Business Chapter 16

Front 1

Explain the functions of accounting and its importance to the firm's management, investors, creditors, and government agencies.

Back 1

Accountants measure, interpret, and communiccate financial information to parties inside and outside the firm to support improved decision making. Accountants gather, record, and interpret financial information to management. They also provide financial information on the status and operations of the firm for evaluation by such outside arties as government agencies, stockholders, potential investors, and lenders.

Front 2

Define accounting.

Back 2

Accounting is the process of measuring, interpreting, and communicating financial information in a way that describes the status and operation of an organization and aids in decision making.

Front 3

Who uses accounting information?

Back 3

Managers of all types of organizations use accounting information to help them plan, assess perfomance, and control daily and long-term operations. Outside users of accounting information include government officials, investors, creditors, and donors.

Front 4

Identify the three basic business activities involving accounting.

Back 4

Accounting plays key roles in financing activities, which help start and expand an organization; investing activities, which provide the assets it needs to continue operating; and operating activities, which focus on selling goods and services and paying expenses incurred in regular operations.

Front 5

Describe the roles played by public, management, government, and not-for-profit accountants.

Back 5

Public accountants provide accounting services to other firms or individuals for a fee. They are involved in such activities as tax statement preparation, management consulting, and accounting system design. Management accountants collect and record financial transactions, prepare financial statements, and interpret them for managers in their own firms. Government and not-for-profit accountants perform many of the same functions as management accountants, but they analyze how effectively the organization or agency is operating rather than its profits and losses.

Front 6

What is the difference between a public accountant and a management accountant?

Back 6

A public accountant provides accounting services to inidviduals and organizations for a fee. A management accountant is employed by an organization other than a public accounting firm.

Front 7

What services does the typical public accounting firm provide to clients? How has the mix of services changed in recent years?

Back 7

Public accounting firms provide audit, tax, and consulting services to clients. In recent years, some of the largest public firms, such as PWC, sold their consulting businesses in order to focus mainly on tax and auditing services.

Front 8

Outline the steps in the accounting process.

Back 8

The accounting process involves recording, classifying, and summarizing data about transactions and then using this information to produce financial statements for the firm's managers and other interested parties. Transactions are recorded chronologically in journals, posted in ledgers, and then summarized in accounting statements. Today much of this takes place electronically. The foundation of the accounting system is GAAP (generally accepted accounting principles), a set of guidelines or standards that accountants follow. IN the US, the Financial Accounting Standards Board (FASB) is primarily responsible for evaluating, setting, and modifying GAAP. The basic accounting equation states that assets (What a firm owns) must always equal liabilities (what a firm owes creditors) plus owners' equity. This equation also illustrates double-entry bookkeeping--the process by which accounting transactions are recorded. Under double-entry bookkeeping, each individual transaction must have an offsetting transaction.

Front 9

Briefly describe the accounting process.

Back 9

The accounting process involves recording, classifying, and summarizing transactions in order to produce financial statements.

Front 10

Define GAAP. What is the role of the Finincial Accounting Standards Board?

Back 10

GAAP stands for generalaly accepted accounting principles and consists of guidelines or standards that accountants follow when recording, classifying, and summarizing transactions. IN the US the Financial Accounting Standards Boards (FASB) is primarliy responsible for evaluating, setting, and modifying GAAP.

Front 11

Describe the basic accounting equation.

Back 11

The basic equation states that assets (what a firm owns) always equals liabilities (what a firm owes creditors) plus owners' equity.

Front 12

Explain the functions and major components of the financial statement: the balance sheet.

Back 12

The balance sheet shows the financial position of a company on a particular date. The three major classifications of balance sheet data represent the components of the accounting equation: assets, liabilities, and owners' equity.

Front 13

Explain the function and major components of the financial statement: the income statement.

Back 13

The income statement shows the results of a firm's operations over a specific period. It focuses on the firm's activities--its revenues and expenditures--and the resulting profit or loss during the period. The major componenets of the income statement are revenues, cost of goods sold, expenses, and profit or loss.

Front 14

Explain the function and major components of the financial statement: the statement of cash flows.

Back 14

The statement of cash flows indicates a firm's cash receipts and cash payments during an accounting period. It shows the sources and usses of cash in the basic business activities of financing, investing, and operating.

Front 15

Explain how a company's balance sheet is organized and its overall purpose.

