SOM 122 Exam 2 (Accounting)

Bookkeeping

one function of accounting, which includes recording a company’s financial transactions

Managerial Accounting

is concerned with preparing accounting information and analysis for managers and other decision makers inside and organization

Financial Accounting

is concerned with preparing account information and analyses primarily for people outside of the organization, such as stockholders, government agencies, creditors, lenders, suppliers, unions, customers, consumer groups

Types of Accountants

• private accountants: internal accountants working for a single organization

• public accountants: provide accounting services to clients on a fee basis

• non-for-profit accountant: work for governments and nonprofit organizations and perform the same service as for-profit accounts—except they’re concerned primarily with efficiency, not profit

Generally Accepted Accounting Principles (GAAP)

ensures that financial statement are relevant, reliable, consistent, and comparable

6 steps of the accounting process

1. locate and sort records (collection)

2. record daily transaction in journal (record)

3. organize journal entries in categories within a ledger (classification)

4. test the accuracy of the ledger by running a trial balance (summarization)

5. issue financial statements (reporting)

6. assess the firm’s financial condition via ratio analysis (analysis)

Accounting Information Systems (AIS)

a system that manages the accounting and financial functions of a business, such as recording transaction, preparing reports, and complying with regulations

Enterprise Resource Planning (ERP)

a system that streamlines and coordinates the operation of a business, such as planning, executing, monitoring, and controlling processes, activities, and resources

Income Statement

shows a firm’s revenues and expenses for a particular time period and the resulting profit or loss

4 Parts of the Income Statement

1. sales and revenue

2. cost of goods sold

3. operating expenses

4. net income

Gross Profit is Made up of (Income Statement)

• sales revenues: the funds received from the sales of good and services during a certain period

• gross sales: funds received from all sales of the firm’s products

• sales returns; products that customers return to the company for a refund

• allowances: partial refunds to customers for damaged products they choose to keep, not return

• net sales: the money resulting after sales return and allowances are subtracted from gross sales

• cost of good sold (COGS): represents the cost of producing a firm’s pmerchandise for sale during a certain period

Operating Expenses

Selling and administrative expenses

Selling Expenses

all the expenses incurred in marketing the firm’s products, such as salespeople’s salaries, advertising, and supplies

Administrative Expenses

costs incurred for the general operation of the business, such as salaries, supplies, depreciation, insurance, rent, and utilities

Net Income

The firm’s profit or loss after paying income taxes; net income = revenue − expenses

Balance Sheet

Statement of a firm’s financial condition at a given time showing its assets, liabilities, and owners’ equity

The Accounting Equation

Assets = Liabilities + Owners’ Equity

Assests

Anything of value that is owned by a firm

Liabilities

Debts owed by a firm to an outside individual or organization

Owners’ Equity

Represents the value of a firm if its assets were sold and its debts paid (also known as stockholders’ equity)

Current Assets

items that can be converted to cash within 1 year

• the essential characteristic of current assets is their liquidity

Liquidty

The essential feature of current assets, as they are easily converted into cash

Accounts Receivable (Current Assets)

The total amount owed to a firm from customers who have purchased goods or services on credit

Inventory (Current Assets)

The name given to goods kept in stock to be used for the production process or for sales to customers

Marketable Securities (Current Assets)

Stocks, bonds, government securities, and money market certificates, which can be easily converted to cash

Prepaid Expenses (Current Assets)

An expenditure paid for during an accounting period, but the asset will not be consumed until a later time

Fixed Assets

Items that are held for a long time and are relatively permanent

Accumulated Depreciation

The reduction in value of assets to reflect their wearing down or obsolescence over time

Intangible Assets

Assets that are not physical objects but are nonetheless valuable, such as patents, trademarks, and goodwill.

Goodwill

An amount paid for a business beyond the value of its other assets, based on its reputation, customer list, loyal employees, and similar intangibles

Liability

Debts owed by a firm to an outside individual or organization

2 Types of Liabilities

• current

• long term

Accounts Payable

Money owed to others that the firm has not yet paid

Notes Payable

Money owed on a loan based on a promise (either short term or long term) the firm made

Long-Term Liabilities

Obligations in which payments are due in one year or more

Current Liabilities

Obligations in which payments are due within one year or less

Common Stock

Stockholders are able to vote on major company decisions

Retained Earnings

The portion of the company profits that the owners choose to reinvest in the company

Retained Earnings Formula

net profits - dividend payments made to stockholders

Dividend

Part of a company’s profits that are distributed to stockholders

Cash Flow Statement

Reports over a period of time, first, the firm’s cash receipts and, second, disbursement related to the firm’s

4 Line of Cash Flow Statement

1. operating

2. investing

3. financing activities

4. cash balance

Operating Activities (Cash Flow)

reflects income from sales and other income and payments from salaries, interest, taxes, and so forth

• these are the ordinary costs of running a business

Investing Activities (Cash Flow)

the cash received from selling long-term assets, cash spent on buying equipment, and other investment activities

Financing Activities (Cash Flow)

the inflows and outflows of borrowed funds and long-term debt, sales of new stock, and payment of dividends

Cash Balance (Cash Flow)

Balance in the firm’s cash account at the end of the year

What is Ratio Analysis used for?

1. compare to stated objectives

2. compare to the performance of similar firms

Liquidity Ratios

determine how well a firm can pay its liabilities as they come due

Activity Ratios (Efficiency Ratios)

determine how well the firm manages its assets to generate revenue

Debt to Owners’ Equity Ratios

determine how much the firm relies on borrowing to finance its operations

Profitability Ratios

determine how high the firm’s profits are in relation to its sales, assets, or owners’ equity

Current Ratio (Liquidity Ratio)

current assets / current liabilities

• have 2.0 or higher (2:1)

  • could more than likely pay backs ts current debts

Acid-Test Ratio (quick ratio) (Liquidity Ratio)

(Cash + marketable securities + receivables) / current liabilities

• 1.0 or higher (1:1)

  • looks at a company’s most liquid assets compared to its current debt

Inventory Turnover Ratio

COGS in one year / Average value of inventory

• good number of turns varies between industries

  • high ratio may indicate efficiency

  • low ratio may indicate too much obsolete inventory

Return on Sales (Profit Margin)

Net income / sales (also known as profit margin)

• info helps the company understand how much profit is being generated by every dollar of sales

Return on Assets

Net income / Total assets

• this info helps the company understand how well they are using their assets to generate profits

Return on Owners’ Equity (ROI)

Net income / owners’ equity

• this info helps a company understand how much profit the company is return to shareholders based on their invested capital