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Definition
| the recording of business transactions and the preparation of reports summarizing these transactions |
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Term
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| refers specifically to the records and related reports that are available to be read by people outside of the company |
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| 3 types of business transactions |
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Definition
| 1. Financing 2. Operating 3. Investing |
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| Those transactions that raise funds for the company to operate |
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| The transactions in which the company is investing in assets that it will keep in the business to use in its operations |
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| All of the other transactions that a business engages in which cannot specifically be classified as financing or investing |
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| Two basic ways a company can raise money to help finance its operations: |
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Definition
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| What does equity refer to? Who buys it? |
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Definition
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| The 2 rights buying stock entitles the stockholder to: |
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Definition
1. To vote for the “directors” of the company. All the directors together form the corporation’s “board of directors”. The job of the directors is to represent the stockholders’ interest to management and protect the stockholders’ investment
2. To receive dividends from the company when dividends are paid |
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Term
| Two ways an equity investor can make money on his or her investment: |
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Definition
1. Receiving dividends
2. By selling their stock at some time in the future when the stock price has increased |
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Term
| To what does debt refer in financing activities? |
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Definition
| This refers to borrowing money from investors or banks |
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| Who loans a company money? |
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Definition
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Term
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| The date by which the loan is to be repaid |
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| Refers to the assets that are pledged by the borrower to the creditor if the borrower is not able to repay the loan |
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| The term for the company being unable to repay its loans |
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Definition
| Land, buildings, and equipment to help them operate the business |
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Term
| What makes an asset fixed? |
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Definition
| (1) likely to last a number of years and (2) expected to be used in the operations of the business rather than sold as part of the company’s general operations (generally 2+ years) |
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| Any transactions that are related to running the business and marketing the company’s product |
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| Examples of Operating Activities |
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Definition
| Salaries and wages, rent, utilities, insurance, and purchases of goods to be resold |
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Term
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Definition
| Securities and Exchange Commission: The basic purpose of the SEC is to maintain fair and truthful capital markets. The SEC’s coverage only extends to “publicly-held corporations" |
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Definition
| A corporation is “publicly-held” if its stock is traded on an exchange, such as the New York Stock Exchange or NASDAQ |
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| What reports does the SEC require of companies? |
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Definition
Form 10K: annually (audited financial report)
Form 10Q: quarterly (unaudited financial reports covering the most current quarter)
Annual Report: must be audited by an outside, independent auditor. These annual reports are mailed to stockholders and are available on the company’s website |
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| 4 Required parts of every annual report: |
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Definition
(1) balance sheet, (2) income statement, (3) statement of stockholders’ equity (or statement of
retained earnings), and (4) statement of cash flows
Typically includes a letter from the president of the company discussing management’s performance to date and what the company hopes to accomplish in the future |
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| Give additional information supporting the data in the financial statements |
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| A letter from the company’s independent auditors which states the auditor’s opinion as to whether or not the auditors have found the financial statements to have been prepared in accordance with the required accounting standards |
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Definition
An accounting firm that specializes in “public accounting”. Public accounting means the company is in business to provide accounting services to other companies.
They audit the 10K and annual report of the companies |
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| What classifies an auditor as independent? |
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Definition
| (1) do not work for the company they are auditing and (2) do not own a substantial investment in this company |
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Definition
the largest of all the public accounting firms. They are international and are responsible for much of the public accounting work done in the world.
