Financial Accounting

Accounting

The means whereby a company's financial transactions are identified, recorded, summarized and reported for the benefit of those who have an interest in the business. Users of business financial information might include owners, managers, creditors, government regulatory bodies and others.

AICPA (American Institute of Certified Public Accountants)

The term establishes standards of conduct for its members including GAAS (generally accepted auditing standards)

Annual report

A public report prepared by a company's management at the end of each year describing the company's results of operations and financial position through audited general purpose financial statements. In addition, the report usually includes a section where management gives their take on the company's current operations and prospects for the future.

Auditor's report

A letter issued by a CPA firm subsequent to their audit of a company's financial statements. The letter is included in the company's annual report and declares the auditor's opinion as to the fairness of the company's financial statements in properly disclosing the company's financial position, results of operations and cash flows for the periods reflected in accordance with GAAP.

Balance sheet

Also referred to as a "statement of financial position." The balance sheet is a general purpose financial statement which lists, as of the end of an accounting period, all of an entity's assets, liabilities and owners' equity. Simply stated, the balance sheet reports a company's assets and the amount of those assets financed by creditors (debt financing) and the amount financed by owners (equity financing) through capital contributions and retained earnings/deficits. The balance sheet mirrors the basic accounting equation which is: Assets = Liabilities + Owners' equity.

Bankruptcy

A legal status resulting from a company's inability to pay its debts. Bankruptcy may be voluntarily declared by an insolvent company or it may be imposed by creditors due to defaults on loans or other debts. The resolution of bankruptcy may require liquidation of certain assets, dissolution of the company or the restructuring of debt and/or equity interests in the company.

Board of directors

A group of individuals elected by the stockholders of a corporation to represent their best interests in providing overall direction to the company and in the making of major strategic decisions. The board is also responsible for the hiring and overseeing of senior management personnel and the declaration of dividends to stockholders in the event the company has available retained earnings. Board members need not be stockholders in the corporation and usually receive fees from the company for their efforts. The company may also employ board members such that it is possible for a person to serve on the board of directors and be hired as the company's CEO.

Business

An organization created for the purpose of providing goods or services to customers. The three basic business functions are: (1) manufacturing, (2) merchandising, and (3) service. All businesses perform at least one of these functions and many do two or all three. Most businesses are operated to produce a profit for their owners. Some businesses may be operated on a non-profit basis but they still provide some kind(s) of goods or services to customers. A business is often referred to as a company.

Capital

Money or other assets owned by a company. Most businesses require capital to operate. In other words, it usually takes money to make money. Companies access capital from creditors through the borrowing of assets (debt financing) or from owners' through capital contributions and/or retained earnings (equity financing). The cost of capital to a company and its owners are the interest costs on debt and the value of ownership rights given to those providing equity. The true cost of equity financing is difficult to determine because the valuation of ownership rights can be very subjective.

CEO

Chief Executive Officer. The CEO is a company employee responsible for the overall management of the business. In some cases, the CEO might also be referred to as the "president" of the company. In a corporation, the CEO is hired by the board of directors and may actually be a member of the board.

CFO

Chief Financial Officer. The CFO is a company employee typically responsible for the overall financial affairs of the business. The CFO's scope of responsibility may include the management of a company's accounting information systems, cash balances, financing, financial reporting, investor relations, budgets, investment analysis, cost analysis and control, strategic planning and tax compliance and planning.

Company

A business is often referred to as a company regardless of its legal form of ownership. A business operating as a proprietorship, partnership or corporation may be referred to as a company.

