Principles of Finance and Managerial Accounting - D196

Complete to the end of Unit 3.

Accounting system

The procedures and processes used by a business to analyze transactions, handle routine bookkeeping tasks, and structure information so it can be used to evaluate the performance and health of the business.

Accounting

A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Revenues

The amount of assets created through the sale of goods and services.

Accounting cycle

The procedure for analyzing, recording, classifying, summarizing, and reporting the transactions of a business.

Management accounting

The area of accounting concerned with providing internal financial reports to assist management in making decisions.

Annual report

A document that summarizes the results of operations and financial status of a company for the past year and outlines future plans.

Financial statements

Reports such as the balance sheet, income statement, and statement of cash flows, which summarize the financial status and results of operations of a business entity.

Financial accounting

The area of accounting concerned with reporting financial information to interested external parties.

Assets

Economic resources that are owned or controlled by a company.

Liabilities

Obligations to pay cash, transfer other assets, or provide services to someone else.

Owner’s equity

The remaining claim against the assets of a business after the liabilities have been deducted.

Assets = Liabilities + Owner’s Equity

Owner’s Equity = Capital Stock and Retained Earnings

Balance sheet

Reports the resources of a company (assets) the company’s obligations (liabilities), and the owner’s equity, which represents the difference between assets and liabilities.

Net income

An overall measure of the performance of a company that is equal to revenues minus the expenses for the period.

Income statement

Reports the amount of net income earned by a company during a period.

Statement of cash flows

Reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing.

Lenders (creditors)

Interested in being repaid with interest.

Key external users of financial accounting data

• Lenders (creditors)

• Investors

• Competitors

• Federal, state, and local government agencies

Financial Accounting Standards Board (FASB)

The organization responsible for studying accounting issues and establishing accounting standards for private companies and non-profit organizations to govern financial reporting in the US.

Generally accepted accounting principles (GAAP)

Authoritative guidelines that define accounting practice at a particular time in the US.

Governmental Accounting Standards Board (GASB)

An independent private organization that sets the accounting and financial reporting standards for state and local governments following GAAP.

Securities and Exchange Commission (SEC)

The government body responsible for regulating the financial reporting practices of most publicly owned corporations in connection with the buying and selling of stocks and bonds.

Certified public accountant (CPA)

An accountant who has met the specified professional requirements established by the AICPA and local and state societies. A key service provided by CPAs is the performance of independent audits of financial statements.

American Institute of Certified Public Accountants (AICPA)

A professional organization for CPAs in which membership is voluntary.

International Accounting Standards Board (IASB)

A committee formed to develop international accounting standards.

Ethics

The basic moral principles that govern an individual’s behavior.

Business documents

Records of transactions used as the basis for recording accounting entries; include invoices, check stubs, receipts, and similar business papers.

Transaction

Two parties exchanging something of value.

Correct summary sequence in the accounting cycle

Analyze, record, summarize, prepare

Internal transaction

A transaction that occurs within a company, does not involve an external party, and is not recorded in the company’s financial records.

E.g., hiring a new employee.

External transaction

An exchange that occurs between a company and an external party and that is recorded in the financial records of the company.

E.g., a customer buying something from Walmart.

Arm’s-length transaction

A transaction in which a buyer and seller act independently to get the best possible deal.

E.g., a stranger selling their house to another stranger.

Accounting equation

Assets = Liabilities + Owner’s equity

Account

An accounting record in which the results of transactions are accumulated; shows increases, decreases, and a balance.

Dividends

A sum of money distributed to the owners (stockholders) of a corporation.

Primary financial statements

The balance sheet, income statement, and statement of cash flows, which are used by external groups to assess a company’s economic standing.

Statement of retained earnings

A financial statement that identifies the changes in accumulated investments by owners and earnings or profits since day one. Links together the income statement and balance sheet.

Form 10-K

A form required by the SEC for businesses to report a comprehensive summary of financial performance, including the three primary financial statements.

Form 10-Q

Quarterly financial reports that publicly traded companies must file with the SEC.

Classified balance sheet

A balance sheet that distinguishes between current and long-term assets.

Current assets

Cash and other assets that are expected to be converted to cash within a year.

Long-term assets

Assets that are illiquid and that are needed to operate a business over an extended period of time. E.g., property and equipment needed to operate a business.

Current liabilities

Liabilities expected to be satisfied within a year or the current operating cycle, whichever is longer.

Long-term liabilities

Liabilities that are not expected to be satisfied within a year.

Comparative financial statements

Financial statements that include information for both the current year and preceding year(s) that are prepared for users to identify any significant changes in particular items.

Market value

The value of a company as measured by the number of shares of stock outstanding multiplied by the current market price of the stock; the current value of a business.

Number of Shares of Stock * Current Market Price = Current Value of the Business

Book value

The value of a company measured by the amount of owner’s equity in the company.

Expenses

The amount of assets consumed through business operations; the costs incurred in normal business operations to generate revenues.

Net concept

Reflects the overall profitability after all expenses are accounted for. 

Gross concept

Focuses on the direct costs of producing goods or services.

E.g., profit - cost of goods sold = gross income/loss.

Operating income

A line on the income statement that reports the results of what a company does on a daily basis; calculated by sales minus cost of goods sold minus operating expenses.

Sales - cost of goods sold (COGS) - operating expense = operating income

Gains

Money made on activities outside the normal business of a company.

Losses

Money lost on activities outside the normal business of a company.

Earnings (loss) per share (EPS)

The amount of net income (earnings) related to each share of stock; computer by dividing net income by the number of shares of stock outstanding during this period.

Net Income / Outstanding # of Shares of Stock = Earnings (Loss) per Share

Operating activities

Activities that are part of the day-to-day business of a company.

Investing activities

Activities associated with buying and selling long-term assets.

Financing activities

Activities whereby cash is obtained from or repaid to owners and creditors.

Articulation

The interrelationships among the financial statements.

Notes to the financial statements

• Summary of significant accounting policies

• Additional information about summary tools

• Disclosure of information not recognized

• Supplementary information

Summary of significant accounting policies

• Revenue recognition

• Inventory methods

• Depreciation methods

• Use of estimates

Additional information about summary totals

• Inventory make up — raw materials, work-in-progress, finished goods

• Receivables — gross amount and the allowance for bad debts

• Pension liability — assumptions about interest rates, etc.

Disclosure of information not recognized

• Status of legal proceedings

• Subsequent events

Supplementary information

• Business segment information

• Domestic/international sales breakdown

Financial statement analysis

The examination of both the relationships among financial statement numbers and the trends in those numbers over time.

Horizontal analysis

A method of financial statement analysis that compares a firm’s results from year to year.

Common size income statement

Income statements/sales

Vertical analysis

A method of financial statement analysis in which each line item is displayed as a percentage of another item to allow for comparison to other companies within the same industry.