Business Essentials Chapter 15: The Role of Accountants and Accounting Information

Vocabulary practice cards covering the key terms, roles, and financial statements discussed in Chapter 15 of Business Essentials.

Accounting

A comprehensive system for collecting, analyzing, and communicating financial information.

Bookkeeping

The specific task of recording accounting transactions.

Accounting Information System (AIS)

An organized procedure for identifying, measuring, recording, and retaining financial information for use in accounting statements and management reports.

Controller

The person who manages all of a firm’s accounting activities, often referred to as the chief accounting officer.

Certified Public Accountant (CPA)

An accountant licensed by the state who offers services to the public.

Financial Accounting

The field of accounting concerned with external users of a company’s financial information.

Managerial (Management) Accounting

The field of accounting that serves internal users of a company’s financial information.

Audit

A systematic examination of a company’s accounting system to determine whether its financial reports reliably represent its operations.

Generally Accepted Accounting Principles (GAAP)

The accounting guidelines that govern the content and form of financial reports.

Tax Services

Assistance provided by CPAs for tax preparation and tax planning.

Management Advisory Services

Assistance provided by CPA firms in areas such as financial planning, information systems design, and other areas of concern for client firms.

Core Competencies for Accounting

The combination of skills, technology, and knowledge necessary for the future CPA, including strategic thinking and critical problem solving.

Private Accountant

A salaried accountant hired by a business to carry out its day-to-day financial activities.

Management Accountant

A private accountant who provides financial services to support managers in various business activities within a firm.

Certified Management Accountant (CMA)

A professional designation awarded by the Institute of Management Accountants (IMA) in recognition of management accounting qualifications.

Forensic Accounting

The practice of accounting for legal purposes.

Certified Fraud Examiner (CFE)

A professional designation administered by the Association of Certified Fraud Examiners for specialty qualifications in forensic accounting.

Sarbanes-Oxley Act of 2002 (Sarbox)

Federal regulations designed to restore public trust in accounting practices by imposing new requirements on financial activities in publicly traded corporations.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Owners’ Equity}$$

Asset

Any economic resource expected to benefit a firm or an individual who owns it.

Liability

A debt owed by a firm to an outside organization or individual.

Owners’ Equity

The amount of money that owners would receive if they sold all of a firm’s assets and paid all of its liabilities.

Financial Statement

Reports summarizing a company’s financial status to stakeholders, including the balance sheet, income statement, and statement of cash flows.

Balance Sheet

A financial statement that supplies detailed information about a firm’s assets, liabilities, and owners’ equity.

Current Asset

An asset that can or will be converted into cash within $1\,\text{year}$.

Liquidity

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

Fixed Asset

An asset with long-term use or value, such as land, buildings, and equipment.

Depreciation

An accounting method for distributing the cost of an asset over its useful life.

Current Liability

A debt that must be paid within $1\,\text{year}$.

Accounts Payable (Payables)

A current liability consisting of bills owed to suppliers.

Long-Term Liability

A debt that is not due for at least $1\,\text{year}$.

Retained Earnings

Earnings retained by a firm for its use rather than paid out as dividends.

Intangible Asset

A nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit.

Goodwill

The amount paid for an existing business above the value of its other assets.

Income Statement (Profit-and-Loss Statement)

A financial statement listing annual revenues and expenses showing a bottom line of profit or loss ($\text{Profit} = \text{Revenues} - \text{Expenses}$).

Revenues

Funds that flow into a business from the sale of goods or services.

Cost of Goods Sold

The costs of obtaining materials for making the products sold by a firm during the year.

Operating Expenses

Costs, other than the cost of revenues, incurred in producing a good or service.

Gross Profit

A profit figure calculated from the firm’s revenues minus its cost of revenues.

Operating Income

Gross profit minus operating expenses.

Net Income (Net Profit, Net Earnings)

Gross profit minus operating expenses and income taxes.

Statement of Cash Flows

A financial statement describing a firm’s yearly cash receipts and cash payments.

Budget

A detailed statement of estimated receipts and expenditures for a future period of time.

Revenue Recognition

The formal recording and reporting of revenues at the appropriate time.

Full Disclosure

A guideline stating financial statements should include management’s interpretations and explanations along with numbers.

Solvency Ratio

A financial ratio used for estimating a borrower’s ability to repay debt.

Profitability Ratio

A financial ratio used for measuring a firm’s potential earnings.

Activity Ratio

A financial ratio used for evaluating management’s efficiency in using a firm’s assets.

Short-Term Solvency Ratio

A financial ratio measuring a company’s ability to pay immediate debts.

Current Ratio

A financial ratio measuring a company’s ability to pay current debts out of current assets.

Leverage

The ability to finance an investment through borrowed funds.

Earnings Per Share

A profitability ratio measuring the net profit a company earns for each share of outstanding stock.

Code of Professional Conduct

A code of ethics for CPAs maintained and enforced by the AICPA.

International Accounting Standards Board (IASB)

An organization responsible for developing and implementing a set of global accounting standards.