MIE 201 Final Exam

Accounting

recording, measuring, and interpretation of financial info

Certified Public Accountant (CPAs)

indvidual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records

Forensic accounting

accounting that is fit for legal review, analyzing financial documents in search of fraudulent entries or financial misconduct

Private accounts

accountants employed by large corporations, government agencies, & other organizations to prepare & analyze their financial statemens

Certified Management Accountants (CMAs)

private accountants, who after rigorous examination, are certified by the Institute of Management Accountants and who have some managerial responsibility

Bookkeping

routine, day-to-day recording of business transactions

• narrower and more mechanical than accounting

• requires less training

• responsible for obtaining & recording info accountats require to analyze firm’s financial position

Internal uses of accounting info

• managerial accounting

• cash flow

• budget

• master budgets

managerial acounting

internal use of accounting statements by managers in planning & directing organization’s acitivities

Cash flow

movement of money through organization over daily, weekly, monthly, or yearly basis

Budget

internal financial plan that forecasts expenses & income over set period of time

external uses of accounting info

• filing income taxes

• abstaining credit

• reporting results to stockholders and potential investors

• annual report

• audited financial statements

• stockholders

• banks and other lenders

• labor unions and employees

Anual report

summary of firm’s financial info, products, & growth plans for owners & potential investors

Internal users of accounting info

• board of directors

• owners

• managers

• accountants

• employees/unions

external users of accounting info

• government

• creditors

• stockholders

• security analysts

• customers

The Big Four

• Ernest & Young (EY)

• KPMG

• Deloitte

• PricewaterhouseCoopers (PwC)

assets

firm’s economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things

Liabilties

debts that a firm owes to creditors

Owners’ equity

equals asset minus liabilities and reflects historical values

• owners’ contribution to organization

• income earned by organization & retained to finance continued growth & development

• stock shares represent ownership in company

• each type of stock must be represented by separate owners equity account called contributed capital

Accounting equation

assets = liabilities + stockholders’ equity

double-entry bookkeeping

• sustem of recording & classifying business transactions that maintains balance of accounting equation

• each transaction must be recorded in two separate accounts

accounting cycle

4 step procedure of an accounting equation system

1. examine source documents

2. record transactions in a journal

3. post transaction

4. prepare financial statements

journal

time-ordered list of account transactions

ledger

book or computer file w separate sections for each account

posting

transferring info from journal into ledger

trial balance

Summary of balances of all the accounts in the general ledger

income statement

shows organizations profitability over period of time

• offers clear picture of company’s overall revenues & costs

Expenses

costs incurred in the day-to-day operations of organization

depreciation

costs of long-lived assets are spread out

balance sheet

snapshot of organization’s financial position at a given moment

traditional balance sheet format

organization’s assets on left side & its liabilities & owners’ equity on the right

vertical balance sheet format

assets on top followed by liabilities & owners’ equity

Current assets

assets that are used or converted into cash within the course of a calendar yr, short-term

accounts receivable

money owed a company by its clients or customers who have promised to pay for products at a later date

current liabilities

firm’s financial obligations to short-term creditors, which must be repaid within 1 yr

accounts payable

amount company owes to suppliers for goods & services purchased w credit

accrued expenses

all unpaid financial obligations incurred by organization

statement of cash flows

explains how company’s cash changed from beginning of accounting period to end

cash from operating acitvies

calculated by combining changes in revenue, expense, current asset, & liability accounts

cash from financing activities

calculated from changes in the long-term liability accounts & the contributed capital accounts in owners’ equity

cash from investing activities

calculated from changes in long-term or fixed asset accounts

revenues (sales, goods or services sold)

total amount of money received from sales of goods & services, as well as from related business activities

Cost of Goods Sold

amount of money a firm spent to buy or produce products it sold during period to which income statement applies

= beginning inventory + interim purchases - ending inventory

Gross Profit (gross income, gross earnings)

• revenues - cost of goods sold required to generate revenues

• difference b/w what it costs to make and sell a product and what a customer pays for it

Net Income (earnings after taxes, profits after taxes)

• total profit (or loss) after all expenses including taxes that have been deducted from revenue

• very sensitive to corporate tax rate

Retained earnings

at end of accounting period, dollar amount in revenue and expense accounts are moved to this

• results in owners’ equity account being equal to net income

• zeros out the account

Ratio Analysis

• calculations that measure organization’s financial health

• aids in measuring & comparing organization’s productivity, profitability, & financing mix w similar entities

• should compare previous year’s performance, company’s competitors, & company’s stated goals

Profitability Ratios

measure how much operating income or net income and organization is able to generate relative to its assets, owners’ equity, and sales

• profit margin

• return on assets

• return on equity

Profit margin

= net income/sales

• shows overall percentage of profits earned by company

• based solely on data obtained from income statement

return on assets

= net income/assets

• shows how much income firm produces for every dollar invested in assets

• requires data from both income statement and balance sheet

return on equity or return on investment (ROI)

= net income/owners’ equity

• shows how much income is generated by each $1 owners have invested in firm

asset utilization ratios

measure of well a firm uses its assets to generate each $1 of sales, used to find inefficiencies in operations

• receivales turnover

• inventory turnover

• total asset turnover

receivables turnover

= sales/accounts receivable

• indicates how many times firm collects its A/R in 1 yr

• demonstrates how quickly firm can collect payments on its credit

inventory turnover

= sales/total inventory

• indicates how many times firm sells and replaces inventory over course of 1 yr

total asset turnover

= sales/total assets

• measures how well organization uses all of its assets in crediting sales

• indicates whether company is using its assets productively

liquidity ratios

measure speed with which company can turn its assets into cash to meet its debts as they fall due