Deloitte
Ernst and Young
Pricewaterhouse Coopers (pwc)
KPMG |
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Term
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Definition
| The mechanisms which encourage managers in a business to report the truth in their financial statements |
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| 3 ways corporate governance is encouraged |
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Definition
1. The reputation of the managers and of the business
2. The threat of legal liability
3. "Ethics”, meaning that running the business and reporting the results of operations in a clear, truthful manner is the right thing to do |
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| What set of rules are publicly-held companies required to follow in the US? |
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Definition
| Generally Accepted Accounting Principles”, or “GAAP |
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| What type of system is GAAP considered? |
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Definition
A Rules-Based system
-Tries to give specific directions for how to account for all types of transactions |
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| Who is responsible for organizing GAAP? |
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Definition
| "Financial Accounting Standards Board” (“FASB”)- private institution |
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Term
| What set of rules do foreign countries use in accounting? |
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Definition
| ”International Financial Reporting Standards” (“IFRS”). These are the responsibility of an organization called the “International Accounting Standards Board” (“IASB”). |
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Term
| What type of system is the IFRS considered? |
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Definition
Principles-based
-Gives substantially less guidance and relies on interpretation to be handled on an individual basis by the preparers of the statements and their external auditors |
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Term
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Definition
| The FASB and IASB have been working hard to develop standards to merge GAAP and IFRS while keeping the best of both |
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Term
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Definition
Those organizations that prepare financial statements. One type of reporting entity is a profit-seeking business (also called “company” or “firm”). charitable organizations and foundations
governmental entities, such as cities, states, and school districts |
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| 3 common types of businesses (profit-seeking) |
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Definition
1. Retail
2. Service
3. Manufacturing |
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Definition
The networks that exist for raising money. Many types of markets, including public markets (called “exchanges”), exist to facilitate the transfer of debt and equity investments
Largest= NYSE |
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| Two groups which are in a position to oversee management |
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Definition
| The board of directors and the audit committee |
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Definition
Elected by stockholders
-Determine company policies, decide if dividends should be paid, and review the performance of the company’s officers as well as determine their compensation |
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Term
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Definition
| A subcommittee of the board of directors. This committee’s main responsibility is to select the audit firm that will perform the annual audit and to make sure that the audit was performed in a professional manner |
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Term
| Where would disagreement between an audit committee/company management and an audit firm be reported? |
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| An act that was passed in 2002 in response to several corporate scandals which resulted in billions of dollars in losses to stockholders and debt holders |
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Term
| What did the Sarbanes-Oxley Act establish? |
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Definition
(1) more controls on management, (2) more responsibility on the Audit Committee and the Board of Directors, and (3) stricter requirements for the external auditors
The Act placed more emphasis on the quality of the company’s “internal controls”. |
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| Internal controls of a company |
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Definition
| The procedures and policies in place which have the purpose of protecting the company’s assets and helping to ensure the financial statements are correct |
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| The term for the ethical tone set by top management |
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| What financial statement is the backbone of accounting? |
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Definition
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| The basic Balance Sheet Equation |
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Definition
| Assets= Liabilities + Stockholder's Equity |
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| Assets, Liabilities, Equity |
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Definition
Assets= What a business owns
Liabilities= What the business owes
Equity= a representation of the owners’ interest in the asset |
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| Alternative Balance Sheet equation |
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Definition
| Assets – Liabilities = Equity |
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Term
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Definition
| There are always at least two entries for each transaction of a business |
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Term
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Definition
1. Current- cash and assets that are expected to be converted into cash (or used up) in about one year or less from the Balance Sheet date
2. Investment- assets purchased by the company to be held as an investment
stock investments, bond investments, and land held for resale
3. Fixed-( Property, Plant, and Equipment”) are assets that are purchased by the business to be used in its operations but that are not expected to be used up quickly and are not to be resold in the ordinary operations of the business
4. Intangibles- no physical substance
patents, copyrights, trademarks, and goodwill |
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Definition
Current- Paid within a year
Long-term- Not paid within a year |
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Term
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Definition
| Measure of the portion of a company’s assets that are owned outright, meaning that the company does not owe for this portion of its assets |
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| 2 categories of stockholder's Equity |
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Definition
| Common stock and retained earnings |
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Term
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Definition
| The amount of money received when the company originally sells shares of ownership to various investors is the amount shown in the common stock account |
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Term
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Definition
| The total profits of the company (minus any losses) and minus any amounts that have been paid to stockholders over the lifetime of the company |
