Accounting Module Terminology

Financial accounting

Serves outsiders (investors, creditors, and regulators)
Produces the formal financial statements (income statements, statement of owner’s equity)
Public companies must report

Financial statements

Show information about a company’s financial position, performance, and cash flows

Income statements

Shows whether a company made or lost money over a specific time period

Statement of owner’s equity

Financial report that tracks how the owner’s stakes in a business change over time

Balance sheet

Assets = Liabilities + Equity
Financial statement that provides a snapshot of a company’s financial position at a specific point in time

Statement of cash flows

Financial report that tracks actual cash moving into and out of a business

Generally Accepted Accounting Principles (GAAP)

Set of rules and standards that companies in the US follow when preparing financial statements

International Financial Reporting Standards (IFRS)

Rulebook issued by IASB

Management (managerial) accounting

Can be tailored for managers
Worked on by many departments - HR, marketing, etc.
Doesn’t need to be reported to SEC, even if a public company

Investors

Group of people who put money into an asset or business with the goal of making a financial profit

Creditors

A person that lends money or provides goods or services to another party with the expectation of repayment

Securities and Exchange Commission (SEC)

Federal agency which public companies report to. Regulates the markets, requires the filings, enforces regulations

Fundamental accounting equation:

Assets = Liabilities + Owner’s Equity

Accrual

Revenue when it is earned, expenses when incurred

Cash profitable when?

Revenue when cash comes in, expense when cash goes out

Deferred revenue

Revenue unearned, made back later

Accounts receivable

Work done, revenue earned, but money hasn’t arrived

Accrued expense

Benefits received, cash not yet paid

Cash first, prepaid expense means it is a(n) asset/liability

Asset

Cash first, deferred revenue means it’s a(n) asset/liability

Liability

Cash later, accrued expense means it’s a(n) asset/liability

liability

Cash later, accrued revenue means it’s a(n) asset/liability

asset

Why is depreciation reported on cash flow statements?

It reduces reported income, as cash left earlier when asset was bought, not during this period, so it’s reported to explain where the money went

Operating cash flow

Collections from customers, payments to suppliers and employees

(Financial Accounting Standards Board) FASB

Private and independent, writes US GAAP

Audit

Independent, systematic check of a company’s financial records, rules, and daily work

How do write downs affect the balance sheet?

Reduces total assets on balance sheet

How do write downs affect the income statement?

Reduces a company’s reported net income by recognizing the loss in an asset’s value

FIFO physical flow

Stock rotates oldest-first or it spoils

FIFO cost flow

assumes oldest inventory costs are matched against revenue

variable costs

rises and falls with volume (food, hourly labor, credit card)

fixed costs

does not change with volume (rent, salaried manager, ultilities)

contribution margin

what is left from sale after the variable costs that the sale caused

break even

revenue at which total contribution exactly covers total fixed costs - no profit, no loss

debt financing

taking a loan from a commercial bank

equity financing

can sell an ownership stake, giving stakeholders a share of capital