WGU C213

Accounting

The recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company’s financial status

Bookkeeping

The preservation of a systematic, quantitative record of an activity

Accounting system

Used by a business to handle routine bookkeeping tasks and to structure the information so it can be used to evaluate the performance and financial status of the business

Accounting Information

Info that is intended to be useful in making decisions about the futureTh

The Balance Sheet, Income statement, and the Statement of Cash Flows

What are the three primary financial statements?

External Users

Who is financial accounting information primarily prepared for and used by?

Managerial Accounting

The name given to accounting systems designed for internal users

Balance Sheet

Reports a company’s assets, liabilities, and owners’ equity

Income Statement

Reports the amount of net income earned by a company during a period

Net Income

The excess of a company’s revenues over its expensesS

Statement of Cash Flows

Reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing and financing

FASB (Financial Accounting Standards Board

A private body established and supported by the joint efforts of the U.S. business community, financial analysts and practicing accountants that establish accounting rules in the US.

The Securities and Exchange Commision (SEC)

The organization that regulates the U.S. stock exchanges and seeks to create fair information environment in which investors can buy and sell stocks without fear that companies are hiding or manipulating financial data.

American Institute of Certified Public Accountants (AICPA)

Professional organization of certified public accountants (CPAs) in the US.

Public Company Accounting Oversight Board (PCAOB)

Organization that inspects the audit practices of registered audit firms and has statutory authority to investigate questionable audit practices and to impose sanctions such as barring an audit firm from auditing SEC-registered companies. (Who audits the auditors)The

The IRS (Internal Revenue Service)

Government agency that establishes rules to define exactly when income should be taxed. No role in setting financial accounting rules, and a company’s financial statements are not used in determining how much taxes the company must pay.T

The International Accounting Standards Board (IASB)

Organization that was formed to develop a common set of worldwide accounting standards. Its standards are increasingly accepted worldwide, but the FASB rules are still the standard in the US.

1. Rapid Advancements in the IT field

2. The international integration of worldwide business

3. Increased scrutiny associated with large corporate accounting scandals

Which 3 factors have combined to make right now a time of significant change in accounting?

Sarbanes-Oxley Act

A wave of accounting scandals starting in 2001 resulted in this act, which increases U.S. federal government scrutiny of the production of financial statements.

Balance Sheet

Reports a company’s financial position at a specified point in time and lists the company’s resources (assets), obligations (liabilities), and net ownership interest (owners’ equity)

Assets

Probable future economic benefits obtained or controlled by a company as a result of past transactions or events

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events

Owners’ Equity

The residual interest in the assets of a company that remains after deducting its liabilities

Assets = Liabilities + Owners’ Equity

What is the accounting equation?

By order of liquidity

In what order are assets typically listed on the balance sheet?

Current and Long-term

Liabilities are divided into which 2 categories on the balance sheet?S

States that the financial results of an economic entity should be reported separately from the financial results of other entities, even though all those entities may be controlled by the same person

What is the entity concept

Net Income = Revenues - Expenses

Equation to calculate net income

When work has been done and collectability of cash can be reasonably assured

According to accounting rules, when should revenue be recognized?

Operating activities

Those activities that comprise the day-to-day operations of a business.

Investing activities

The purchase and sale of long-term assets such as land and equipment are known as ____.

Financing activities

Those activities through which cash is obtained from, or repaid to, creditors and investors.

Information on the accounting assumptions used in preparing the statements and supplemental information not included in the statements themselves

What information do the notes to accounting statements provide?

1. Summary of accounting policy

2. Additional info about summary totals

3. Disclosure of info not included in summary

4. Supplemental disclosure required by the FASB or SEC

What are the 4 general types of accounting notes?

Conservatism

The practice of recognizing all loses but not recognizing gains until they are certainMa

Materiality

The concept that weighs whether a certain dollar amount is large enough to make a difference to anyone

Articulation

The idea that the three primary financial statements are interrelated

Debt Ratio = Total Liabilities / Total Assets

Percentage of funds needed to purchase assets that were obtained through borrowing

Current Ratio = Current Assets / Current Liabilities

Measure of liquidity; number of times current assets could cover current liabilitiesR

Return on Sales Ratio = Net income / Sales

Number of pennies earned during the year on each dollar of sales

Asset Turnover = Sales / Total Assets

Number of dollars of sales during the year generated by each dollar of assets

Return on Equity = Net Income / Stockholder’s Equity

Number of pennies earned during the year on each dollar invested.

Price-Earnings Ratio (PE) = Market Value of Shares / Net Income

Amount investors are willing to pay for each dollar of earnings; indication of growth potential

1. To predict a company’s future profitability and cash flows

2. To identify and improve potential problem areas

What are the two main purposes of financial statement analysis?

