Business Foundations - Chapter 14

accounting

the recording, measurement, and interpretation of financial information

certified public accountant (CPA)

an individual 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 accounts

private accountants

accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements

certified management accountants (CMAs)

private accountants who, after rigorous examinations, are certified by the National Association of Accountants and who have some managerial responsibility

Sarbanes-Oxley Act

passed in early 2000s, required firms to be more rigorous in their accounting reporting practices; accounting firms had to separate their consulting and accounting businesses and punished corporate executives with potential jail sentences for inaccurate, misleading, or illegal accounting statements

bookkeeper

limited to routine, day-to-day recording of business transactions; less trained than acccountants

assets

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

liabilities

debts that firms owe to others

owner's equity

all of the money that has every been contributed to the company that never has to be paid back

accounting equation

assets equal liabilities plus owners' equity; Assets=Liabilities+Owner's equity

accounting cycle

the four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements

journal

a time-ordered list of account transactions

ledger

a book or computer program with separate files for each account

double-entry bookkeeping

a system of recording and classifying business transactions in separate accounts to maintain the balance of the accounting equation

income statement

a financial report that shows an organization's profitability over a period of time - month, quarter, year

revenue

the total amount of money received or promised from the sale of goods or services as well as from related business activities

cost of goods sold

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

gross income (profit)

revenues minus the cost of goods sold required to generate the revenues

expenses

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

depreciation

the process of spreading the costs of long, lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used

net income

the total profit (or loss) after all expenses, including taxes, have been deducted from revenue, also call net earnings

balance sheet

a snapshot of an organization's financial position at a given moment

current assets

assets that are used or converted into cash within the course of a calendar year

accounts receivable

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

current liabilities

a firm's financial obligations to short-term creditors, which must be repaid within one year

accounts payable

the amount a company owes to suppliers for goods and services purchased with credit

accrued expenses

an account representing all unpaid financial obligations incurred by the organization

statement of cash flows

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

ratio analysis

calculations that measure an organization's financial health

profitability ratios

ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners' equity and sales

profit margin

net income divided by sales

return on assets

net income divided by assets

return on equity

net income divided by owners' equity; also called return on investment (ROI)

asset utilization ratios

ratios that measure how well a firm uses its assets to generate each $1 of sales

receivables turnover

sales divided by accounts receivable

inventory turnover

sales divided by total inventory

total asset turnover

sales divided by total assets

liquidity ratios

ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt

current ratio

current assets divided by current liabilities

quick ratio (acid test)

a stringent measure of liquidity that eliminates inventory

debt utilization ratios

ratios that measure how much debt an organization is using relative to other sources of capital, such as owning equity

debt to total assets ratio

a ratio indicating how much of the firm is financed by debt and how much by owners' equity

times interest earned ratio

operating income divided by interest expense

per share data

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

earning per share

net income or profit divided by the number of stock shares outstanding

dividends per share

paid by the corporation to the stockholders for each share owned