Accounting For Dummies Lecture Notes

Vocabulary flashcards covering the fundamental concepts of accounting, financial statements, and managerial analysis based on the 'Accounting For Dummies' text.

GAAP (Generally Accepted Accounting Principles)

The authoritative standards and rules that govern financial accounting and reporting for businesses in the United States.

Balance Sheet

A snapshot of a business's financial condition at a specific moment in time, showing assets, liabilities, and owners' equity.

Income Statement

A financial report that summarizes profits and losses by subtracting expenses from revenues over a specific period.

Statement of Cash Flows

A summary of the business's actual cash inflows and outflows during a period, categorized by operating, investing, and financing activities.

Accounting Equation

Assets = Liabilities + Owners’ Equity; the foundation of double-entry bookkeeping.

Accounts Receivable

An asset account representing the amounts owed to a business by customers who purchased products or services on credit.

Accounts Payable

A liability account used for items or services a business buys on credit and owes payment for to vendors.

Depreciation

The accounting process of spreading the cost of a long-term fixed asset over its useful life.

Owners' Equity

The total of invested capital by owners plus retained profit; it represents the owners' residual claim on assets after liabilities are paid.

Inventory

The stock of products a business holds and intends to sell to its customers.

Operating Profit (EBIT)

Profit calculated before interest and income taxes are deducted; often called Earnings Before Interest and Taxes.

Retained Earnings

The cumulative amount of profit a business has earned over time that has not been distributed to owners as dividends.

Net Income

The 'bottom line' of an income statement, representing final profit after all expenses, interest, and taxes are deducted.

Solvency

The ability of a business to pay its debt obligations and liabilities on time.

Current Ratio

A measure of short-term solvency calculated by dividing current assets by current liabilities.

FIFO (First-In, First-Out)

An inventory valuation method where the first products purchased are assumed to be the first ones sold.

LIFO (Last-In, First-Out)

An inventory valuation method where the most recently purchased products are assumed to be sold first.

Gross Margin

The difference between sales revenue and the cost of goods sold before operating expenses are deducted.

Variable Costs

Expenses that increase or decrease in direct proportion to changes in sales volume or production levels.

Fixed Costs

Expenses that remain the same regardless of changes in sales volume or production output in the short term.

Break-Even Point

The sales level at which total margin exactly equals total fixed expenses, resulting in zero profit or loss.

CPA (Certified Public Accountant)

A professional designation for accountants who have met state education and experience requirements and passed a national exam.

Audit

An examination of a company's financial records by an independent CPA to ensure the financial statements are fair and follow GAAP.

Internal Controls

Procedures and forms designed to detect and deter errors, embezzlement, fraud, and theft within a business.

Earnings Per Share (EPS)

A ratio that divides net income by the total number of common stock shares outstanding; required for public companies.

Which accounting standards govern financial reporting for US-based businesses, and what is their primary objective?

The standards are GAAP (Generally Accepted Accounting Principles). Their primary objective is to ensure that financial statements are consistent, transparent, and comparable for investors and creditors.

Problem: A company reports total assets of 500,000 and total liabilities of 320,000. Calculate the Owners' Equity using the accounting equation.

Based on the Accounting Equation (Assets = Liabilities + Owners' Equity):

50,000 = 320,000 + Owners' Equity

Owners' Equity = 500,000 - 320,000 = 180,000

Theory: Explain the difference between FIFO and LIFO inventory valuation during a period of rising prices (inflation).

• FIFO (First-In, First-Out): Assumes older, cheaper items are sold first. This leads to a lower Cost of Goods Sold (COGS), higher ending inventory value, and higher reported Net Income.

• LIFO (Last-In, First-Out): Assumes newer, more expensive items are sold first. This leads to a higher COGS, lower ending inventory value, and lower reported Net Income (often used to reduce tax liability).

Problem: Company A has 120,000 in current assets and 60,000 in current liabilities. Calculate the Current Ratio and explain what the result indicates regarding Solvency.

Current Ratio = \frac{Current Assets}{Current Liabilities} = \frac{120,000}{60,000} = 2.0

A ratio of 2.0 indicates that for every dollar of short-term debt, the company has two dollars of current assets, suggesting strong short-term solvency.

Theory: List and briefly describe the three sections of the Statement of Cash Flows.

1. Operating Activities: Cash generated or used by the core business transactions (e.g., receipts from customers, payments to suppliers).
2. Investing Activities: Cash flows related to the purchase and sale of long-term assets (e.g., equipment, property).
3. Financing Activities: Cash flows related to borrowing, repaying debt, or transactions with owners (e.g., issuing stock, paying dividends).

Problem: A business has fixed costs of 40,000, a unit sales price of 150, and variable costs per unit of 100. What is the Break-Even Point in units?

Break-Even Point = \frac{Fixed Costs}{Unit Price - Variable Cost per Unit}

Break-Even Point = \frac{40,000}{150 - 100} = \frac{40,000}{50} = 800 \text{ units}

Theory: Define Depreciation and explain how it affects both the Income Statement and the Balance Sheet.

Depreciation is the allocation of a fixed asset's cost over its useful life.

• Income Statement: It appears as an expense, reducing the Net Income for the period.

• Balance Sheet: It increases the Accumulated Depreciation (a contra-asset), which reduces the net book value of the associated asset.

Problem: If a corporation has a Net Income of 750,000 and has issued 250,000 shares of common stock, what is the Earnings Per Share (EPS)?

EPS = \frac{Net Income}{Total Shares Outstanding}

EPS = \frac{750,000}{250,000} = 3.00 \text{ per share}

Theory: What is the purpose of an Audit performed by a CPA?

An Audit is an independent examination of a company's financial records to provide assurance that the financial statements are presented fairly, in all material respects, and comply with GAAP.

Problem: Given Sales Revenue of 2,000,000, Cost of Goods Sold (COGS) of 1,200,000, and Operating Expenses of 500,000, calculate the Gross Margin and Operating Profit (EBIT).

• Gross Margin = Sales - COGS = 2,000,000 - 1,200,000 = 800,000

• Operating Profit (EBIT) = Gross Margin - Operating Expenses = 800,000 - 500,000 = 300,000