Introduction to Business - Chapter 14

Chapter 14, Using Financial Information and Accounting

Accounting

The systematic process of collecting, recording, classifying, summarizing, reporting, and interpreting financial transactions and information for decision-making.

Acid-test (quick) ratio

A measure of a company’s short term liquidity. It assesses the ability to cover current liabilities without relying on inventory sales. Assets are divided by current liabilities, excluding inventory/owner’s equity.

Activity ratios

Ratios that measure the production on how well a firm uses its assets.

Annual Report

A yearly document that describes a firm’s status and usually discusses the firm’s activities during the past year and it’s prospects for the future business planning.

Assets

Things of value owned by a firm.

Auditing

In accordance with accepted accounting rules, a process of reviewing the records used to prepare financial statements and issuing a formal auditor’s opinion indicating completion.

Balance sheet

A financial statement that summarizes a firm’s financial position at a specific point in time.

Certified Management Accountant (CMA)

A managerial account who has completed a professional certificate program, including passing an examination.

Certified Public Accountant (CPA)

An accountant who has completed an approved bachelor’s degree program, passed a test prepared by the American Institute of CPA’s, and met state requirements. *The only one who can issue an auditor’s opinion on a firm’s financial statement.

Cost of Goods Sold

The total expense of buying or producing a firm’s goods or services.

Current Assets

Assets that can or will be converted to cash within the next 12 months.

Current Liabilities

Short-term claims that are due within a year of the date of the balance sheet.

Current ratio

The ratio of total current assets to total current liabilities; used to measure a firm’s liquidity.

Debt ratio

Ratios that measure the degree and effect of a firm’s use of borrowed funds (debt) to finance its operations.

Debt-to-equity ratio

The ratio of total liabilities to owners’ equity; measures the relationship between the amount of debt financing (borrowing) and the amount of equity financing (owner’s funds).

Depreciation

The allocation of an asset’s original cost to the years in which it is expected to produce revenues.

Double-entry bookkeeping

A method of accounting in which each transaction is recorded as two entries so that two accounts or records are changed.