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28 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is Fischer Black's definition of accounting?
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"Accounting is a language that people within a firm can use to discuss its projects and progress with one another, and that they can use to tell outsiders what's happening in the firm without giving away too many of its secrets to competitors."
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What is the difference between bookkeeping and accounting?
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Bookkeeping
-generates financial data -records transactions -keeps the books -compiles financial statements -not much judgement involved -gives financial statements to others to use |
Accounting
-turns financial data into information -analyzes transactions -analyzes the books -uses financial statements to tell/understand story of company -decision-making and judgement -uses financial statements as one source of information about a company |
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Who crafts the accounting lens in the U.S.?
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The body of accounting standards used in the U.S. is called GAAP (Generally Accepted Accounting Principles). It is established by the FASB (Financial Accounting Standards Board).
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Who crafts the accounting lens outside of the U.S.?
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The body of standards used internationally (most everywhere except the U.S.) is called IFRS (International Financial Reporting Standards). It is established by the IASB (International Accounting Standards Board).
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What do we call the process of recording transactions and preparing financial statements?
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The Accounting Cycle
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What are assets?
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Any things of value owned or leased by a business
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What are liabilities?
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Claims against a firm's assets by creditors
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What is owners' equity (OE or SE)?
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The portion of a company's assets that belongs to the owners after obligations to all creditors have been met
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What is the accounting equation?
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A = L + SE
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What are the two basic pieces of SE?
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1. Equity invested by shareholders (preferred stock / common stock)
2. The accumulated net income or losses of the company (retained earnings / retained deficit) |
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What information does the balance sheet provide?
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This statement provides a snapshot of A = L + SE.
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Why is the balance sheet useful?
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-Describes resources a company has for generating future cash flows
-The Asset balance informs us about the size of the company -Provides information about company's liquidity -Provides information about long-term solvency |
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What are some limitations of the balance sheet?
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-As of one date in time
-Does not portray the market value of a company -Does not portray the liquidation value -Assets and liabilities are measured using a combination of approaches, including historical cost and fair value -Some assets are left off the balance sheet, including human capital assets and self-developed intangible assets (Ex: If Google develops a patent, the can't record the value as an asset) |
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How does double entry bookkeeping work?
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Every transaction that gets recorded must affect the accounting equation in 2 ways (so that it always stays in balance)
Example: You buy an asset and finance it with the company credit card. Effects: Assets increase / Liabilities increase |
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What are the two types of accounting?
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1. Cash Basis Accounting
2. Accrual Accounting |
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What is cash basis accounting?
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Revenue is recognized when cash is received. Expenses are recognized when cash is paid.
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What is accrual accounting?
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Revenue is recognized when earned. Expenses are recognized when incurred.
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What is the primary accounting method?
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Accrual accounting
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What is the income statement?
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A financial record of a company's revenues, expenses, and profits over a given period of time.
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What are the 6 basic components of the income statement?
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1. Expenses
2. Net Income 3. Cost of Goods Sold 4. Gross Profit 5. Operating Expenses 6. Earnings per Share |
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What is the income statement definition of an expense
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Costs created in the process of generating revenues
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What is the income statement definition of net income?
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-Profit earned or loss incurred by a firm, determined by subtracting expenses from revenues
-Referred to as the bottom line |
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What is the income statement definition of cost of goods sold?
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The cost of producing or acquiring a company's products for sale during a given period
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What is the income statement definition of gross profit?
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-The amount remaining when the cost of goods sold is deducted from net sales
-Also known as gross margin -Can also be stated as a percentage (gross margin percentage = gross margin / net revenue) |
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What is the income statement definition of operating expenses?
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-All costs of operation that are not included under cost of goods sold
-Selling, general, and administrative (SG&A) |
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What is the income statement of earnings per share?
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A way to present earning that scales it by the number of shares of common stock outstanding
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What is the statement of cash flows?
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A statement of a firm's cash receipts and cash payments that presents information on its sources and uses of cash.
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What are the 3 sections of the statement of cash flows?
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1. Operating cash flows
2. Investing cash flows 3. Financing cash flows |
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