Exploring Accounting and Finance FBLA Study Guide

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Accounting

Process of identifying, measuring, and reporting financial info of an entity

Accounting Equation

assets = liabilities + equity

Accounts Payable

money owned to creditors, vendors, etc

Accounts Receivable

money owned to a business, i.e. credit sales

Assets

Current assets are those that will be used within one year. Typically this could be cash, inventory or accounts receivable. Fixed assets (non current) are more long-term and will likely provide benefits to a company for more than one year, such as a building, land or machinery.

Balance Sheet

A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner's equity at a given time.

Capitol

A financial asset and its value, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities.

Cash Flow

The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.

Certified Public Accountant

A designation given to someone who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

Cost of Good Sold

The direct expense related to producing the goods sold by a company. This may include the cost of the raw materials (parts) and amount of employee labor used in production.

Credit

An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: a credit and a debit.

Debt

An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

Expenses (Fixed, Variable, Accrued, Operation)

The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Examples of expenses include payments to banks, suppliers, employees or equipment.

Generally Accepted Accounting Principles

A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

General Ledger

A complete record of the financial transactions over the life of a company.

Liabilities (Current and Long-Term)

A company's debts or financial obligations it incurred during business operations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period of time greater than one year. An example of a long-term liability would be a bank loan.

Net Income

A company's total earnings, also called net profit or the "bottom line." Net income is calculated by subtracting totally expenses from total revenues.

Owner's Equity

An owner's equity is typically explained in terms of the percentage amount of stock a person has ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.

Present Value

The value of how much a future sum of money is worth today. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now. See an example of the time value of money here.

Profit and Loss Statement

A financial statement that is used to summarize a company's performance and financial position by reviewing revenues, costs and expenses during a specific period of time; such a quarterly or annually.

Return on Investment

A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.

time deposits

Savings accounts and certificates of deposits at a bank.

trade discount

A discount that often varies by customer. For example, a company may sell its products to a variety of re-sellers. Some of the re-sellers might buy $1 million of products each year, other re-sellers might purchase $100,000, and still others buy less than $10,000 per year. The company would probably have lower selling prices for the large-volume re-sellers and have higher selling prices for the low-volume re-sellers. One way to achieve this is to have a catalog showing just one selling price for each item, but to offer discounts that vary with the volume purchased. That discount is known as a trade discount.

turnover

In some countries turnover refers to sales.

Turnover is also associated with some financial ratios such as the inventory turnover ratio, the accounts receivable turnover ratio, and asset turnover ratio.

trade names

An intangible asset reported on the balance sheet at the company's cost (or lower). Often, successful trade names were developed by companies over many years. As a result the cost of the trade name is minimal, but the trade names are often the most valuable assets of the company. Trade names should be registered with the U.S. Patent and Trademark Office.

outlier

A cost and/or volume of activity that is outside of an expected range.

outsourcing

Sending work to another organization instead of processing the work in-house. Often payroll is outsourced to a company that specializes in payroll processing.

consistent

A quality of accounting information that facilitates comparing a company's reporting of one accounting period to another. For example, the reader of a company's financial statements can assume that the company is using the same inventory cost flow assumption this period as it used last period or last year. (If the company did change, it must be disclosed to the reader.)

holding costs

In the EOQ model, the holding costs are the incremental costs of storing or holding an item in inventory for one year.

contribution margin

The result of subtracting all variable expenses from revenues. It indicates the amount available from sales to cover the fixed expenses and profit.

consigned goods

Merchandise that is not owned by the party in possession of the goods. For example, a crafts-person might have produced 100 ornate wood items. In order to sell the items, the person asks a local merchant to take five of the items on consignment. This means that the merchant has possession of the five items and will attempt to sell them for a commission, but the merchant does not own the items. Those five items are consigned goods. (When the merchant sells one of the items, the merchant might be required to remit 80% of the selling price to the crafts-persons and can keep 20% as a commission.) The merchant is the consignee and the crafts-person is the consignor.