Corporation

A business entity authorized by a state government to exist and function subject to the laws of the state. This term has separate legal status allowing owners of a term to benefit from its business activities without exposing their personal assets to claims that may arise against the business. Ownership in this term is evidenced through shares of stock providing stockholder's with the right to vote in certain term matters, participate in any distributions of profits (dividends) and share in any distributions in the event of dissolution. This term is a popular form of business ownership not only because they offer limited liability to owners, but also because they facilitate access to capital through the issuance of stock to potentially large numbers of investors. In addition, this term facilitates changes in ownership through the trading of stock in secondary markets. A disadvantage of the term is the federal and, in some cases, state taxation of term profits. Those same profits are taxed a second time if and when they are distributed to stockholders as a dividend. There are ways to avoid this "double" taxation, but it requires planning and compliance with specific provisions of the tax law. LLCs and S corporations are two such options. An alternative form of business ownership is a proprietorship or partnership.

CPA

Certified Public Accountant. CPAs are individuals who have been licensed by a state and are authorized to provide certain services to customers, including the certified audit of a company's general purpose financial statements. CPAs do much more than perform certified audits. They often provide tax advice, prepare tax returns, advise businesses and individuals in their financial affairs, consult and assist businesses in improvements of their accounting information systems, and provide consulting services in a wide variety of business areas.

Creditor

Any entity to whom a company has an obligation is a creditor of the company. Creditors are providers of a company's debt financing.

Debt financing

The acquiring of business assets through borrowing or the incurring of liabilities. The only alternative to debt in the financing of a business is equity financing, which refers to the amount of owners' capital contributions plus retained earnings. Debt financing is also referred to as "temporary financing" due to the fact that any borrowed assets must be repaid in the future. Only equity financing is permanent.

Dissolution

The process of closing a company's operations, liquidating its assets, paying off its debts, distributing any residual assets to owners and legally terminating the company.

Distributions in the event of dissolution

Amounts paid to a company's owners upon dissolution of the company. The amount paid to owners will be the amount of any assets left after liquidation of a company's assets and payoff of all company debts.

Entreprenuer

An individual who takes the initiative, and in most cases the risk, associated with starting or growing a business.

Equity financing

The acquiring of assets or resources for a business through either owners' capital contributions or retained earnings. Because all business financing comes through either debt or equity financing, the amount of a company's equity financing is equal to the amount of its total assets less total liabilities which is also equal to the amount of its total owners' equity. Equity financing is also referred to as permanent financing because there is no obligation for a company to repay the assets provided through owners' capital contributions and retained earnings, except in the event of business dissolution.

FAF (Financial Accounting Foundation)

A private organization established to support and direct the activities of the FASB.

FASB (Financial Accounting Standards Board)

A private organization funded by the FAF and currently responsible for the establishment of GAAP in the United States. Term is recognized by the SEC, however, it is the SEC that has the ultimate legal authority to determine what information must be provided by publicly held companies in the United States. As a result, the SEC exercises considerable influence in any decisions made by the term.

Financial accounting

The system of accounting designed to provide a company's financial information to users who are external to the company's management. Primary external users are current or prospective investors and creditors (providers of capital) and government regulatory agencies such as the SEC, IRS and FTC.

Financial statements

AKA "general purpose financial statements." Term required under GAAP include a company's balance sheet, income statement, and statement of cash flows. An optional statement that is not required under GAAP but is often provided is a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the term that provide supplemental information.

Financing

The way a company gets the capital or assets necessary to operate. Companies obtain assets through either debt or equity term.

Debt financing

The borrowing of assets and equity financing comes from owners' capital contributions and retained earnings.

Foreclosure

The forced sale of an asset(s) intended to generate cash in full or partial payoff of a loan. Term typically takes place when a borrower is in default on a loan secured with collateral.

GAAP (Generally Accepted Accounting Principles)

The standards or rules of accounting used in the US in preparation of general purpose financial statements. The SEC has the legislated authority to establish this term for publicly held companies in the U.S.; but, the SEC has delegated that role to the FASB which is a private organization devoted entirely to the establishment of this term.

GAAS (Generally Accepted Auditing Standards)

Term details the audit procedures and guidelines prescribed by the AICPA for the performance of a CPAs certified audit of a company's financial statements.

