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Chapter 17
Understanding Accounting and Financial Information
118
Business
Undergraduate 1
01/14/2022

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Term
What is the recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation?
Definition
Accounting
Term
What is the method we use to record and summarize accounting data into reports?
Definition
Accounting system
Term
What is GAAP?
Definition
Generally accepted accounting principles
Term
Who would use a tax return report?
Definition
Government taxing agency
Term
Who would have required reports for a business?
Definition
Government regulatory agencies
Term
Who would be interested in financial statements found in annual reports?
Definition
Owners, creditors, financial analysts, and suppliers
Term
Who would be interested in financial statements and various internal financial reports?
Definition
Managers of the firm
Term
What is the six-step procedure that results in the preparation and analysis of major financial statements?
Definition
The accounting cycle
Term
T/F The accounting cycle relies on both a account and a bookkeeper.
Definition
True
Term
What is the recording of business transactions?
Definition
Bookkeeping
Term
Who uses the information that bookkeeping provides?
Definition
Accountants
Term
T/F Accountants suggest strategies for improving the financial condition of a company.
Definition
True
Term
T/F Accountants prepare income tax returns.
Definition
True
Term
What is the first step in the accounting cycle?
Definition
Analyze source documents (Sales slips/travel records)
Term
What is the second step in the accounting cycle?
Definition
Record transactions in journals
Term
What is the third step in the accounting cycle?
Definition
Transfer journal entries into a ledger
Term
What is the fourth step in the accounting cycle?
Definition
Take a trial balance
Term
What is the fifth step in the accounting cycle?
Definition
Prepare 3 financial statements (income statement, balance sheet, and statement of cash flow
Term
What is the sixth step in the accounting cycle?
Definition
Analyze financial statements
Term
What is the first task of a bookkeeper?
Definition
Categorize financial statements
Term
What is the record book or computer program where accounting data is first entered?
Definition
Journal
Term
What is the practice of writing all business transactions in 2 places?
Definition
Double-entry bookkeeping
Term
What is a specialized accounting book or computer program in which information from accounting journals is categorized, so information can be found quickly?
Definition
A ledger
Term
What is a summary of all the financial data in the account ledgers that ensures the figures are correct?
Definition
Trial balance
Term
Computerized accounting programs help which size of business the most?
Definition
Small businesses (they have less specialized staff to do so)
Term
What is a summary of all the transactions that have occurred over a particular period?
Definition
Financial statement
Term
What are the 3 financial statements?
Definition
Balance sheet, income statement, and statement of cash flows
Term
What reports the firms financial condition on a specific date?
Definition
Balance sheet
Term
What summarizes revenues, cost of goods sold, and expenses for a particular period and highlights the total profit or loss the firm experienced during that period?
Definition
Income statement
Term
What provides a summary of money coming into and going out of the firm. It also tracks a company's cash receipts and cash payments.
Definition
Statement of cash flows
Term
What details what the company owns and owes on a certain day?
Definition
Balance sheet
Term
What shows the revenue a firm earned selling its products compared to its selling costs over a specific period of time?
Definition
Income statement
Term
What highlights the difference between cash coming in and cash going out of a business?
Definition
Statement of cash flows
Term
What is your equity?
Definition
What you own
Term
A = L + OE
Definition
Assets = Liabilities + owners' equity
Term
What is the fundamental accounting equation?
Definition
Assets = Liabilities + owners' equity
Term
What is the basis of a balance sheet?
Definition
The fundamental accounting equation
Term
Who enforces the generally accepted accounting principles?
Definition
Securities and Exchange Commission (SEC)
Term
What are equipment, buildings, land, furniture, and motor vehicles considered?
Definition
Tangible items
Term
What are patents, trademarks, copyrights, and goodwill considered?
Definition
Intangible items
Term
What is the firm's reputation, location, and superior products considered?
Definition
Goodwill
Term
What is usually included on a balance sheet only when one firm acquires another and pays more for it than the value of its tangible assets?
Definition
Goodwill
Term
What is the ease that an asset can be converted into cash?
Definition
Liquidity
Term
What is an amount of money owed to the firm that it expects to receive within 1 year?
Definition
Accounts receivable
Term
What type of asset are accounts receivable?
Definition
Liquid assets because they can be quickly converted to cash
Term
What type of asset is land considered?
Definition
Fixed or long-term asset
Term
What are items that can or will be converted into cash within one year?
Definition
Current assets
Term
What 3 things are considered current assets?
Definition
Cash, accounts receivable, and inventory
Term
What are considered fixed assets?
Definition
Land, buildings, and equipment
Term
What are long-term assets that have no physical form but do have value?
Definition
Intangible assets
Term
What are debts that are due in one year or less?
Definition
Current liabilities
Term
What are liabilities not due for a year or more?
Definition
Long-term liabilities
Term
What are current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for?
Definition
Accounts payable
Term
What are short-term or long-term liabilities that a business promises to repay by a certain date?
Definition
Notes payable
Term
What are long-term liabilities that represent money lent to the firm and must be paid back?
Definition
Bonds payable
Term
What is the value of things you own minus the amount of money you owe others?
Definition
Equity
Term
What is the amount of the business that belongs to the owners minus any liabilities owed by the business?
Definition
Owners' equity
Term
Owners' equity in a firm is called what?
Definition
Capital account
Term
What are the accumulating earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends?
Definition
Retained earnings
Term
What's the statement that shows the business bottom line?
Definition
Income statement
Term
What is revenue left over after all costs and expenses, including taxes, are paid?
Definition
Net income or net loss
Term
How do you calculate gross profit?