• current ratio

• quick ratio (asset test)

current ratio

= current assets/current liabilities

quick ratio

= (current assets - inventory)/current liabilities

• stringent measure of liquidity that eliminates inventory

• measures how well organization can meet its current obligations w/o resorting to sale of its inventory

debt utilization ratio

measures how much debt an organization is using relative to other sources of capital

• debt to total assets ratio

• times interest earned ratio

debt to total assets ratio

= debts (assets - equity)/total assets

• indicates how much firm is financed by debt and how much by owners’ equity

times interest earned ratio

= operating income/interest expense

• measure of safety margin company has w respect to interest payments it must make to its creditors

• low ratio indicates that even small decrease in earnings may lead company into financial straits

per share data

data used by investors to compare performance of one company with another on equal, per share basis

• generally, the more share company issues, the less income is available for each sahre

• earnings per share

• dividends per share

earnings per share

= net income/number of stock shares outstanding

• helps determine company’s overall stock price

• when earnings go up, so does company’s stock price and wealth of stockholders

dividends per share

= dividends paid/number of shares outstanding (yr end)

• actual cash received for each share owned

• paid to stockholders for each share owned

• results in double taxation: corporation pays tax on its earnings & stockholders pay tax on their dividend income

Finance

study of how money is managed by individuals, companies, & government

Money (currency)

anything generally accepted in exchange for goods and services

Fiat money

paper money not readily convertible to a precious metal

functions of money

• medium of exchange

• measure of value

• store of value

characteristics of money

• acceptability (most important)

• divisibility

• portability

• stability

• durability

• difficult to counterfeit

checking account (demand deposit)

• money stored in an account at a bank or other financial institution that can be withdrawn w/o advance notice

• write a check, a written order to a bank to pay another party

savings account (time deposit)

accounts w funds that usually cannot be withdrawn w/o advance notice and/or have limits on # of withdrawals per period

money market accounts

accounts that offer higher interest rates than standard bank rates but w greater restrictions

certificates of deposit (CDs)

savings accounts that guarantee a depositor a set interest rate over specified interval as long as funds are not withdrawn before end of period

• money can be withdrawn early w penalty

credit cards

means to access to pre-approved lines of credit granted by a bank or finance company

• convenience, easy access to credit, worldwide acceptance

rewards cards

credit cards that carry a benefit to the user

• cash back, miles, or points

Credit CARD (Card Accountability Responsibility and Disclosure) Act of 2009

passed to regulate practices of credit card companies

• limited ability of card issuers to raise interest rates, limit credit to young adults, gave people more time to pay bills, and made clearer due dates on billing cycles

• young adults under 21 have to have an adult co-signer or show proof they have enough income to handle debt limit on the card

Debit Card

card that looks like a credit card but works like a check

• results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party

Near money

traveler’s checks, money orders, cashier’s checks

• financial institution, bank, credit card company, or neighborhood currency exchange issues them in exchange for cash & guarantees that the purchase note will be honored and exchanged from cash when it is presented to institution making the guarantee

cryptocurrency

digital exchange medium that uses secure online ledgers enabled by blockchain tech

• fluctuation price

• not favored by government

Federal Reserve Board (“the Fed”)

• guardian of American financial system

• independent agency of federal government

• established in 1913 to regulate nation’s banking & financial industry

• organized into 12 regions

• chief economic policy arm of the U.S.

Four major functions of the Fed

• controls money supply, monetary policy

• regulates banks & other financial institutions

• manages regional & national check-clearing procedures

• supervises federal deposit insurance programs of banks belonging to federal reserve system

monetary policy

• means by which the Fed controls the amount of money available in the economy

• aims to keep supply & demand in balance to avoid inflation/deflation

• could result in: rapid price increases (inflation) bc of too little money, or economic recession & slowburn of price increases (disinflation) bc of too little growth in money supply

buy government securities

money supply increases; economic activity increases

sell government securities

money supply decreases; economic activity slows down

raise discount rate

interest rates increase; money supply decreases; economic activity slows

lower discount rate

interest rates decrease; money supply increases; economic activity increases

increase reserve requirements

banks make fewer loans; moeny supply decreases; economic activity slows down

decrease reserve requirements

banks make more loans; money supply increases; economic activity increases

relax credit controls

more people are encouraged to make major purchases increasing economic activity

restrict credit controls

people are discouraged from making major purchases, decreasing economic activity

three actions of monetary policy

open market operations, reserve requirements, discount rate

open market operations

decisions to buy to sell U.S. treasury bills & other investments in the open market

• most commonly used of all Fed operations

U.S. Treasury bills

short-term debt issued by U.S. government

Reserve requirement

percentage of deposits that banking institutions must hold in reserve

• has strong effect on economy, not used often

Discount rate

rate of interest the Fed charges to loan money to banking institutions to meet reserve requirements

• lowering discount rate encourages borrowing & expands money supply and vice versa

credit controls

authority to establish & enforce credit rules for financial institutions and some private investors

• allows the Fed to effectively control the total amount of credit borrowing in the stock market

regulatory functions

establishes & enforces banking rules

check clearing

national check processing

depository insurance

federal insurance funds that protect the deposits of member institutions

Federal Reserve combats inflation w monetary policy

• high fed-funds rate combats inflation w monetary policy

• mortgages become more costly

• businesses borrow less, growth slows

• price increases slow, spending is restrained

• fewer workers are hired, paycheck growth slows

Commercial banks

• largest and oldest all financial institutions

• rely mainly on checking and savings accounts

• sources of funds for loan to businesses and individuals

• banks are quite diversified and offer a number of services