Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
61 Cards in this Set
- Front
- Back
|
15.1 DEFINE: ACCOUNTING |
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. |
|
|
15.1 WHO USES ACCOUNTING INFORMATION? |
Individuals both inside and outside a business, or organization.
INSIDE
MANAGERS - the major users of accounting information, since it helps them to plan future operations and control daily and long-term operations.
BUSINESS OWNERS & BOARDS OF DIRECTORS - use accounting data to determine how well managers are operating the organizations.
UNION OFFICIALS - use accounting data in contract negotiations.
EMPLOYEES - use accounting data to monitor their firms productivity and profitability performance; proponents of what is called "OPEN BOOK MANAGEMENT" allow employees access to this information in order to better understand how their work contributes to the company's success, which in turn, benefits them.
OUTSIDE
POTENTIAL INVESTORS - evaluate accounting information to help them decide if they want to purchase stock.
**Any company whose stock is traded publicly is required to report financial results on a regular basis.
BANKERS AND CREDITORS - any financial lender to a company or organization, uses accounting information to determine whether or not to lend to the company based on their financial soundness.
IRS - uses accounting information to determine a company's tax liability
CITIZEN'S GROUPS and GOVERNMENT AGENCIES use accounting information in assessing the efficiency of operations in the organization.
**[organizations i.e.] MA General Hospital; Topeka, KS School System; Community College of Denver; and the Art Institute of Chicago
|
|
|
15.1 DIAGRAM: Users of Accounting Information |
|
|
|
15.1 WHAT THREE BUSINESS ACTIVITIES INVOLVE ACCOUNTING? |
1. FINANCING - provide necessary funds to start an organization and to expand the organization after it begins operating
2. INVESTING - provide valuable assets required to run an organization
3. OPERATING - focus on selling goods and services, but they also consider expenses as important elements of sound financial management
**The natural progression of a business begins with financing. Subsequent steps, including investing, lead to operating the business. All organizations, profit oriented, and not-for-profit, perform these three basic activities, and accounting plays a key role in each one. |
|
|
15.2 DEFINE: PUBLIC ACCOUNTANT |
An accountant who provides accounting services to individuals or business firms for a fee.
Because they are not an employee of the client firm, they can provide unbiased advice about the firm's financial condition. |
|
|
15.2 LISTS THE THREE PRIMARY TASKS PERFORMED BY A PUBLIC ACCOUNTANT: |
1. Auditing - examining financial records
2. Management Consulting
3. Tax Services - preparation, planning, and related services. |
|
|
15.2 DEFINE: MANAGEMENT ACCOUNTANT |
An accountant who is employed by a business, other than a public accounting firm. |
|
|
15.2 LIST PRIMARY TASKS OF A MANAGEMENT ACCOUNTANT |
1. Collects and records financial transactions
2. Prepares and interprets financial statements
|
|
|
15.2 GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTANTS PERFORM MANY OF THE SAME FUNCTIONS AS WHAT TYPE OF ACCOUNTANT?
|
Management Accountant
|
|
|
15.2 WHAT IS A MAJOR DIFFERENCE IN THE ANALYSIS PROVIDED BY ACCOUNTANTS WORKING IN THE PRIVATE SECTOR VS. ACCOUNTANTS WORKING FOR THE GOVERNMENT OR NOT-FOR-PROFIT ORGANIZATIONS? |
Accountants who work for the government or not-for-profit organizations analyze how effectively the organization is operating, RATHER THAN its profits and losses. |
|
|
15.3 DEFINE: 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.
|
|
|
15.3 WHAT FOUR BASIC PRINCIPLES ARE ALL GAAP STANDARDS BASED ON? |
1. Consistency - means that all data should be collected and presented in the same manner across all periods. Any change in the way in which specific data are collected or presented must be noted and explained.
2. Relevance - states that all information being reported should be appropriate and assist users in evaluating that information.
3. Reliability - implies that the accounting data presented in financial statements are reliable and can be verified by an independent party such as an outside auditor.
4. Comparability - ensures that one firm’s financial statements can be compared with those of similar businesses. |
|
|
15.3 DEFINE: FASB |
The Financial Accounting Standards Board
an organization responsible for evaluating, setting, or modifying GAAP in the United States.
|
|
|
15.3 WHAT IS OF THE FOREIGN CORRUPT PRACTICES ACT? |
federal law that prohibits U.S. citizens and companies from bribing foreign officials in order to win or continue business. |
|
|
15.4 DEFINE: THE ACCOUNTING CYCLE |
A set of activities involved in converting information and individual transactions into
|
|
|
15.4 DIAGRAM: The Accounting Cycle |
|
|
|
15.4 NAME THREE FUNDAMENTAL TERMS USED IN THE ACCOUNTING EQUATION. |
1. Asset 2. Liability 3. Owner's Equity |
|
|
15.4 DEFINE: ASSET |
anything of value owned or leased by a business,
i.e: land, buildings, supplies, cash, accounts receivable (amounts owed to the business as payment for credit sales), marketable securities, buildings, equipment, and inventory; EVEN intangible possessions such as patents and trademarks, which are often some of a firm ’s most important assets.
|
|
|
15.4 DEFINE: LIABILITY |
anything owed to creditors—the claims of a firm’s creditors; includes:
- People/Businesses whom the business borrows money from (accounts payable, notes payable, or long-term debt)
- Employee Wages & Salaries that are owed (wages payable or accrued wages) |
|
|
15.4 DEFINE: OWNER'S EQUITY |
the owner’s initial investment in the business; plus profits that were not paid out to owner over time in the form of cash dividends.
