Comprehensive Overview of Accounting and Finance

Accounting

The recording, classifying, summarizing, and interpreting of financial transactions.

Managerial Accounting

Provides internal financial analysis to assist managers.

Financial Accounting

Generates financial reports for external stakeholders.

Auditing

Reviews and evaluates financial statements for accuracy.

Tax Accounting

Specializes in tax law, tax preparation, and strategic tax planning.

Governmental & Nonprofit Accounting

Focuses on budgets rather than profits.

The Accounting Cycle

A six-step process leading to financial statement preparation.

Balance Sheet

Reports financial condition with the formula: Assets = Liabilities + Owner's Equity.

Income Statement

Shows profitability with the formula: Revenue - Expenses = Net Income.

Statement of Cash Flows

Reports cash inflows and outflows in operations, investments, and financing.

Liquidity Ratios

Short-term financial health indicators.

Current Ratio

Current assets / Current liabilities.

Acid-test Ratio

(Cash + Receivables + Marketable Securities) / Current Liabilities.

Bookkeeping

Recording business transactions.

Journal

First entry of all accounting data.

Double-entry bookkeeping

Each transaction is recorded in two places.

Ledger

Summarizes transactions into categories.

Trial Balance

Ensures financial records are accurate.

Financial Statements

Summarize financial performance.

Cost of Goods Sold (COGS)

Cost of inventory sold.

Gross Profit

Earnings after COGS.

Operating Expenses

Rent, salaries, utilities.

Depreciation

Spread of asset cost over time.

Leverage Ratios

Debt reliance.

Debt-to-equity ratio

Total liabilities / Owner's equity.

Profitability Ratios

Earnings efficiency.

Earnings per share (EPS)

Net income after taxes / Shares outstanding.

Return on sales

Net income / Net sales.

Return on equity

Net income after tax / Total owner's equity.

Activity Ratios

Inventory efficiency.

Inventory turnover

COGS / Average inventory.

Finance

Managing funds and resources for business operations.

Financial Managers

Analyze financial data, develop financial strategies, prepare budgets.

Short-term forecast

Predicts finances for less than a year.

Cash flow forecast

Predicts cash in/outflows (monthly/quarterly).

Long-term forecast

Covers 1+ years of financial expectations.

Capital budget

Plans for big purchases (land, buildings).

Cash budget

Predicts cash in/outflows.

Operating/master budget

Summarizes overall financial plans.

Capital expenditures

Major investments in assets (land, patents, equipment).

Debt financing

Borrowing funds (loans, bonds).

Equity financing

Selling stock or using retained earnings.

Short-term financing

Funds needed for less than a year.

Long-term financing

Funds needed for more than a year.

Trade credit

Buying goods now, paying later.

Promissory note

Written promise to pay.

Revolving credit agreement

Pre-approved credit line with a fee.

Factoring

Selling accounts receivable for quick cash.

Risk/return trade-off

Higher risk = Higher interest.

Venture capital

Investment in startups with high potential.

Securities Markets

Facilitate buying & selling of stocks, bonds, and investments.

Primary market

Initial stock/bond sales (IPOs).

Secondary market

Investors trade existing stocks/bonds.

Investment Bankers

Help companies issue & sell securities.

Stock Exchanges

New York Stock Exchange (NYSE) and Nasdaq.

Over-the-counter (OTC) market

Direct trading between two parties.

Common stock

Voting rights, most common form of ownership, share in profits (dividends).

Preferred stock

Higher claim on dividends, paid before common stockholders.

Bonds

Investors lend money to a firm in exchange for fixed interest payments.

Maturity date

The date a company must repay the bondholder.

Unsecured (debenture) bonds

No collateral.

Secured (mortgage) bonds

Backed by collateral.

Sinking fund

Reserve to pay off bonds before maturity.

Money

Anything people generally accept as payment for goods and services.

Barter

The direct trading of goods or services.

Portability

Easy to carry around.

Divisibility

Different sizes, different values.

Stability

The value of money is relatively stable.

Durability

Coins last for thousands of years.

Uniqueness

Easily identifiable.

Money Supply

The amount of money the Federal Reserve makes available for people to buy goods and services.

Create money

The Federal Reserve can create money to stimulate the economy.

M-1

Includes coins and paper bills, checks, etc—money that can be accessed quickly and easily. ($0-500).

M-2

Everything in M-1, plus money in savings accounts, etc. This money is harder to obtain and takes more time. ($500-$5,000).

M-3

M-2, plus large deposits. ($500,000+).

Falling dollar value

The amount of goods and services you can buy with a dollar decreases.

Rising dollar value

The amount of goods and services you can buy with a dollar increases.

Reserve Requirement

The percentage of banks' checking and savings accounts that they must keep in the bank or in a non-interest-bearing deposit in the Federal Reserve district bank.

Open Market Operations

Involve the buying and selling of government bonds.

Discount Rate

The interest rate the Fed charges for loans to member banks.

Commercial banks

Profit-seeking organizations that receive deposits from individuals and corporations and use these funds to make loans.

Depositors

Provide funds.

Borrowers

who takes loans.

Checking account

A demand deposit because money is available on demand.

Savings account

A time deposit, requiring prior notice before withdrawal.

Certificate of deposit

A time deposit that earns interest, with a maturity date.

Credit unions

Nonprofit, member-owned financial cooperatives offering a full range of banking services.

Nonbanks

Financial organizations that accept no deposits but offer many of the services of regular banks.

Letter of credit

A promise by the bank to pay the seller a given amount if certain conditions are met.

Banker's acceptance

A promise that the bank will pay a specified amount at a particular time.