Back 15

The purpose of a balance sheet is to show a company's financial position at a point in time--say the end of the fiscal year. Assets are listed on one side in order of liquidity (how easily and quickly the asset could be converted into cash). Liabilities are listed on the other side in the order in which they are due. Owners' equity is listed after liabilities.

Front 16

What is an income statement?

Back 16

The income statement lists all sales (or revenues) and expenses that occured during a period of time (such as a quarter or year). The bottom line of the income statement is net income.

Front 17

Why do firms prepare a statement of cash flows? Explain accrual accounting.

Back 17

The statement of cash flows lists the sources and uses of cash during a period of time. Public companies are required to prepare and report a statement of cash flows. Cash flow can differ from income because of the widespread use of accrual accounting. Accrual accounting records transactions when they occur, not necessarily when cash changes hands.

Front 18

Discuss how financial ratios are used to analyze a firm's financial strenghts and weaknesses.

Back 18

Liquidity ratios measure a firm's ability to meet short term obligations. Examples are the curretn ratio and the acid-test ratio. Activity ratios, such as the inventory turnover ratio and the total asset turnover ratio, measure how effectively a firm uses its resources. Profitability ratios assess the overall financial performance of the business. The gross profit margin, net profit margin, return on assets, and return on owners' equity are examples. Leverage ratios, such as the total liabilities to total assets ratio and the long-term debt to equity ratio, measure the extent to which the firm relies on debt to finance its operations. Financial ratios help managers and outside evaluaters compare a firm's current financial information with that of previous years and with results for other firms in the same industry.

Front 19

What is the purpose of financial ratio analysis?

Back 19

Financial ratis provide managers and outside investors and creditors with information concerning the financial health of a company. They allow comparisons of a company's financial information with that of previous years and with results for similar firms.

Front 20

List the categories of financial ratios. Give an example of each.

Back 20

The major categories of financial ratios are liquidity, activity, profitability, and leverage. Examples include current ratio (liquidity), inventory turnover (activity), net profit margin (profitability), and debt ratio (leverage).

Front 21

Describe the role of budgets in a business.

Back 21

Budgets are financial guidelines for future periods reflecting expected sales revenues, operating expenses, and/or cash receipts and outlays. They represent management expectations for future occurrences based on plans that have been made. Budgets serve as important planning and controlling tools by providing standards against which actual performance can be measured.

Front 22

What is a budget?

Back 22

A budget is a planning and control tool that reflects the firm's expected sales revenues, operating expenses, cash receipts, and cash outlays.

Front 23

Describe how a cash budget is organized.

Back 23

Cash budgets are generally prepared monthly. Cash receipts are listed first. They include cash sales as well as the collection of past credit sales. Cash outlays are listed next. THese include cash purchases, payment of past credit purchases, and operating expenses. The difference between cash receipts and cash outlays is net cash flow.

Front 24

Explian how exchange rates influence international accounting practices and the importance of uniform financial statements for global business.

Back 24

An exchange rat is the ratio at which a country's currency can be exchanged for other currencies. Daily changes in exchange rates affect the accounting entries for sales and purchases of firms involved in international markets. These fluctuations create either losses or gains for particular companies. Data about international financial transactions must be translated into the currency of the country in which the parent company resides. The International Accounting Standards Committee was established to provide worldwide consistency in financial reporting practices and comparability and uniformity of international accounting standards.

Front 25

Assume the US dollar gets stronger relative to the euro. What impact would that have on a US firm with extensive operations in Europe?

Back 25

European profits have to be converted from euros to dollars. If the value of the dollar rises relative to the euro, the dollar value of European profits declines. This decline will hurt the firm's earnings.

Front 26

What is the IASC?

Back 26

The IASC (International Accounting Standards Committee) provides worldwide consistency in financial reporting practices and comparability and uniformity of accounting standards worldwide.

Front 27

What is a liquidity ratio?

Back 27

Measure's the firms ability to meet short term requirements. Examples: current ratio and acid test ratio

Front 28

What does a profitability ratio do?

Back 28

Assess the overall profitability of a business. Examples: Gross profit margin, net profit margin, return on assets, return on owners equity

Front 29

What does an activity ratio measure?

Back 29

Measure how effectively a company uses it's resources. Examples: inventory turnover ratio, total asset turnover ratio.

Front 30

Leverage ratios

Back 30

measure the extent to which the firms rely on debt to finance operations. Examples: total liabilities to total assets ratio and long term debt to equity ratio.