Term
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Definition
| system for recognizing, recording, organizing, summarizing, analyzing, and reporting information about the financial transactions that affect an organization |
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managers- for information on sales
stockholders- has management generated enough return on their investment?
employees- pay raise? new job?
creditors- can this company pay back what they owe us? |
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Definition
| users of the accounting system: |
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| work within a business or nonprofit organization, preparing reports and analyzing financial information for the organization that employs them |
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| responsible for verifying accuracy of their organization’s internal records and identify areas where mismanagement, waste, and fraud may exist |
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| accountants who provide a variety of accounting services for clients on a fee basis |
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| branch of accounting that addresses the needs of external stakeholders, including stockholders, creditors, and government regulators |
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Definition
Generally Accepted Accounting Principles
a set of rules that guide the practice of accounting
to reduce confusion and provide external stakeholders with consistent and accurate financial statements |
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| Financial Accounting Standards Board- (FASB) |
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Definition
The SEC (Securities and Exchange Commission) currently delegates the primary responsibility of establishing and enforcing principles to this private, self-regulated organization
makes sure that financial statements are:
relevant
reliable
consistent
comparable |
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Term
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Definition
summarizes a firm’s financial position at a specific point in time
identifies the firm’s assets, liabilities, and owners’ equity |
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Definition
| assets = liabilities + owners’ equity |
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| things of value that the firm owns, such as cash, inventory of goods available for sale, land, machinery, equipment, and buildings; ex: accounts receivable |
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Definition
indicate what the firm owes to non-owners
represent the claims non-owners have against the firm’s assets
ex: amount a firm owes to a bank when it takes out a loan; accounts payable
accounts payable- what the firm owes suppliers on credit |
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Definition
refers to the claims the owners have against their firm’s assets
ex: common stock |
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Definition
refers to the claims the owners have against their firm’s assets
ex: common stock |
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| common stock and retained earnings |
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Definition
| 2 most basic accounts listed in the owner’s equity section for corporations |
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Definition
| summarizes a firm’s operations over a given period of time in terms of its net income (profit or loss) |
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| revenue - expenses = net income |
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Definition
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Definition
| represents the increase in the amount of assets the firm earns in a given time period as the result of its ongoing operations |
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| a firm normally earns revenue by selling goods or by charging fees for providing services or both |
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Definition
| how does a firm normally get revenue? |
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Definition
| True or False: revenue a firm reports is not the same as the amount of cash it receives in that time period |
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Definition
| often called “bottom line” of the income statement because it is such an important measure of firm’s operating success |
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Definition
| profit or loss the firm earns in the time period covered by the income statement |
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Definition
| indicate the cash a firm spends or other assets it uses to carry out the normal business activities necessary to generate its revenue |
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Definition
| recognizes revenue when it is earned and matches revenues to the revenues they helped produce |
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Definition
| True or False: if a firm sells most of its goods on credit, the revenue it earns might show up as an increase in cash |
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Definition
| shows cash flow into and out of the firm |
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Definition
| also can cash to pay dividends, take advantage of investment opportunities, and cope with with unexpected problems |
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operations
investing
financing |
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Definition
| statement of cash flows shows cash flow into and out of the firm from 3 types of activities: |
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Definition
| CPA grades no problems in report |
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Definition
| CPA grades as problems with firms accounting methods or financial statements |
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Definition
| CPA grade due to major and widespread problems |
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| Sarbanes and Oxley Act of 2002 (SOX) |
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Definition
| law that banned business relationships between CPA firms and the companies they audit that might create a conflict of interest |
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Definition
| compares information in a firm’s financial statements over a period of 2 or more years |
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Definition
| expresses each item on a balance sheet or income statement as a percentage of some key value |
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Definition
| compares selected items found in financial statements by comparing percentages, rates, or proportions |
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Definition
| type of accounting that provides info to extend stakeholders (creditors, stockholders, and government regulations) |
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Definition
| type of accounting that prepares a standard set of financial statements |
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Definition
| type of accounting that presents statements on a schedule (usually quarterly and annually) |
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| type of accounting that is governed by GAAP |
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Definition
| type of accounting that uses internally-developed procedures |
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Definition
| type of accounting that prepares customized reports to deal with specific problems/issues |
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Definition
| type of accounting that provides info to internal stakeholders (managers of specific divisions or departments) |
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Definition
| type of accounting that presents statements upon request |
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Definition
| brings all documents together in the operating and financial budgets into a unified whole; show the pieces of the whole picture |
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Definition
| focus on firm’s financial objectives and identify the resources needed to achieve goals |
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Definition
| management tool that shows now firms will acquire and used resources needed to achieve its goals over time |
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Definition
| cost that influences entire production facility but not to one specific product; ex: property taxes on a building |
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Definition
| cost that is easy to identify and measure |
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| to find the sources and users of funds that maximize the value of the firm to its owners |
