ADM 1300 Chapter 11: Understanding Accounting

accounting

comprehensive information system for collecting, analyzing and communicating financial information

bookkeeping

recording accounting transactions

accounting information system

organized procedure for identifying, measuring, recording and retaining financial information for use in accounting statements and management reports

uses of accounting information

business managers, employees, unions, investors, creditors, tax authorities and government agencies

controller

individuals who manage all the firm's accounting activities

financial accounting system

process whereby interested groups are kept informed about the financial condition of a firm; focuses on firm as a whole

managerial accounting

internal procedures that alert managers to problems and aid them in planning and decision making

chartered professional accountant (CPA)

banner used to unify the accounting profession in canada; takes best practices from all three former designations

chartered accountant (CPA, CA)

individual who has met certain experience and education requirements; acts as outside account and typically does external financial reporting

certified general accountants (CPA, CGA)

individual who has completed an education program and passed a national exam; typically works in private industry

Certified management accountants (CPA, CMA)

individual who has completed a university degree, passed a national exam and completed a strategic leadership program; typically works on internal management accounting

audit

accountant's examination of a company's financial records to determine if it used proper procedures to prepare its financial reports

international financial reporting standards (IFRS)

standard accounting rules developed by the international accounting standards board (IASB) and used by publicly accountable enterprises and private government enterprises

forensic accountants

accountants who track down hidden funds in business firms; must get certified in financial forensics (CFF) to have the job

tax services

helping clients prepare tax returns and also tax planning

management consulting services

specialized accounting services to help managers resolve a variety of problems in finance, production scheduling and other areas

private accountants

accountant hired as a salaried employee to deal with a company's day-to-day accounting needs

accounting equation

assets = liabilities + owner's equity

asset

any economic resource that is expected to benefit a firm or an individual who owns it

liability

debt that the firm owes to an outside party

owner's equity

amount of money the owners would receive if they sold all the company's assets and paid allof its liabilities

double entry accounting system

used to record the dual effects of financial transactions

financial statements

any of several types of broad reports regarding a company's financial status; most often used in reference to balance sheets, income statement or statements of cash flows

balance sheets

type of financial statement that summarizes a firm's financial position on a particular date in terms of its assets, liabilities and owner's equity

current assets

cash and other assets that can be converted into cash within a year

liquidity

ease of converting an asset into cash

fixed assets

assets that have long-term use or value to the firm

depreciation

accounting method for distributing the cost of an asset over its useful life

intangible assets

non-physical assets that have economic value in the form of expected benefit

goodwill

amount paid for an existing business beyond the value of tis other assets

current liabilities

debts that must be paid within one year

accounts payable

amounts due from the firm to its suppliers for goods or services purchased on credit

long term liabilites

debt not due for at least one year; typically have to pay interest on

paid-in capital

any additional money invested in the firm by the owners

retained earnings

company's net profits less any dividend payments to shareholders

income statements

type of financial statement that describes a firm's revenues and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period; revenues - expenses = profit

revenue

any money received by the firm as a result of selling a good or service or from other sources

revenue recognition

formal recording and reporting of revenues in the financial statements

matching principle

expenses will be matched with revenues to determine net income for an accounting period

cost of goods sold

all expenses directly involved in producing or selling a good or service during a given time period

gross profit

firm's revenues less its cost of goods sold

operating expenses

costs incurred by a firm other than those included in costs of goods sold

selling expenses

occurs from activities related to selling the firm's goods or services

general and administrative expenses

expenses related to the general management of the company

operating income

compares the gross profit from business operations against operating expenses

net income

a firm's gross profit less its operating expenses and income taxes

statement of cash flows

financial statement that describes a firm's generation and use of cash during a given period

cash flows from operations

cash transactions in buying and selling goods and services

cash flows from investing

net cash used in or provided by investing

cash flows from financing

reports net cash from all financing activites

budget

detailed statement of estimated receipts and expenditures for a future period of time

solvency ratios

ratios that estimate the financial risk that is evident in a company

short-term solvency ratios

financial ratio for measuring a company's ability to pay immediate debts

current ratio

ratio for measuring a company's ability to pay current debts out of current assets; divide current assets by current liabilites

debt-to-equity ratio

calculated by dividing total liabilities by owner's equity

leverage

using borrowed funds to make purchases, thus increasing user's purchasing power, potential rate of return and risk of loss

profitability ratios

measures of a firm's overall financial performance in terms of its likely profits

return on equity

net income divided by total owner's equity; shows net income earned for each dollar invested

return on sales

net income divided by sales revenue; profit generated from each dollar of sales revenue

earnings per shares

net income divided by number of shares of common stock outstanding; influences size of dividend a company can pay to its shareholders

activity ratios

measures how efficiently a firm uses its resources

inventory turnover ratio

cost of goods sold divided by average inventory; activity ratio that measures the average number of times inventory is sold and restocked during the year