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Term
| 2 unique aspects of the Balance Sheet |
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Definition
1. The Balance Sheet is a picture at a point in time. Because of this, it is called a “snapshot” of the business.
2. The ending balances reported on one Balance Sheet roll over to become the beginning balances for the next period |
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Definition
| A measure of how fast it is expected to be converted into cash |
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| Income statement basic formula |
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Definition
| Revenues-Expenses= Net income |
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Term
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Definition
| Amounts the company earns by doing what it is in business to do. Recorded on the Income statement regardless if cash was received or not |
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Term
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Definition
| A listing of the all charges the purchaser made during the period and the total amount now due to the seller |
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Term
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Definition
Amounts that were used up during the period in order to generate the revenue
-Cost of products sold, payroll, insurance, taxes, utilities, rent, and supplies |
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Term
| When are expenses to be recorded on the income statement? |
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Definition
| When an expense is incurred- used up (not necessarily when cash is paid for the expense |
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Term
| Accrual Accounting method |
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Definition
| Used by GAAP and IFRS- attempts to show revenue in the period it was earned |
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Term
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Definition
| Expenses are shown as deductions from the associated revenue |
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Term
| Two concepts that make the Balance Sheet and Income Statement differ from one another |
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Definition
1. the Income Statement always covers a period of time
2. The numbers on the Income Statement are eliminated, and the starting figures on the Income Statement for the next period are zero |
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Term
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Definition
| The total of the all of the net incomes earned by the company over all the years it has been in business (minus any net losses) and minus any amounts paid out in dividends over all the company’s years of operations |
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Term
| Statement of Retained Earnings formula |
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Definition
Beginning retained earnings
+Net income (or minus net loss)
-Dividends
=Ending retained earnings |
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Term
| The correct order of Financial statement |
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Definition
| Always prepare the Income Statement first, then the Statement of Retained Earnings, and then the ending Balance Sheet |
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Term
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Definition
In preparing this Statement, look only for those transactions that had an impact on cash
-A reconciliation that takes the reader from the beginning cash to the ending cash by adding in cash receipts and subtracting out cash payments made during the period |
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| Statement of Cash Flows formula |
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Definition
Cash, beginning of period
+/- Operating cash flows
+/- Financing cash flows
+/- Investing cash flows =
Cash, end of period |
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Term
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Definition
| An amount of money borrowed from usually a bank (loan) that goes into the long-term liabilities as well as increasing cash |
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Definition
Rent and Insurance
-Become an expense in the income statement when used up |
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Term
| When equipment is purchased, management must estimate the asset's... |
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Definition
| (1) expected useful life and (2) the value of the asset at the end of its useful life |
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Definition
| Value at the end of its useful life |
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Term
| Straight-Line depreciation |
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Definition
| We subtract the salvage value from the purchase price (which leaves us with an amount called the “amount to be depreciated”) and divide this remainder evenly over the period of time we expect to be using the asset |
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Term
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Definition
| Accumulated depreciation equals the depreciable amount of the asset, or until the asset is sold |
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| Only fixed asset that never depreciates |
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Definition
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Term
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Definition
| Looking over prior year's financial statements to see how a company has progressed over time |
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| Analysis Within the Industry |
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Definition
| Looking at the financial statements of companies in the same industry to see how they handle some of the same obstacles |
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| Common-Size Financial Statements |
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Definition
| Makes the total Asset amount equal to 100% and divides the different assets to see what percentage of a company they are. Income statement, total revenue is set to 100% |
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Definition
| Average total liabilities/Average Stockholder's Equity |
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Term
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Definition
| The finance term for the extent a company uses debt |
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| Commonly used average Debt-to-equity ratio formula |
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Definition
(Beginning total liabilities + ending total liabilities)/2 /
(Beginning stockholders’ equity + ending stockholders equity)/2 |
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Term
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Definition
A measure of how efficiently the company is using its equity
- Net income/
Average stockholders’ equity
-This is a profitability ratio
-Net income/
(Beginning stockholders’ equity + ending stockholders’ equity)/2 |
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Definition
A commonly-used estimate of the company’s ability to pay its debts
- Current assets/
Current liabilities |
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Definition
A measure of how fast the company moves its inventory through the company (asset turnover ratio)
Cost of goods sold/ Average inventory
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| General Rule for Inventory turnover ratio |
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Definition
| a company which has a gross profit of 20% to 30% should try to achieve an inventory turnover ratio of 5 to 7 times per year |
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Term
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Definition
Net income/
Average number of shares outstanding
-or Net income
(Beginning number of shares outstanding + ending number of shares outstanding)/2
-it is a return on each share of stock outstanding. In addition, it is easy to compare companies in different industries and of different sizes by using this one ratio. |
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Term
| What is the 1 ratio that is required to be on Financial statements |
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Definition
EPS
-On the Income Statement directly below Net Income
-It is usually seen as the most important of all ratios because it is often an important component in determining the value of a share of stock |
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