looking for another, and those who have decided to return to the workforce |
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seasonal unemployment |
the joblessness of people in a seasonal industry ex: construction workers, farm laborers, fishing boat operators and landscape employees |
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cyclical unemployment |
people who are out of work because of cyclic contraction in the economy (like facing a recession and people are let off) ex: high tech industries, air travel, and manufacturing |
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structural unemployment |
people who remain unemployed for long periods of time, often with little hope of finding new jobs like their old ones. this situation may arise for worker who lack the necessary skill for available jobs or because the skills they have are no longer in demand |
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monetary policy |
government actions to increase or decrease the money supply change banking requirements and interest rates t influences bankers' willingness to make loans |
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expansion versus restrictive monetary policies |
expansion: increases money supply in an effort to cut the cost of borrowing, which encourages businesses to make new investments and expand (using loans) restrictive: reduces the money supply to curb rising prices, over-expansion and concerns about overly rapid economic growth |
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FRS |
"Federal Reserve System" or the "Fed" - responsible for formulating and implementing the nations's monetary policy - board of governors with the head of chair being Janet Yellen - all national banks must be a member of this system |
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FOMC |
"Federal Open Market Committee" - overseas the nation's open market operations, which consists of buying and selling treasury securities |
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fiscal policy |
government spending and taxation decisions designed to control inflation, reduce unemployment, improve the general welfare of citizens and encourage economic growth |
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budget |
organizations plan for how it will raise and spend money during a given period of time |
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budget deficit |
situation in which the government spends more money than the amount of money it raises through taxes |
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national debt |
money owed by the government to individuals, businesses and government agencies who purchase Treasury bills, Treasury notes and Treasury bonds sold to cover expenditures |
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budget surplus |
excess funding that occurs when government spends less than the amount of funds raised through taxes and fees |
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balanced budget |
situation in which total revenues raised by taxes equal the total proposed spending for the years - a balanced budget (nor budget surplus) doesn't erase the national debt |
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small business |
- independent business with fewer than 500 employees - 99.7 percent of US companies are small businesses - has generated 64% of jobs in the past two decades |
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home-based businesses |
- makes up 52% of small businesses - positives: more control over business structure and personal time - negatives: isolation, separating business and personal life, less customer visibility |
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contributions of small businesses |
1. creates new jobs (allows those who have a hard time finding work to get a job) 2. creates new industries (develops new ideas) 3. innovation of already created goods and services (customize) |
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ways small businesses can create new industries (3) |
1. when small businesses adapt to provide needed services to a large corporate company 2. when small businesses adapt to shifts in consumer interests and preferences 3. when both the business world and consumers recognize a need for change (ex: going green) |
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Why do small businesses fail? (3) |
THE RISK 1. inexperienced management 2. inadequate financing 3. challenge of meeting governmental regulations |
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inexperienced management: |
overconfidence, lack of people skills, inadequate knowledge of finance, inability to track inventory or sales, poor assessment of competition or customer or poor time management |
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inadequate financing |
money provides the growth engine of any business - big or small - first-time business owners often over estimate the funds their firm will generate, debt is easy to slip into |
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meeting governmental regulations |
larger businesses can better cope with giant governmental regulations because they have more resources - paperwork costs accounts for billions of small businesses each year - one of the biggest challenges they face |
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business plan |
written document that provides an orderly statement of a company's goals, methods and standards |
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a business plan should contain: (4) |
1. an executive summary (who, what where, when, why and how) 2. an introduction (general statement of the concept, purpose, and objectives of business) 3. seperate financial and marketing sections (explains the firm's target market, financial forecasts funds necessary and when the firm will break even) 4. resumes principals (especially in plans to obtain financing) |
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a business plan should address: (6) |
1. the company's mission and the vision of its founders 2. an outline of what makes the company unique 3. the customers (who they will be and how they'll suit their needs) 4. the competition (who they are and how to out due or differentiate from them) 5. financial evaluation of the industry and market conditions 6. assessment of risks |
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franchising |
contractual business arrangement between a manufacturer or other supplier and a dealer such as a restaurant operator or retailer - franchises account for 18 million jobs in US workforce |
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The two principles of a franchise agreement |
franchiser (the firm whose products are being sold to customers) the franchisee (the individual or business firm purchasing a franchise and will sell those goods and services of that corporation ex: McDonald's Cor. is a franchiser, the local Moscow McDonald's restaurant owner is a franchisee |
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benefits/ drawbacks of a franchise |
benefits: opportunities for expansion that may not otherwise be available, franchiser can negotiate better prices because of financial power, quickest way to becoming a business owner, business owner with financial backing of a big corporation drawbacks: if one fails so does the other, can be too confining with decision-making |
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three categories of legal structure for businesses |
1. proprietorship 2. partnership 3. corporation |
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sole proprietorship |
business ownership in which there is no legal distinction between the sole proprietor's status as and individual and his/her status as a business owner 70% of all firms in US advantages: maximum management flexibility, right to all profits after tax, simple requirements disadvantages: personal financial liabilities, wearing many hats |
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partnership |
association of two or more person who operate a business as co-owners by voluntary legal agreement advantage: easy to form, greater financial capability, share operations and skill with disadvantage: exposed to unlimited financial liability (liable for each others actions), breaking up of partnership think of it as a marriage lol |
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corporation |
legal organization with assets and liabilities separate from those of its owner(s). revenue is 19x greater than those of sole proprietors advantage: sockholders have limited financial risk (if the firm fails, they lose only their small investment) greater financial capabilities because of stock sales disadvantage: double taxation of corporate earnings |
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S corporations |
corporations that do not pay corporate taxes on profits but instead profits are distributed to shareholders who pay individual income taxes |
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Limited-liability corporation |
(LLC) corporation that secures the corporate advantage of limited liability while avoiding the double taxation characteristic of a traditional corporation |
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employee ownership |
business ownership in which workers own shares of stock in the company that employs them - rising because employees want to reap the benefit of profit their company earns - employers want the employees to care deeply about company's success |
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merger |
agreement in which two or more firms combine to form one company vertical merger: combines firms operating at different levels in the production and marketing cost horizontal merger: joins firms in the same industry fro the purpose of diversification, increasing customer bases, cutting costs or expanding product lines conglomerate merger: combines unrelated firms, usually with the goal of diversification, spurring sales growth or spending a cash surplus in order to avoid a takeover attempt |
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joint venture |
partnership between companies form for specific undertaking |
