Chapter 14- Accounting Principles and Practices

Flashcards covering key accounting principles, definitions, and concepts essential for understanding financial statements and accounting practices.

Accounting

The recording, measurement, and interpretation of financial information.

Financial Accounting Standards Board (FASB)

An organization that has been setting the principles and standards of financial accounting and reporting in the private sector since 1973.

How is bookkeeping different from accounting?

Bookkeeping records raw data; accounting analyzes and interprets that data.

Certified Public Accountant (CPA)

An individual who has been state certified to provide various accounting services, including audits and preparation of financial records.

What is a CMA?

Certified Management Accountant—private accountant certified to handle managerial responsibilities.

Private Accountant

Accountants employed by organizations to prepare and analyze their financial statements.

Managerial Accounting

The internal use of accounting statements by managers for planning and directing organizational activities.

Cash Flow

The movement of money through an organization over a specified time period.

Budget

An internal financial plan that forecasts expenses and income over a set period.

Who are internal users of accounting info?

Managers, owners, board members, employees.

Who are external users of accounting info?

IRS, stockholders, creditors, analysts, customers.

Assets

A firm’s economic resources, or items of value that it owns.

What is a current asset?

An asset that can be used or converted to cash within one year.

What is accounts receivable?

Money owed to a company by customers.

Liabilities

Debts that a firm owes to others.

What is a current liability?

A debt due within one year.

What is accounts payable?

Money a company owes to suppliers.

What is accrued expense?

An unpaid financial obligation.

Owner’s Equity

The difference between a firm’s total assets and total liabilities.

Accounting Equation

Assets = Liabilities + Owners’ Equity.

Double-entry Bookkeeping

A system of recording business transactions that maintains the balance of the accounting equation.

What are the 4 steps of the accounting cycle?

Source documents show that a transaction took place, The transaction is recorded in the journal, The transaction is posted in the general ledger under the appropriate account, At the end of the accounting period, the ledger is used to prepare the firm’s financial statements

What is a journal?

A time-ordered list of transactions.

What is a ledger?

A book/file that organizes transactions by account.

Financial Statements

Reports that summarize the financial performance and position of a firm over a specific period.

What does an income statement show?

A company’s profitability over a period of time.

Revenue

The total amount of money received from the sale of goods or services.

Cost of Goods (COGS)

Cost of Goods Sold: money spent to produce goods sold.

Net Income

The total profit or loss after all expenses have been deducted from revenue.

How is gross profit calculated?

Revenue - COGS

What are operating expenses?

Costs of running a business day-to-day.

What is depreciation?

Spreading the cost of an asset over its useful life.

What is a balance sheet?

A snapshot of a firm’s financial position at a specific point.

What is goodwill?

An intangible asset based on a company’s positive reputation.

What are the 3 sections of the statement of cash flows?

Operating, investing, and financing activities.

Ratio Analysis

Calculations that measure an organization’s financial health.

What is return on assets (ROA)?

Net income divided by total assets.

What is return on equity (ROE)?

Net income divided by owners’ equity.

Profit Margin

Net income divided by sales; shows the percentage of profits earned by the company.

What is receivable turnover?

Sales divided by accounts receivable.

What is inventory turnover?

Sales divided by inventory.

Current Ratio

Current assets divided by current liabilities; measures the ability to meet short-term obligations.

What is total asset turnover?

Sales divided by total assets.

What is the current ratio?

Current assets divided by current liabilities.

What is the quick ratio (acid test)?

(Current assets – Inventory) / Current liabilities

What is the debt to total assets ratio?

(Debt × (Assets – Equity)) / Total assets

What is the times interest earned ratio?

Operating income divided by interest expense.

Earnings per Share (EPS)

Net income divided by the number of outstanding shares.

What is dividends per share?

Dividends paid divided by shares outstanding.