Definition
Revenue - cost of goods sold
Term
How do you calculate the net income or net loss?
Definition
Gross profit - operating expenses - taxes
Term
What are gross sales minus returns, discounts, and allowances?
Definition
Net sales
Term
What are gross sales minus returns, discounts, and allowances?
Definition
Net sales
Term
What are gross sales minus returns, discounts, and allowances?
Definition
Net sales
Term
What is the monetary value of what a firm received for goods sold, services rendered, and other payments?
Definition
Revenue
Term
What's the difference between revenue and sales?
Definition
Revenue also includes rent payments, money used from patents, and interest earned
Term
What are all sales a firm completes called?
Definition
Gross sales
Term
What is a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale?
Definition
Cost of goods sold (or cost of goods manufactured)
Term
What is how much a firm earned by buying/making and selling merchandise?
Definition
Gross profit (or gross margin)
Term
What are the costs involved in operating a business, such a rent, utilities, and salaries?
Definition
Operating expenses
Term
What does FIFO stand for?
Definition
First in, first out
Term
What does LIFO stand for?
Definition
Last in, first out
Term
What is the systematic write-off of the cost of a tangible asset over its estimated useful life?
Definition
Depreciation
Term
What are related to the marketing and distribution of the firm's goods or services, such as advertising, salespeople's salaries, and supplies?
Definition
Selling expenses
Term
What are the administrative expenses of the firm such as office salaries, insurance, and rent?
Definition
General expenses
Term
What are the three major activities of a firm?
Definition
Operations, investments, and financing
Term
What are cash transactions associated with running a business?
Definition
Operations
Term
What are cash used in or provided by the firm's investment activities?
Definition
Investments
Term
What is cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, and company dividends?
Definition
Financing
Term
What's the difference between cash coming in and going out?
Definition
Cash flow
Term
What is the act of shifting sales from a quarter to another quarter?
Definition
Revenue recognition
Term
What is the assessment of a firm's financial condition using calculations and interpretations of financial ratios developed from the firm's financial statements?
Definition
Ratio analysis
Term
What measure a company's ability to turn assets into cash to pay short-term debts?
Definition
Liquidity ratios
Term
WHat are the 2 liquidity ratios?
Definition
Current ratio and acid-test ratio
Term
What is the current ratio formula?
Definition
Current assets divided by current liabilities
Term
What is another name for the acid-test ratio?
Definition
Quick ratio
Term
What measures the cash, marketable securities (stocks/bonds), and receivables of a firm, compared to its liabilties?
Definition
Acid-test ratio
Term
What measures the cash, marketable securities (stocks/bonds), and receivables of a firm, compared to its liabilties?
Definition
Acid-test ratio
Term
What is the formula for the acid-test ratio?
Definition
Cash + accounts receivable + marketable securities divided by current liabilities
Term
What ratio is important to companies that have a hard time converting inventory into quick cash?
Definition
Acid-test ratio
Term
What measures the degree to which a firm relies on borrowed funds in its operations?
Definition
Leverage (debt) ratios
Term
What measures the degree to which the company is financed by borrowed funds that they must repay?
Definition
Debt to owners' equity ratio
Term
What is the formula for the debt to owners' equity ratio?
Definition
Total liabilities divided by owners' equity
Term
What measures how effectively a firm's managers are using its various resources to achieve profits?
Definition
Profitability (performance) ratios
Term
What are 3 of the most important ratios to a business?
Definition
Earnings per share, return on sales, and return on equity
Term
What measures the amount of profit earned for each share of outstanding common stock?
Definition
Diluted earnings per share
Term
What's the formula for basic earnings per share?
Definition
Net income after taxes divided by number of common stock shares outstanding
Term
What tells us whether the firm is doing as well as competitors by generating income from sales?
Definition
Return on sales
Term
What's the formula for return on sales?
Definition
Net income divided by set sales
Term
What indirectly measures risk by telling is how much a firm earned for each dollar invested by its owners?
Definition
Return on equity
Term
What % or above is considered a good return on equity?
Definition
15% or above
Term
What is the formula for return on equity?
Definition
Net income after tax divided by total owners' equity
Term
What measures the speed with which inventory moves through the firm and gets converted into sales?
Definition
Inventory turnover ratio
Term
What is the formula for inventory turnover?
Definition
Cost of goods sold divided by average inventory
Term
What are the four main categories of financial ratios?
Definition
Liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios
Term
What are the 5 key working areas of the accounting profession?
Definition
Financial accounting, managerial accounting, auditing, tax accounting, and governmental and not-for-profit accounting
Term
What is accounting information and analyses prepared for people outside the organization?
Definition
Financial accounting
Term
What is a yearly statement of the financial condition, progress, and expectations of an organization?
Definition
Annual report
Term
What is an accountant who works for a single firm, government agency, or nonprofit organization?
Definition
Private accountant
Term
What is an accountant who provides services to individuals or businesses for a fee?
Definition
Public accountant
Term
WHat is a person called that passed a series of examinations established by the American INsitute of Certified Public Accountants (AICPA)?
Definition
Certified public accountant
Term
What is the act called that brought increased accountability to accountants?
Definition
Sarbanes-Oxley Act
Term
WHo oversees the AICPA?
Definition
Public Company Accounting Oversight Board (PCAOB)
Term
What type of accounting is concerned with measuring and reporting costs of production?
Definition
Managerial accounting
Term
What is the job of reviewing and evaluating the information used to prepare a company's financial statements?
Definition
Auditing
Term
What is a evaluation and unbiased opinion about the accuracy of a company's financial statements?
Definition
Independent audit
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