A strong owners ’ equity position often is used as evidence of a firm ’s financial strength and stability. |
|
|
15.4 DEFINE: THE ACCOUNTING EQUATION |
assets must equal liabilities plus owners ’ equity; (also referred to as the accounting identity)
ASSETS = LIABILITIES + OWNER'S EQUITY
The relationship expressed by the accounting equation underlies development of the firm ’s financial statements. |
|
|
15.4 WHAT IS THE SIGNIFICANCE OF THE ACCOUNTING EQUATION? |
This equation reflects the financial position of a
Because financing comes from either creditors or owners, the right side of the accounting equation (liabilities + owner's equity) also represents the business ’s financial structure. |
|
|
15.4 DEFINE: DOUBLE-ENTRY BOOKING |
process by which accounting transactions are |
|
|
15.5 WHAT ARE THE FOUR PRIMARY FINANCIAL STATEMENTS? |
1. the balance sheet 2. the income statement 3. the statement of owners’ equity 4. the statement of cash flows
The first three financial statements form the foundation of a company's financial wellbeing: the information found in these statements is calculated using the double-entry bookkeeping system and reflects the basic accounting equation.
The fourth statement, is prepared to focus specifically on the sources and uses of cash for a firm from its operating, investing, and financing activities. |
|
|
15.5 WHAT IS THE IMPORTANCE OF FINANCIAL STATEMENTS? |
Financial statements provide managers with essential information they need to evaluate: -the liquidity position of an organization (its ability to meet current obligations and needs by converting assets into cash); -the firm ’s profitability; -the firm's overall financial health.
Financial statements also provide a foundation on which managers can base their decisions. |
|
|
15.5 WHICH FINANCIAL STATEMENT IS CONSIDERED TO BE A PERMANENT STATEMENT? |
The Balance Sheet
The income statement, statement of owners’ equity, and statement of cash flows are considered temporary because they are closed out at the end of each year. |
|
|
15.5 DEFINE: THE BALANCE SHEET |
statement of a firm ’s financial position on a particular date. |
|
|
15.5 DIAGRAM: The Balance Sheet |
|
|
|
15.5 WHAT IS THE FUNCTION OF THE BALANCE SHEET? |
Balance sheets must be prepared at regular intervals, because a firm’s managers and other internal parties often request this information every day, every week, or at least every month.
On the other hand, external users, such as stockholders or industry analysts, may use this information less frequently, perhaps every quarter or once a year. |
|
|
15.5 WHAT FORMULA DOES THE BALANCE SHEET FOLLOW? |
The accounting equation. |
|
|
15.5 WHAT INFORMATION WOULD ONE FIND ON THE LEFT SIDE OF THE BALANCE SHEET? |
The firm ’s assets—what it owns.
These assets, shown in descending order of liquidity (in other words, convertibility to cash), represent the uses that management has made of available funds. Cash is always listed first on the asset side of the balance sheet. |
|
|
15.5 WHAT INFORMATION WOULD ONE FIND ON THE RIGHT SIDE OF THE BALANCE SHEET? |
The claims against the firm ’s assets.
Liabilities and Owners’ Equity indicate the sources of the firm’s assets and are listed in the order in which they are due.
Liabilities reflect the claims of creditors—financial institutions or bondholders that have loaned the firm money; suppliers that have provided goods and services on credit; and others to be paid, such as federal, state, and local tax authorities.
Owners ’ Equity represents the owners’ claims (those of stockholders, in the case of a corporation) against the firm’s assets.
It also amounts to the excess of all assets over liabilities. |
|
|
15.5 DEFINE: THE INCOME STATEMENT |
a summary of a firm ’s financial performance in terms of revenues, expenses, and profits over a given time period, say, a quarter or a year.
**(some times called a profit-and-loss, or P&L, statement) |
|
|
15.5 DIAGRAM: The Income Statement |
|
|
|
15.5 WHAT IS THE FUNCTION OF THE INCOME STATEMENT? |
-Reports the firm’s profit or loss results.
-Indicates the flow of resources which reveals the performance of the organization over a specific time period.
-Helps decision makers focus on overall revenues and the costs involved in generating these revenues.
-Managers of a not-for-profit organization use this statement to determine whether its revenues from contributions, grants, and investments will cover its operating costs. the income statement
-Provides much of the basic data needed to calculate the financial ratios managers use in planning and controlling activities |
|
|
15.5 DEFINE: THE STATEMENT OF OWNER'S EQUITY |
A record of the change in owners ’ equity from the end of one fiscal
|
|
|
15.5 DIAGRAM: The Statement of Owner's Equity |
|
|
|
15.5 DEFINE: The Statement of Cash Flow |
statement showing the sources and uses of cash
Public companies are required to prepare and publish a statement of cash flows.
