Name:

Intro to Business

CRN:

T/Th 9:35 – 11:00 a.m.

Date (The date the assignment is turned in)

Chapter 16 Outline

Getting to the Bottom Line:

Basic Accounting Concepts

1.  Discuss how both managers and external stakeholders use financial information. Managers use financial information by accounting. They use this financial information to plan and control a company’s operation and make business decisions. They also use this information to help evaluate the business. External stakeholders to see where there invested money is being used and if it is a good investment. It is also used for both to make good decisions.

Accounting – measuring, interpreting, and communicating financial information to support internal and external decision making

Financial accounting – preparing financial information for users outside the organization

Management accounting – preparing data for use by managers within the organization

2.  Describe what accountants do. Accountants design accounting systems, prepare financial statements, analyze and interpret financial information, prepare financial forecasts and budgets, and prepare tax returns. Some accounts specialize in tax accounting, cost accounting, and financial analysis. Accountants may also help clients in the business process, future planning, evaluate the product, analyze profitability, design and install new computer systems, help in decision making, and several other areas.

Bookkeeping – recordkeeping; clerical aspect of accounting

Cost accounting – calculating the cost of creating and selling a company’s goods and services

Tax accounting – area of accounting focusing on tax preparation and tax planning

Financial analysis – evaluating a company’s performance and analyzing the costs and benefits of a strategic action

Private accountants – in-house accountants employed by organizations and businesses other than a public accounting firm

Controller – highest-ranking accountant in a company, responsible for overseeing all accounting functions

Certified public accountants (CPAs) – professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination

Certified management accountants (CMAs) – accountants who have fulfilled the requirements for certification as specialists in management accounting

Public accountants – professionals who provide accounting services to other businesses and individuals for a fee

Audit – formal evaluation of the fairness and reliability of a client’s financial statements

External auditors – independent accounting firms that provide auditing services for public companies

Generally accepted accounting principles (GAAP) – professionally approved U.S. standards and practices used by accountants in the preparation of financial statements

Internal auditors – employees who analyze and evaluate a company’s operations and data to determine their accuracy

3.  Summarize the impact of the Sarbanes-Oxley Act. The impact of the Sarbanes-Oxley Act is in play now partly due to the reason of Enron and World Com. This Act works on trying to keep this right and fair in the companies so that there is no cheating. With this Act some of the rules that are enforced are the requirements that the corporate lawyers report financial wrongdoings, they require the CEO’s and CFO’s to now sign the statements of their financial statements so they cannot say they were unaware of the happening, companies also have to document and test the internal financial controls and processes. This Act also requires that audit committees on the BOD have at least one financial expert and that the not be company executives. This act was brought about to help repair the investor confidence after the disappointment with the companies such as Enron and World Com.

Sarbanes-Oakley - comprehensive legislation, passed in the wake of Enron and other scandals, designed to improve integrity and accountability of financial information

Quality of earnings – general term for the degree of confidence that investors should have in the profits reported by public corporations

4.  State the basic accounting equation and explain the purpose of double-entry bookkeeping and the matching principle. The basic accounting equation is Assets = liabilities + owner’s equity. The purpose of double-entry bookkeeping is to keep the books or the accounting equation equal or in balance. This system keeps the assets and the liabilities balanced. Matching principles is matching expenses and revenues in accounting period. They try to do this to show a picture of the profitability. My thinking is they want things to equal out because it would look really good it you have a period of revenues but at the same time if you then had a period you would have to pay your expenses that period would not look so good. So you try to equal them out.

Assets – any things of value owned or leased by a business

Liabilities – claims against a firm’s assets by creditors

Owner’s equity – portion of a company’s assets that belongs to the owners after obligations to all creditors have been met

Accounting equation – basic accounting equation that assets equal liabilities plus owner’s equity

5.  Differentiate between cash basis and accrual basis accounting. The cash basis and accrual basis accounting are different because with cash the company records the revenue when the cash is received and with accrual the company records the revenue when the sale is made.

Double-entry bookkeeping - way of recording financial transactions that requires two entries for every transaction so that the accounting equation is always kept in balance

Matching principle – fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period

Accrual basis – accounting method in which revenue is recorded when a sale is made and expense is recorded when it is incurred

Cash basis – accounting method in which revenue is recorded when payment is received and expense is recorded when cash is paid

Deprecation – accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life

Close the books – the act of transferring net revenue and expense account balances to retained earnings for the period

6.  Explain the purpose of the balance sheet and identify its three main sections. The purpose of the balance sheet is to show a snapshot of the company’s financial position on a particular date. The balance sheets three main sections are the assets of the company on one side and on the other the liabilities and owner’s equity.

Balance sheet – statement of a firm’s financial position on a particular date; also known as a statement of financial position

Calendar year – twelve-month accounting period that begins on January 1 and ends on December 31

Fiscal year – any 12 consecutive months used as an accounting period

Current assets – cash and items that can be turned into cash within one year

Fixed assets – assets retained for long-term use, such as land, buildings, machinery, and equipment; also referred to as property, plant, and equipment

Current liabilities – obligations that must be met within a year

Long term liabilities – obligations that fall due more than a year from the date of the balance sheet

Lease – legal agreement that obligates the user of an asset to make payments to the owner of the asset in exchange for using it

7.  Explain the purpose of the income statement and statement of cash flow. The purpose of the income statement is like a movie instead of snapshot and if shows the profit performance over a specific period of time. Usually a year instead of a certain date. The statement of cash flow show how much money the company generated and what it was used for and where it went.

Retained earnings – the portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends

Income statement – financial record of a company’s revenues, expenses, and profits over a given period of time

Revenues – amount earned from sales of goods or services and inflow from miscellaneous sources such as interest, rent, and royalties

Expenses – costs created in the process of generating revenues

Net income- profit earned or loss incurred by a firm. Determined by subtracting expenses from revenues; casually referred to as the bottom line

Cost of goods sold – cost of producing or acquiring a company’s products for sale during a given period

Gross profit – amount remaining when the cost of goods sold is deducted from net sales; also known as gross margin

Operating expenses – all costs of operation that are not included under cost of goods sold

Selling expenses – all the operating expenses associated with marketing goods or services

General expenses – operating expenses, such as office and administrative expenses, not directly associated with creating or marketing a good or service

EBITDA – earnings before interest, taxes, depreciation, and amortization; a simpler and more direct measure if income

Statement of cash flows – statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash

Ratio analysis – use of quantitative measures to evaluate a firm’s financial performance

Profitability ratios – ratios that measure the overall financial performance of a firm

Return on sales – ratio between net income after taxed and net sales

Return on investment (ROI) – ratio between net income after taxes and total owner’s equity; also known as return on equity

Earnings per share – measure of profitability calculated by dividing net income after taxed by the average number of shares of common stock outstanding

Liquidity ratios – ratios that measure a firm’s ability to meet its short term obligations when they are due

Working capital – current assets minus current liabilities

Current ration – measure of a firm’s short term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities

Quick ratio – measure of a firm’s short term liquidity, calculated by adding cash, marketable securities, and receivables, the dividing that sum by current liabilities

Activity ratio – ratios that measure the effectiveness of the firm’s use of its resources

Inventory turnover ratios – measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period

Accounts receivable turnover ratio – measure of time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period

Debt ratios – ratios that measure a firm’s reliance on debt financing of its operations (sometimes called leverage ratios)

Debt to equity ratio – measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owner’s equity

Debt to total assets ratio – measure of a firm’s ability to carry long term debt, calculated by dividing total liabilities by total assets.

1