fixed expenses

Expenses which do not change in response to reasonable changes in sales or other activity.

fringe benefits

Compensation for employees that is in addition to salaries and wages. Examples include paid absences (vacation, sick, holiday), insurances (health, dental, vision, life), pensions, profit sharing contributions, employer matching of Social Security and Medicare taxes, unemployment taxes, worker compensation insurance, continuing education costs, etc. Generally, the cost of fringe benefits should be expensed when they are earned by the employee, not in the period in which they are paid.

financial statements

Usually financial statements refer to the balance sheet, income statement, statement of cash flows, statement of retained earnings, and statement of stockholders' equity.

The balance sheet reports information as of a date (a point in time). The income statement, statement of cash flows, statement of retained earnings, and the statement of stockholders' equity report information for a period of time (or time interval) such as a year, quarter, or month.

absorption costing

Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements.

expenses

Costs that are matched with revenues on the income statement. For example, Cost of Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising Expense, Interest Expense are expenses matched with the period of time in the heading of the income statement. Under the accrual basis of accounting, the matching is NOT based on the date that the expenses are paid.

Expenses associated with the main activity of the business are referred to as operating expenses. Expenses associated with a peripheral activity are nonoperating or other expenses. For example, a retailer's interest expense is a nonoperating expense. A bank's interest expense is an operating expense.

Generally, expenses are debited to a specific expense account and the normal balance of an expense account is a debit balance. When an expense account is debited, the account credited might be Cash (if cash was paid at the time of the expense), Accounts Payable (if cash will be paid after the expense is recorded), or Prepaid Expense (if cash was paid before the expense was recorded.)

disposal of fixed assets

The sale, retirement, or exchange of property, plant and equipment.

depositor

A person or business that has a checking account or savings account at a bank.

reliability

A qualitative characteristic in accounting. It is achieved when information is verifiable, objective (not subjective) and you can depend on it.

Revenue

The total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner's equity and is calculated before any expenses are subtracted.

Cash Basis Accounting

An accepted form of accounting that records all revenues and expenditures at the time when payments are actually received or sent. This straightforward method of accounting is appropriate for small or newer businesses that conduct business on a cash basis or that don't carry inventories.

Dividends

amounts paid to shareholders out of current or retained earnings

Equity

money owed to the owner or owners of a company, also known as "owner's equity"

Financial Accounting

accounting focused on reporting an entity's activities to an external party; ie: shareholders

Goodwill -

an intangible asset reflecting the value of an entity in excess of its tangible assets

General Ledger

a record of all financial transactions within an entity

Loan

money borrowed from a lender and usually repaid with interest

Net Income

money remaining after all expenses and taxes have been paid

Subsidiary Accounts

the subaccounts that are totaled on the financial statement under "master accounts;" i.e. "Cash-ABC Bank" might be one of several subsidiary accounts that are subtotaled under "Cash"

Treasury Stock

shares purchased by the entity from shareholders, reducing shareholder equity

Loss

The result of the sale of an asset for less than its carrying amount; the write-down of assets; the net result of expenses exceeding revenues.

Leverage

Using debt in order to control more assets. Also known as financial leverage

Limited Liability company

A business organization different from a sole proprietorship, partnership, and corporation. As the name implies it provides the limited liability protection usually associated with a corporation. To learn more about this business structure, you should discuss this with a tax and legal professional.

Lease

A legal agreement to pay rent to the lessor for a stated period of time. Sometimes the lease is in substance a purchase of an asset and a financing arrangement. For example, if a company agrees to lease a forklift truck for 60 months and the agreement cannot be canceled without purchasing the asset, it is possible the arrangement is more than a mere rental of equipment. See capital lease and operating lease.

Land Improvements

A long-term asset which indicates the cost of the constructed improvements to land, such as driveways, walkways, lighting, and parking lots. Land Improvements will be depreciated over their useful life by debiting the income statement account Depreciation Expense and by crediting the balance sheet account Accumulated Depreciation: Land Improvements.