General purpose financial statements

The financial statements, including balance sheet, income statement, and statement of cash flows, required under GAAP. An additional statement that is optional would be a statement of owners' equity or statement detailing the activity of the retained earnings/deficits portion of owners' equity. GAAP also requires certain notes to the financial statements that provide supplemental financial statement information.

Income statement

Sometimes referred to as a "statement of operations," "statement of profit and loss," "P & L statement" or "statement of earnings."

Income statement

This term is a general purpose financial statement which lists a company's revenues less expenses and the resulting net income or net loss for a period of time. A company's earnings per share must also be disclosed in the term.

Investor

A provider of capital to a company. The term is most commonly associated with providers of equity financing; but providers of debt financing might also refer to a loan as an "investment."

IRS (Internal Revenue Service)

Term is a federal agency responsible for the collection of federal taxes in the United States.

LLC (Limited Liability Corporation)

A corporate form of business ownership that enjoys some partnership characteristics, including the possible avoidance of federal corporate income taxes, while maintaining limited legal liability for its owners.

LLC (Limited Liability Corporation)

Term is subject to their authorizing state's law, which in most cases restricts the number of stockholders allowed and limits certain transfers of ownership.

Limited liability

Term refers to the legal shielding of a business owner's personal assets from any claims against the business.

Partnerships

Term do not generally provide such legal protections unless they are formed and operated as LLPs according to state law.

LLP (Limited Liability Partnership)

Term are treated as partnerships for income tax purposes and are therefore exempt from the separate income taxation faced by most corporations.

Management

Refers collectively to the people involved in leading a business. Term also refers to the process of organizing, controlling and directing a company's activities.

Managerial accounting

The system of accounting designed to provide information useful to a company's managers in improving operations. Term information is rarely made public and is not governed by any rules of accounting or GAAP.

Managerial accounting

The SEC has no role in term information. Management reports are often produced daily and may include considerable detail required in the day-to-day monitoring of business operations.

Managerial accounting

Much of term information involves budgets and forecasts for planning purposes along with follow-up reports noting budget and actual variances.

Managers

People responsible for the organization, control and direction of a company's business activities

Manufacturing business

Term assembles or constructs a tangible product for sale to customers. Term customers are typically wholesale or retail merchandisers involved in the distribution of manufactured products to the end user or consumer.

Merchandising business

A company involved in the purchase and sale of finished products. Part of term are also referred to as "distributors."

NASDAQ (National Association of Securities Dealers Automated Quotations system)

A computerized system established to facilitate public trading of securities.

NYSE (New York Stock Exchange)

The oldest and largest stock exchange in the U.S., located on Wall Street in New York City. The term is a secondary market for the trading of securities (stocks and bonds) listed with the exchange.

Non-profit business

A business operated with no intent to produce a profit for the business owners. Term generally operate to fulfill a charitable or social purpose of interest to the business owners. Many hospitals fall under this term.

Partnership

A form of business ownership in which two or more individuals and/or organizations share in the ownership of all of the business assets, liabilities and profits or losses.

Publicly held company

A company that has shares of ownership available for purchase in a public secondary market such as the NYSE or NASDAQ. Term are subject to federal securities laws and the rules and regulations of the SEC.

Retail merchandiser

A distribution business that typically purchases finished goods from manufacturers or wholesale merchandisers for the purpose of selling those goods to the end user or consumer.

S corporation

An electable status under the Internal Revenue Code that allows for a corporation to avoid federal income taxation and requires instead that all taxable income or losses of the business be attributed directly to the stockholders of the corporation for inclusion in their taxable income.

SEC (Securities and Exchange Commission)

A federal regulatory agency charged with the responsibility of regulating the issuance and trading of securities of publicly held companies in the United States.

Service business

A company devoted to providing services to clients or customers rather than tangible products. Examples: consulting firms, law firms, hospitals and car washes.

Shares

This term of stock represents a single unit of ownership in a corporation and has equal voting and dividend rights with every other term of stock in its class, either common or preferred.

