Chapter 17 - Understanding Accounting and Financial Information

Comprehensive vocabulary flashcards covering the core concepts of business accounting, financial statements, ratios, and professional disciplines as detailed in Chapter 17.

Accounting

The language of business; recording, classifying, summarizing & interpreting of financial events & transactions in an organization to provide management & other interested parties the financial info they need to make good decisions about its operations.

Accounting system

The method used to record & summarize accounting data into reports.

Financial Accounting Standards Board (FASB)

The body that defines the generally accepted accounting principles (GAAP) that accountants must follow.

Generally Accepted Accounting Principles (GAAP)

The standard accounting principles defined by the Financial Accounting Standards Board (FASB) that accountants must follow.

Accounting cycle

A six-step procedure that results in the preparation & analysis of the major financial statements.

Bookkeeping

The recording of business transactions.

Journal

A record book or computer program where accounting data is first entered.

Double-entry bookkeeping

The practice of writing every business transaction in two places.

Ledger

A specialized accounting book or computer program in which info from accounting journals is accumulated into specific categories & posted so that managers can find all the info about one account in the same place.

Trial balance

A summary of all the financial data in the account ledgers that ensures the figures are correct & balanced.

Financial statement

A summary of all the financial transactions that have occurred over a particular period, indicating a firm’s financial health and stability.

Balance sheet

A financial statement that reports the firm’s financial condition on a specific date; details what a company owns & owes on a certain day.

Income statement

A financial statement that summarizes revenues, cost of goods sold & expenses (including taxes) for a specific period & highlights the total profit or loss the firm experienced during that period.

Statement of cash flows

A summary of money coming into & going out of the firm; tracks a company’s cash receipts & cash payments.

Fundamental Accounting Equation

$$Assets = Liabilities + Owner’s equity$$

Assets

Economic resources (things of value) owned by a firm, such as cash, equipment, and land.

Liabilities

The debts a business owes to others.

Owner's equity

The value of what stockholders own in a firm (also called stockholder’s equity); records owner's claims to funds invested and retained earnings.

Current assets

Items that can be converted to cash within one year, including accounts receivable and inventory.

Fixed assets

Long-term assets that are relatively permanent, such as land, buildings, & equipment (also referred to as property, plant, & equipment).

Intangible assets

Long-term assets of value that do not have a physical form, such as patents, trademarks, copyrights, & goodwill.

Retained earnings

Accumulated earnings from a firm’s profitable operations that were reinvested in the business & not paid out to stockholders in dividends.

Goodwill

Represents the value attached to factors such as a firm’s reputation, location, & superior products; only included in balance sheet when one firm acquires another and pays more than the tangible asset value.

Liquidity

The ease with which an asset can be converted into cash.

Accounts receivable

The amount of money owed to the firm that it expects to receive within one year; considered a liquid asset.

Current liabilities

Payments or debts that are due in one year or less.

Long-term liabilities

Payments or debts that are not due for one year or longer.

Accounts payable

Current liabilities or bills the company owes others for merchandise or services it purchased on credit but has not yet paid for.

Notes payable

Short-term or long-term liabilities (like loans from banks) that a business promises to repay by a certain date.

Bonds payable

Long-term liabilities representing money lent to the firm by bondholders that must be paid back.

Net income or net loss

The revenue left over after all costs & expenses, including taxes, are paid; also called the bottom line.

Revenue

The monetary value of what's received from goods sold, services rendered, and other financial sources like rents or interest.

Cost of goods sold

Measures the cost of merchandise sold or cost of raw materials or parts used for producing items for resale; includes purchase price, freight charges, and storage costs.

Gross profit (gross margin)

$$\text{Net sales} - \text{cost of goods sold} = \text{gross profit}$$

Operating expenses

Costs incurred in operating a business, including rent, salaries, supplies, utilities, insurance, & depreciation.

Depreciation

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Selling expenses

Operating expenses related to the marketing & distribution of the firm’s goods or services, such as advertising and sales salaries.

General expenses

Administrative operating expenses of the firm such as office salaries, insurance, & rent.

Ratio analysis

The assessment of a firm’s financial condition using calculations & financial ratios developed from the firm’s financial statements.

Liquidity ratios

Measure a company’s ability to turn assets into cash to pay its short-term debts.

Current ratio

$$\text{Current ratio} = \frac{\text{current assets}}{\text{current liabilities}}$$

Acid-test (quick ratio)

$$\text{Acid-test ratio} = \frac{\text{cash} + \text{Accounts receivable} + \text{Marketable securities}}{\text{current liabilities}}$$

Leverage (debt) ratios

Measure the degree to which a firm relies on borrowed funds in its operations.

Debt to owner’s equity ratio

$$\text{Debt to owner’s equity ratio} = \frac{\text{total liabilities}}{\text{owner’s equity}}$$

Profitability (performance) ratios

Measure how effectively a firm’s managers are using its various resources to achieve profits.

Basic earnings per share (basic EPS)

$$\text{Basic earnings per share} = \frac{\text{net income after taxes}}{\text{number of common stock shares outstanding}}$$

Diluted earnings per share (diluted EPS)

Measures profit per share considering common stock plus stock options, warrants, preferred stock, & convertible debt securities.

Return on sales

$$\text{Return on sales} = \frac{\text{Net income}}{\text{net sales}}$$

Return on equity

$$\text{Return on equity} = \frac{\text{net income after tax}}{\text{total owner’s equity}}$$

Inventory turnover ratio

$$\text{Inventory turnover} = \frac{\text{costs of goods sold}}{\text{avg inventory}}$$

Financial accounting

Generates financial information and analyses for people primarily outside the organization, such as creditors, lenders, and government agencies.

Annual report

A yearly statement of the financial condition, progress, & expectations of an organization.

Private accountant

An accountant who works for a single firm, government agency, or nonprofit organization.

Public accountant

An accountant who provides accounting services to individuals or businesses for a fee.

Certified Public Accountant (CPA)

An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA).

Sarbanes-Oxley Act (Sarbox)

Legislation that created new government reporting standards for publicly traded companies and established the Public Company Accounting Oversight Board (PCAOB).

Managerial accounting

Provides information & analysis to managers inside the organization to assist them in decision making, budgeting, and strategy.

Auditing

The job of reviewing & evaluating the information used to prepare a company’s financial statements.

Independent audit

An evaluation and unbiased opinion about the accuracy of a company’s financial statements conducted by public accountants.

Tax accountant

A professional trained in tax law responsible for preparing tax returns or developing tax strategies.

Government & Not-for Profit accounting

An accounting system for organizations whose purpose is serving ratepayers or taxpayers according to an approved budget rather than generating profit.