Lien

Usually a claim on an asset that is pledged as collateral. The lien is usually filed with a governement

Land

A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property. Land usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Generally, land is not depreciated.

Linear programming

A mathematical tool to optimize profits ( contribution margin) given a limited amount of inputs and other constraints

loss on sale of equipment

A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).

loss on sale of assets

This is a non-operating or "other" item resulting from the sale of an asset (other than inventory) for less than the amount shown in the company's accounting records.

kitting

This activity, which involves playing the float, is sometimes used when a company is facing an overdrawn checking account. Assume that a company has a checking account at NY Bank that is about to overdraw. To prevent the NY Bank checking account from overdrawing, the company deposits one of its checks drawn on its PA Bank. However, its PA Bank checking account does not have sufficient funds to cover the check that the company deposited in the NY Bank. To avoid its PA Bank checking account from overdrawing, the company deposits into its PA Bank checking account a check drawn on its NY Bank checking account. Of course there are not sufficient funds in the NY Bank account, so the company deposits into its NY Bank account a check drawn on its PA Bank account. This pattern will require the writing and depositing of many checks until the company gets some money or until the scheme is detected. Banks have reduced the opportunity for kiting by clearing checks more quickly and by not paying checks until deposited checks have been in an account for several days.

k

A symbol that represents 1000

J. Ott, Capital

This is an owner's equity account. The balance in this account reflects the owner's investment in this sole proprietorship plus the net income and minus the owner's draws since the company began. (The current year net income and draws may not yet be recorded in this account. The net income may still be in the temporary revenue and expense accounts and the draws may still be in J. Ott, Drawing, also a temporary account. The temporary accounts will be closed to J. Ott, Capital after the year's financial statements are prepared.)

J. Ott, Drawing

This is a contra owner's equity account, because it has a debit balance if draws were made. Even though it is a balance sheet account, it is a temporary account. At the end of each year the account's debit balance is closed to J. Ott, Capital.

just-in-time (JIT)

An effort to have materials delivered by suppliers just as the materials are needed, thereby eliminating the need for the buyer to store inventories of component parts. Obviously, the buyer is relying on the dependability of the supplier.

job order cost sheet

This is a record on an individual job (product, batch) within the job costing system. For items in process this is a subsidiary record to the general ledger account inventory: work-in-process (WIP).

job order costing

The cost accounting system where costs are recorded by individual job (versus process costing system). The job order system can use standard costs or actual costs.

journal

The record of journal entries appearing in order by date. Some refer to the journal as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal. With computerized accounting systems, it is likely that the general journal will be used sparingly. The software is likely to record the other transactions automatically as invoices are entered, checks are prepared, receipts processed, etc.

joint cost

A common cost. Often refers to the costs prior to the point where several products emerge from a common process.

QuickBooks

The leading accounting and bookkeeping software for small businesses in the United States. QuickBooks is the registered trademark of Intuit Inc.

quick ratio

Also known as the acid test ratio. This ratio compares the amount of cash + marketable securities + accounts receivable to the amount of current liabilities. To learn more, see Explanation of Financial Ratios.

quick assets

Assets such as cash, temporary investments, and accounts Receivable

quarterly earnings

a corporations's reported net income and earnings per share for three-month period

quantity variance

In standard costing, the quantity variance could be the direct materials' usage variance or the direct labor's efficiency variance. The quantity variance is the difference between the quantity of inputs that were actually used versus the quantity of inputs that should have been used to manufacture the period's output.

qualitative characteristics

In accounting the qualitative characteristics include relevance, reliability, comparability, and consistency. Qualitative characteristics are discussed in the Financial Accounting Standards Board's Statement of Financial Accounting Concepts No. 2.

root cause

The underlying true cause of a cost occurring. In other words, the root cause is more than a mere correlation between an event and a cost. There is a real cause and effect relationship.

