What Is Accounting? Chapter 15 notes BA 100

What is accounting?

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

Who uses accounting information?

Managers, employees, investors, creditors, tax authorities, government regulatory agencies, and external accountants.

What is the role of the Accounting Information System (AIS)?

An organized procedure for identifying, measuring, recording, and retaining financial information.

What is bookkeeping?

The process of recording accounting transactions.

What distinguishes public accountants?

They offer accounting services to the public and maintain independence from the clients they serve.

What is a Certified Public Accountant (CPA)?

An accountant who is licensed by the state after passing the CPA exam and meeting experience requirements.

What are Generally Accepted Accounting Principles (GAAP)?

Accounting guidelines that govern the content and form of financial reports.

What is the accounting equation?

Assets = Liabilities + Owner’s Equity.

What is managerial accounting?

A field of accounting that serves internal users within a company.

What is forensic accounting?

The use of accounting skills for legal purposes, often involving fraud investigation.

What is net income?

The amount of profit remaining after all expenses, including taxes, have been deducted from revenues.

What is a balance sheet?

A financial statement that details a firm's assets, liabilities, and owners' equity at a specific point in time.

What are retained earnings?

Profits that a company retains for reinvestment rather than paying out as dividends.

Define the term 'current asset'.

An asset that can be converted into cash within one year.

What is an audit?

A systematic examination of a company's accounting system to ensure financial reports reliably represent its operations.

What is the purpose of the Sarbanes-Oxley Act?

To restore public trust in corporate accounting practices by imposing new requirements on financial activities.

Define 'financial accounting'.

A field of accounting concerned with external information users such as investors, creditors, and regulatory agencies.

What is the purpose of financial statements?

To summarize the financial status and results of operations of a company.

What does a statement of cash flows report?

It summarizes a company's cash receipts and cash payments over a period.

What is the primary focus of the International Accounting Standards Board (IASB)?

To develop and promote global accounting standards.

What is a budget in accounting?

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

What is a profitability ratio?

A financial ratio that measures a firm's potential earnings.

Define 'solvency ratio'.

A financial ratio that estimates a firm's ability to meet its debt obligations.

What is an expense?

An expense is a cost incurred in the process of generating revenue.

Define 'liabilities'.

Liabilities are debts or obligations that a company owes to outside parties.

What is financial reporting?

The process of producing statements that disclose an organization's financial status to management, investors, and the government.

What is a trial balance?

A report that lists the balances of all accounts in the general ledger to ensure they balance.

What does EBITDA stand for?

Earnings Before Interest, Taxes, Depreciation, and Amortization.

What is a general ledger?

A comprehensive record of all financial transactions within a company.

What is a fiscal year?

A one-year period that companies and governments use for financial reporting and budgeting.

Define 'cash basis accounting'.

An accounting method where revenues and expenses are recorded when cash is received or paid.

What is accrual accounting?

An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of cash flow.

What is a financial analysis?

The evaluation of a company's financial performance through financial statements and ratios.

What is the matching principle?

An accounting principle stating that expenses should be matched with the revenues they help to generate.

What is a cash flow statement?

A financial statement that shows the inflows and outflows of cash over a certain period.

What is a ledger?

A book or digital record that contains all accounts of a business.

What is a chart of accounts?

A listing of all accounts used by a business in its financial reporting.

What is a journal entry?

An entry made in the accounting journal to record financial transactions.

What is a deferred expense?

An expense that has been paid but not yet incurred.

What is a variance analysis?

The process of analyzing the differences between planned financial outcomes and the actual results.

What is working capital?

The difference between current assets and current liabilities.

What is a financial ratio analysis?

The process of evaluating the relationship between various financial statement accounts.

What is depreciation?

The allocation of the cost of a tangible asset over its useful life.

What is an asset?

Resources owned by a company that have economic value.

Define 'owner's equity'.

The residual interest in the assets of a company after deducting liabilities.

What is a financial statement audit?

An examination of the financial statements by an independent auditor to ensure their accuracy.

What is a trial balance used for?

To verify that the total debits equal the total credits in the accounting records.

What is the revenue recognition principle?

The accounting guideline that determines when revenue is recognized and recorded.

What is a financial model?

A representation of a company's financial performance, often used for forecasting.

What is short-term debt?

Liabilities that are due within one year.

What is a capital asset?

A long-term tangible asset used in the operations of a business.

What is liquidity?

A measure of how easily an asset can be converted into cash.

Define 'cost of goods sold (COGS)'.

The direct costs attributed to the production of goods sold by a company.

What is an internal control system?

Processes put in place to ensure the integrity of financial and accounting information.

What is an extensive audit?

A thorough review of all aspects of a company's financial statements and records.

Return on Assets (ROA) formula

(net income / total average asset) * 100

Current Ratio (liquidity) formula

(current total assets / current total liabilities) * 100

Inventory turnover formula

(costs of good sold / average inventory) * 100