Commercial lenders often require a borrower to submit a statement of cash flows. |
|
|
15.5 WHAT IS THE FUNCTION OF THE STATEMENT OF CASH FLOW? |
Provides investors and creditors with relevant information about a firm ’s
|
|
|
15.5 DEFINE: Accural Accounting |
accounting method that records revenues and expenses when they occur,
|
|
|
15.5 DIAGRAM: The Statement of Cash Flow |
|
|
|
15.6 DEFINE: Ratio Analysis |
A critical analysis tool, created by accountants which allow for interpretation of the financial statements. |
|
|
15.6 WHAT IS THE FUNCTION OF RATIO ANALYSIS? |
It provides a measure of a firm’s: 1. liquidity 2. profitability 3. reliance on debt financing 4. the effectiveness of management ’s resource utilization
This analysis also allows comparisons with -Comparison helps managers better understand their firm’s performance relative to competitors’ results. -These industry standards are important yardsticks and help pinpoint problem areas, as well as areas of excellence. -Ratios for the current accounting period may be compared with similar calculations for previous periods to spot developing trends.
Ratios can be classified according to their specific
|
|
|
15.6 NAME: the four categories of financial ratios |
1. Liquidity Ratio 2. Activity Ratio 3. Profitability Ratio 4. Leverage Ratio |
|
|
15.6 DEFINE: Liquidity Ratio |
The tool used to measure a firm ’s ability to meet its short-term obligations when they must be paid. -Increasing liquidity reduces the likelihood that a firm will face emergencies caused by the need to raise funds to repay loans. -On the other hand, firms with low liquidity
|
|
|
15.6 NAME: Two commonly used LIQUIDITY RATIOS |
The Current Ratio The Acid-Test (or quick) Ratio |
|
|
15.6 DEFINE: The Current Ratio |
The current ratio compares current assets to current liabilities, giving executives information about the firm ’s ability to pay its current debts as they mature. A current ratio of 2:1 is generally considered satisfactory liquidity.
A type of liquidity ratio. |
|
|
15.6 DEFINE: The Acid-Test Ratio (or The Quick Ratio) |
Measures the ability of a firm to meet its debt payments on short notice. This ratio compares quick assets against current liabilities. An acid-test ratio of 1:1 is generally considered satisfactory liquidity
-Quick assets—the most liquid current assets— generally consist of cash and equivalents, short-term investments, and accounts receivable. So, generally quick assets equal total current assets minus inventory.
A type of liquidity ratio. |
|
|
15.6 DEFINE: Activity Ratio |
A measure of the effectiveness of management’s use of the firm ’s resources. |
|
|
15.6 DEFINE: The Inventory Turnover Ratio |
Indicates the number of times merchandise moves through a business. -If a company makes a substantial portion of its sales on credit, measuring receivables turnover can provide useful information.
A type of activity ratio. |
|
|
15.6 DEFINE: Profitability Ratios |
Ratios that measure the organization ’s overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses. -To compute these ratios, accountants compare the firm ’s earnings with total sales or investments -Over a period of time, profitability ratios may reveal the effectiveness of management in operating the business. |
|
|
15.6 NAME 3 IMPORTANT PROFITABILITY RATIOS |
1. gross profit margin ratio 2. net profit margin ratio 3. return on equity ratio |
|
|
15.6 DEFINE: Leverage Ratios |
Leverage ratios measure the extent to which a firm relies on debt financing. -They provide particularly interesting information to potential investors and lenders. -These ratios show if management has assumed too much debt in financing the firm ’s operations, and indicate if problems may arise in meeting future interest payments and repaying outstanding loans. |
|
|
15.6 NAME: Two important types of Leverage ratios |
1. The Debt Ratio 2. The Long-Term Debt to Equity Ratio |
|
|
15.7 DEFINE: Budget |
A planning and controlling tool that reflects the firm’s expected sales revenues, operating expenses, and cash receipts and outlays. -It quantifies the firm ’s plans for a specified future period.
|
|
|
15.7 WHAT IS THE FUNCTION OF A BUDGET? |
To match income and expenses in a way that accomplishes objectives and correctly times cash inflows and outflows.
One of the most important budgets created for a firm is the cash flow budget. |
|
|
15.7 DIAGRAM: The Cash Flow Budget |
|
|
|
15.8 WHAT ARE IMPORTANT TASKS OF ACCOUNTANTS WORKING FOR INTERNATIONAL FIRM'S? |
International accounting practices for global firms must reliably translate the financial statements of the firm ’s international affiliates, branches, and subsidiaries and convert data about foreign currency transactions to dollars.
Also, foreign currencies and exchange rates influence the accounting and financial reporting processes of firms operating internationally.
|
|
|
15.7 DEFINE: Exchange Rate |
An exchange rate is 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. |
|
|
15.7 DEFINE: International Accounting Standards Board (IASB) |
An organization established in 1973 to
|
|
|
15.7 DEFINE: International Financial Reporting Standards (IFRS)
|
Standards and interpretations adopted by |