vacation pay

A common fringe benefit given to employees during a period in which they do not have to work. If an employee earns one week of paid vacation to be taken after working one full year, the employer should recognize this cost/expense and liability while the employee is earning it. One possible journal entry is to debit Vacation Pay Expense and to credit Vacation Pay Payable. Later, when the employee takes the vacation time, the employer would debit Vacation Pay Payable and credit Cash.

vacation pay expense

An income statement account showing the amount of vacation expense earned by employees (by working) during the specified accounting period.

value billing

Billing a client based on the value of the information or service provided rather than billing based on time spent.

direct costing

A method where only the variable manufacturing costs are assigned to inventory and the cost of goods sold. Fixed manufacturing costs are viewed as expenses of the period in which they are incurred. This method is not allowed for external financial statements, but can be used internally. External financial statements must have fixed manufacturing costs allocated to the products.

variable manufacturing overhead applied

The variable manufacturing costs other than direct materials and direct labor that have been assigned to the products manufactured via a predetermined rate. Ideally, by the end of the accounting year the amount applied will equal the amount actually incurred.

variable manufacturing overhead spending variance

A variance arising in a standard costing system that indicates the difference between the actual variable manufacturing costs incurred and the expected variable manufacturing overhead costs based on some activity such as actual direct labor hours or actual machine hours

variable manufacturing overhead incurred

The actual cost incurred for manufacturing costs other than direct materials and direct labor which increase as production volume increases. Examples include manufacturing supplies and electricity to operate the production equipment.

variance

A term used with standard costs to report a difference between actual costs and standard costs.

variance reports

Accounting reports that identify the differences between standard costs and actual costs, between budget amounts and actual amounts, etc.

vehicles

A long-term asset account that reports a company's cost of automobiles, trucks, etc. The account is reported under the balance sheet classification property, plant, and equipment. Vehicles are depreciated over their useful lives.

Explain the nature of tax liabilities

The total taxes owed by an individual or business to the government, recorded as a financial obligation on the balance sheet, and must be managed responsibly to ensure compliance and accurate financial reporting.

Maintain financial records

To accurately record and organize financial transactions to ensure reliable reporting and legal compliance.

Balance a bank account

To compare your records with the bank statement to ensure all transactions match and the account total is accurate.

Calculate the cost of credit

Involves determining the total expenses related to borrowing, including interest rates and any associated fees. This assessment helps borrowers understand the financial impact of their credit usage.

Make responsible financial decisions

This means carefully evaluating options, planning, and managing resources to achieve financial goals while avoiding unnecessary risk or debt.

Explain the need to save and invest

Building financial security, preparing for emergencies, and growing wealth over time ensures both short-term needs are met and long-term goals are achieved.

Set financial goals

Done by identifying priorities, planning actions, and tracking progress, as it helps achieve short-term and long-term financial objectives while maintaining discipline and focus.

Describe the need for financial information

Having such knowledge enables informed decisions, planning, and risk management to ensure financial stability.

Explain the concept of accounting

The process of recording, analyzing, and reporting financial transactions to provide accurate information for decision-making, planning, and financial management.

Discuss the nature of the accounting cycle

A series of steps used to record, process, and report financial transactions, ensuring accuracy and consistency in financial statements from the initial transaction to the final reports.

Distinguish among types of business transactions

This can be operating, investing, or financing in nature: operating involves day-to-day activities like sales and expenses, investing includes buying or selling assets, and financing covers borrowing or repaying funds and equity changes.

Distinguish among types of business documentation

Types of this can include invoices, receipts, purchase orders, and bank statements: invoices request payment, receipts confirm payment, purchase orders authorize purchases, and bank statements track account activity.

Demonstrate the effects of transactions on the accounting equation

It affects the accounting equation (Assets = Liabilities + Equity) by increasing or decreasing assets, liabilities, or equity, ensuring the equation remains balanced after every financial event.

Explain the nature of accounting standards

Rules that ensure consistency, accuracy, and transparency in financial reporting, allowing businesses and stakeholders to rely on comparable and trustworthy information.