Chapter 9: Adding Value Through Accounting

What is accounting?

The process of collecting, organizing, analyzing, and reporting financial information.

Why is accounting called the language of business?

It communicates a business’s financial information to help people make decisions.

What are internal stakeholders?

People inside a business, such as managers and employees.

What are external stakeholders?

People outside a business, such as investors, banks, and the government.

What are the two main types of accounting?

Financial accounting and managerial accounting.

What is financial accounting?

Accounting that provides financial information to external stakeholders about past transactions.

What is managerial accounting?

Accounting that helps internal stakeholders plan, budget, forecast, and make decisions.

What is GAAP?

Generally Accepted Accounting Principles — U.S. accounting standards.

What is IFRS?

International Financial Reporting Standards — accounting standards used in many countries.

What is the difference between GAAP and IFRS?

GAAP is generally rules-based; IFRS is generally principles-based.

What are the three major financial statements?

Balance sheet, income statement, and statement of cash flows.

What is a balance sheet?

Shows a company's assets, liabilities, and owner's equity at a specific point in time.

What is the accounting equation?

Assets = Liabilities + Owner's Equity.

What are assets?

Things of value a business owns or controls.

What are liabilities?

Money a business owes to others.

What is owner's equity?

The owners' remaining interest in the business after liabilities are subtracted from assets.

What is an income statement?

Shows a company's revenues, expenses, and profit or loss over a period.

What is net income?

Revenue minus expenses.

What is gross profit?

Revenue minus cost of goods sold.

What is a statement of cash flows?

Shows where cash comes from and where it goes.

What are the three types of cash flow activities?

Operating, investing, and financing.

What is ratio analysis?

Using financial ratios to evaluate and compare a company's financial health. -To put finacial records into context.

What are the three main types of financial ratios?

Profitability, liquidity, and leverage.

What are profitability ratios?

Measure how well a company generates profit.

What are liquidity ratios?

Measure a company's ability to pay short-term bills.

What are leverage ratios?

Measure a company's reliance on debt.

What is budgeting?

Planning how a business will use its resources to reach its goals.

What is cost accounting?

Identifying and analyzing costs to help with pricing and business decisions.

What are direct costs?

Costs directly related to producing a product, such as raw materials.

What are indirect costs?

Costs that support business operations, such as general facility expenses.

What are fixed costs?

Costs that remain constant in total as output changes within the relevant range.

What are variable costs?

Costs that change in total as production changes.

What is auditing?

Examining financial statements to evaluate their accuracy and reliability.

What is opportunity cost?

The value of the next-best alternative you give up.

What is the Sarbanes-Oxley Act (SOX) of 2002?

A law designed to strengthen corporate accountability and auditor independence.

What is an independent audit?

An audit conducted by an auditor independent of the company.

What is tax accounting?

Preparing tax returns and helping businesses comply with tax laws.

What is the accounting cycle?

The process of recording and organizing transactions in a journal and preparing financial statements.

What is the mission of Security and Exchange Commision?

To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation

SEC

Oversees corporate accounting

Return on assests

Analyzes the ability of a firm to transform assests into net income.