CHAPTER 14: ACCOUNTING AND FINANCIAL STATEMENTS

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 records.

Managerial accounting

the internal use of accounting statements by managers in planning and directing the organization's activities.

Cash flow

the movement of money through an organization over a daily, weekly, monthly, or yearly basis.

Budget

an internal financial plan that forecasts expenses and income over a set period of time.

Annual report

summary of a firm's financial information, products, and growth plans for owners and potential investors.

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 a firm owes to others.

owners' equity

equals assets minus liabilities and reflects historical values.

The accounting equation

assets = liabilities + owners' equity.

Double-entry bookkeeping

a system of recording and classifying business transactions that maintains the balance of the accounting equation.

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 file with separate sections for each account.

Revenue

the total amount of money received 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 to buy or produce the products it sold during the period to which the income statement applies.

Gross income

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

Profit

the difference between what it costs to make and sell a product and what a customer pays for it.

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 called 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; also called short-term assets.

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

all unpaid financial obligations incurred by an 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; shows the overall percentage of profits earned by the company.

Return on assets

net income divided by assets; shows how much income the firm produces for every dollar invested in assets.

Return on equity

net income divided by owners' equity; also called return on investment (ROI); shows how much income is generated by each $1 the owners have invested in the firm.

Asset utilization ratios

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

Certified management accountants (CMA)

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