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Definition
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| (current assets/current liabilities) |
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Definition
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Definition
| ratio that compares current assets to current liabilities |
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Definition
| ratio that is asset management type: measures how a firm is using its assets to generate revenue |
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Definition
| ratio that is a leverage type: measures how much a firm relies on debt to meet its financial needs |
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Definition
| ratio that compares the total amount of debt financing to the amount of financing provided by ownership |
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Definition
| short-term IOUs issued by the U.S. government |
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Definition
| ratio that is leverage type: measures how much a firm relies on debt to meet its financial needs |
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| return on equity ratio, return on assets ratio, and earnings per share ratio |
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Definition
| ratio that is a profitability type: compares the amount of profit to some measure of resources invested |
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Definition
| ratio that indicates the amount of profit earned per dollar invested by the owners of the company |
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Definition
| difference between its current assets and current liabilities |
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Definition
| helps determine when the firm is likely to need additional funds to meet short-term cash shortages, and when surpluses of cash will be available to pay off loans or to invest in other assets |
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Definition
| projected financial statements; this is a forecast |
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Definition
| ratio that is liquidity type: measures the ability to pay short-term liabilities |
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| (cost of goods sold/total owner’s equity) |
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Definition
| inventory turnover ratio equation |
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| (current assets/current liabilities) |
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Definition
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| (total debt/total owners’ equity) |
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Definition
| debt-to-equity ratio equation |
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Term
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Definition
| True/False: a high ratio indicates the the firm is relying heavily on debt, or is “highly leveraged” |
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| (total debt/total assets) |
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Definition
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| (net lineage - preferred dividends) / (avg. common stock equity) |
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Definition
| return on equity ratio equation |
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Term
| common stockholders are the true owners |
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Definition
| why are the preferred dividends are deducted from net income before computing return on equity ratio? |
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Term
| (net income/avg. total assets) |
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Definition
| return on assets ratio equation |
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| (net income - preferred dividends)/(avg. number of common shares outstanding) |
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Definition
| earnings per share ratio equation |
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Term
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Definition
| liquid assets that can be converted into cash so easily that firms view them as part of their cash holdings |
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Term
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Definition
| short-term unsecured promissory notes issued by large corporations |
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Definition
| raise funds by selling shares to large number of investors |
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Definition
| when suppliers ship materials, parts, or goods to a firm without requiring payment at the time of delivery |
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Definition
| major source of spontaneous financing for most firms |
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Definition
| arrangement in which a bank agrees to provide the firm with funds up to some specified limit, as long as the borrower’s credit situation doesn’t deteriorate |
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Term
| revolving credit agreement |
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Definition
| formal agreement in which bank provides funds and bank requires the borrowing firm to pay a commitment fee based on the unused amount of funds |
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Term
| revolving credit agreement |
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Definition
system in which firm pays interest on firm it borrows and
firm pays a commitment fee on funds it doesn’t borrow |
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Definition
| company that buys the accounts receivable of other firms |
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Definition
| the process a firm uses to evaluate long-term investment proposals |
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Definition
| says that a dollar received today is worth more than a dollar received in the future because the sooner you receive a sum of money, the sooner you can put that money to work to earn more money |
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Definition
| earning interest in the current time period on interest from previous periods |
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Term
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Definition
| the amount of money that, if invested today at a given rate of interest, would grow to become some future amount in a specified number of time periods |
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Definition
| process of computing the present value of a future cash flow |
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Term
| amount of cash flow divided by (1+r)^N |
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Definition
| what equation do you use to discount? |
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Term
| the number of periods in the future that the cash flow will be received |
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Definition
| what is N in the discounting equation? |
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Term
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Definition
| what is r in the discounting equation? |
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Term
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Definition
| rate of interest used in the present value computations |
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Term
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Definition
| the sum of the present values of expected future cash flows from an investment minus the net cost of that investment |
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Definition
| if NPV is > or = 0 is the proposal accepted? |
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Definition
| if NPV is < 0 is the proposal accepted? |
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Definition
| measures the increase in shareholder value expected to result from an investment |
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Definition
| the mix of equity and debt financing a firm uses to meet its permanent financing needs |
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Term
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Definition
| conditions lenders place on firms that seek long-term debt financing |
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Term
| direct combinations by owners and retained earnings |
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Definition
| two sources of equity finances |
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Definition
| that part of net income that firm reinvests |
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Definition
| the use of debt in a firm’s capital structure |
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