Financial ratios

Relationships between two financial statement numbers and are often used in analyzing and describing a company’s performance

Financial docs that allow comparison of financial statements across years and between companies and are prepared by dividing all financial statement numbers by sales for the year

Common-size financial statements

Return on sales = Net Income / Sales

In terms of ROE (Return on Equity), define profitability

ROE (Return on Equity)

How efficiently a company uses its shareholders’ money to generate net income and growth

Asset Turnover = Sales / Assets, and is interpreted as the number of dollars in sales generated by each dollar of assets

In terms of ROE (Return on Equity), define efficiency

Assets-to-equity ratio = Assets / Equity, and is interpreted as the number of dollars of assets a company is able to acquire using each dollar invested by stockholders.

In terms of ROE (Return on Equity), define leverage

The profitability of each dollar in sales and turnover is the degree to which assets are used to generate sales

Margin

NOTE: Companies with low margin can still earn an acceptable level of return on assets if they have a high turnover.

Current Asset

An asset that is expected to be used within one year of the balance sheet date

Cash, accounts receivable, and inventory

What are the most common current assets?

Property, plant, and equipment (PPE)

What are the primary long-term assets?

Companies report the intangibles that they have purchased from other companies but not the intangibles that they have developed themselves

Which intangible assets are reported on the balance sheet?

Current liability

Those obligations that are expected to be paid or otherwise satisfied within one year

Long-term bank loans, mortgages, and bonds

What are 3 common sources of long-term debt?

Common stockholders are the true owners of a business; Preferred stockholders give up some of the rights of ownership enjoyed by common stockholders in exchange for some of the safety promised to creditors

What is the difference between a common stockholder and a preferred stockholder?

Retained Earnings

The cumulative amount of corporate profits that have been retained within the business rather than being paid out to stockholders as dividends.

Treasury Stock

The amount the corporation has spent to buy back its own shares from stockholders

2 years, Comparative side-by-side format

How many years worth of balance sheets does a company usually provide and how are they typically formatted?

Cash

What is the first item that is usually listed on a U.S. balance sheet?

Long-term assets

What is the first item usually listed on a non-US balance sheet?

Working capital

The difference of current assets to current liabilities.

Recognition (In terms of accounting)

The process of condensing all estimates and judgements into one number and reporting that one number in the formal financial statements

Disclosure

An alternative way to report information, describing details in a narrative note

Transaction Analysis

Is the process of determining how an economic event impacts financial statements

Asset Mix

The proportion of total assets in each asset category that is largely determined by the industry in which the company operates.In

Income from Continuing Operations

What is the best measure of sustainable profitability?

Gross Profit

The difference between the selling price of a product and the cost of the product (Price of product - Cost of product)

Operating Income

Gross profit minus all other expenses except for interest and taxes; measures performance of the fundamental business operations conducted by a company

Income from Continuing Operations

Operating income - Interest expenses - Income tax expense ± miscellaneous revenue and expense items, and gains and losses from peripheral transactions and events

Net Income

Income from continuing operations ± results of discontinued operations and extraordinary items, net of their respective income tax effects

Comprehensive Income

Net Income ± adjustments for changes in company wealth stemming from changes in certain exchange rates, interest rates, or financial instruments’ values

Gains, Losses, Revenues and Expenses

What are the 4 primary item categories listed on the income statement?

Selling goods, providing services, Earning interest by providing loans

What are some common business activities that generate revenue?

Cost of goods sold; selling, general, and administrative expense, depreciation expense, income tax expense, and interest expense

What are the key expense items commonly found on the income statement?

External

Do gains/losses reported on the income statement arise from internal or external activities?

Income from discontinued operations and extraordinary items

What items are considered “below-the-line” items?

Earnings per Share (EPS)

The amount of net income associated with each share of stock

When value has been delivered to customers (typically only after the required work has been performed and after the collection of cash is reasonably assured)

When should revenue be recognized on an income statement?

Matching

The concept that states that an expense should be recognized in the same period in which the revenue it was used to generate is recognized

Generally Accepted Accounting Principles (GAAP)

Ensure consistency and transparency in financial reporting.

Conservatism

A pervasive factor in accounting that can be summarized as follows: when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities.

Calculate the cost of a product

Product costs = Direct labor + Direct Materials + Factory Overhead Factory overhead = indirect labor + Indirect materials + “Factory expenses”

Can you calculate the product costs for September?

Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000

Total product costs = 20,000 + 25,000 + 23,000 = 68,000

Total non-product costs = 2,000 + 5,000 = 7,000