Statement of cash flows

One of the three general purpose financial statements required under GAAP

Stock

Shares of ownership in a corporation. Stock ownership takes the form of either common stock or preferred stock.

Wholesale merchandiser

A distribution or merchandising business that typically purchases finished products from manufacturers and then sells those products to retail merchandisers.

AICPA (American Institute of Certified Public Accountants)

Term lobbies on behalf of the profession, provides continuing professional education and performs a variety of other services for its members.

Statement of Cash Flows

Term is designed to highlight a company's change in cash during an accounting period with a summary of the major factors giving rise to cash increases and decreases during the period

Statement of Cash Flows

Term discloses a company's cash flows under each of the three basic activities of a business: operating, investing and financing activities.

Statement of Cash Flows

Because cash is such a critical asset in sustaining a company's operations and growth, most financial analysts utilize the term to understand the causes of past changes in cash for purposes of projecting a company's future operations.

Service Business

Some companies are involved in providing both goods and services. A car dealership is both a merchandiser and this term if they provide repair and maintenance services as well as car sales.

Share

The actual percentage ownership rights (voting influence and participation in dividends) represented in a term of stock depends entirely on the total number of term that have been issued and are outstanding at any point in time.

Share

An owner of one term of stock in a company that has only two term outstanding is a 50% owner and can effectively control the company. However, an owner of one term in a company that has a million shares outstanding has very little voting influence and percentage rights to dividends.

Share

The fair market value of a term of stock (trading price in a secondary market) is dependent on the amount of % ownership represented in each term.

Share

Most companies have large numbers of term outstanding, and the resulting price of a term of stock is affordable for most individual investors.

Share

In the event that additional term of stock are issued to raise additional capital for a company, the % rights of existing owners are diluted and the value of their stock decreases accordingly. As a result, any additional issuance may require stockholder approval or the existing stockholders will have an automatic right of first refusal to buy a portion of the additional term such that their percentage ownership will remain the same.

SEC (Securities and Exchange Commission)

Term requires that all public companies register with and provide specified periodic information to the term that is then made available to the public through the term’s internet website. Included in those information requirements are annual general purpose financial statements which must be prepared in accordance with GAAP and audited by an independent CPA firm.

S Corporation

As a result, term avoid the typical double taxation that may occur on corporate profits when they are taxed at the corporate level and then taxed again to stockholders to the extent dividends are paid. In effect, term status allows for a corporation to be taxed as if it were a partnership.

S Corporation

The term election is only available to companies meeting certain criteria specified in the code. Generally speaking, only corporations with relatively few domestic, non-corporate stockholders may qualify.

Proprietorship

A form of business ownership in which a single individual owns all of the business assets, bears all of the business liabilities, and is the sole beneficiary of any net income or losses from business operations.

Proprietorship

A major disadvantage of a term form of ownership is the lack of any separate legal liability between the business and the owner. Therefore, if claims exist against the business and the business has insufficient resources to satisfy those claims, the personal assets of the owner may be taken to satisfy those claims.

Proprietorship

Term do not pay federal or state income taxes on profits. Instead, all of the business profits are taxable to the owner and any losses are deductible on the owner's personal income tax return. Individuals may alternatively choose to operate a business as a corporation.

Partnership

Term can be formed verbally, although a written partnership agreement spelling out the roles, responsibilities and rights of the partners is highly recommended.

Partnership

A major disadvantage of the term form is the lack of any separate legal liability between the business and the partners. Therefore, if claims exist against the business and the business has insufficient resources to satisfy those claims, the personal assets of the partners may be taken to satisfy those claims.

Partnership

This can be avoided through alternative term forms such as an LLP. Term do not pay federal or state income taxes on profits. Instead, all term P&L’s are allocated to the partners for inclusion on their personal income tax returns in proportion to their term interests.

Wholesale merchandisers

Term typically purchase finished products from manufacturers & sell those products to retail merchandisers.

Retail merchandisers

Term sell products to the end user or consumer.