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accounting

function devised to provide decision makers with the information they need. responsible for recognizing, measuring, recording, reporting

accounting processes

designed to provide understandable, relevant, and reliable information. these are based on internal control, correct application of rules and effective communication of results.

internal control

relates to the ability to capture all business transactions and detect and prevent fraud.

balance sheet

tells what economic resources owns or controls (assets) and the sources of the funds the business uses to finance those economic resources (debt and owner's money).

income statement

communicates how business has performed during a period.

managerial accounting

attempts to meet the information needs of a business managers by looks at the the details of business transaction

financial accounting

accounting rules used to report to owners and lenders.

Public Company Accounting Oversight Board
( PCAOB)

Directed by SEC, it oversees and aproves fo the rules set by the FASB

Finacial Accounting Standards Board FASB

made up of accounting and business professionals and sets the rules and standards, companies must follow in providing information to lender and stockholders.

Generally Accepted Accounting Principles GAAP

Standards and rules set by FASB

Conservatism

it means that accountants should not overstate the value of an asset or understate the value of a liability or debt.

cash basis

when a business transaction is recognized only when cash is received or cash is paid out.

accrual basis

recognizes business transactions when they occur, regardless of whether or not the transaction immediately affects cash. e.g. credit card.

financial statements

summarize and report a business transactions

Assests

= Liabilities + owner's equity

current asset

short term assets are cash or assets expected to be converted to cash within the next year. eg cash, account receivable and inventory.

long term asset

assets that have an economic life greater than one year. e.g land building equipment, copyright

cash

currency a business owns. it also includes deposits in banks.

accounts receivable

amounts owned to the business. accountants must estimate and report how much will be and not be collected.

inventory

can be purchased or produced and represents the products business has to sell.

Property, Plant, Equipment PP&E

fixed tangible assets. these assets are typically reported at cost or what the business originally paid for these assets.

Depreciation

tangible assets decrease in value over time. e.g car, land cannot be depreciated.

Amortization

is like depreciation, it its an adjustment to the value of the intangible asset and an expense.

Goodwill

special intangible asset that is not amortized.

impairment

when goodwill loses its value, the accountant will reduce the value on the balance sheet and record an expense called impairment.

liability

claim, debt on the business. represents amounts that individuals or organizations have lent to the business.

current liabilities

short term liabilities that are due to be repaid in one year or less. include account payable, estimated liabilities (accrued liabilities)

long term liabilities

to be repaid in periods beyond one year.

accounts payable

amounts a business owes its suppliers. usually represented by formal documents

accrued liabilities

these are like accounts payable, except no formal document is used. e.g rent, interest and utilities

short term borrowings

include loans from banks and other lender that a business must pay within the next year.

owner's equity

represents money that owners have provided the business. two ways: 1) owners provide money by contributing directly the business. they receive ownership rights. 2) owners provide money by leaving the profits int the business.

owner's capital

contributed money in a sole proprietorship or partnership.

stock

contributed money in a corporation. each stock can be subdivided, into accounts labeled "par" and "additional paid-in capital". these two represent the amount of money the stockholder paid the company for their stock.

retained earnings

represent the business' accumulated net income and losses that owners have left in business. it is the sum of the company's net income, less losses, less dividends.

cash dividends

when owners decide they do not want to let the business retain earnings, the business pays the earnings to the owners.

income statement

it answers: how has the business used the economic resources to create a net income or loss in a given period?

Sales - Expenses = Net Income

...

Sale

or revenue when there is an exchange.

gross profit

sales less cost of goods sold.

Earnings before interest and taxes EBIT

gross profits less operating expenses = EBIT
also known as operating profit.

net income before taxes or taxable income (or loss)

EBIT less interest expense.

net income or loss

taxable income less tax expense. net income or loss belongs to the owners of the business

closing the accounting records

process of ending one period and starting another period.

statement of retained earnings

shows how the retained earnings account changed during a given period. retained earnings + net income earned - net losses - dividends

cash flow statement

how the cash account, in the balance sheet, changed during given period. shows business sources and uses of cash.
reflects beginning cash + sources of cash - use of cash - netting to be ending cash.

operating activities

cash provided by or used in generating net income.

investing activities

cash provided by or used in buying and selling long term activities. eg you receive cash when you buy a building.

financing activities

reflect cash provided by or used to pay for financing activities relate to long term debt and owner's equity. borrowing money form lender and selling stock. eg repaying debt and paying cash dividends are financing activities that use cash.

budget

financial plan that shows the projected sales and costs that result form management decisions. show the assets and people needed to produce the sales and expense.

standards

benchmarks that businesses use to determine if budgeted transactions are being achieved.

variance

difference between actual and budgeted (standard) amounts.

variable costs

costs that vary directly with the amount sold

fixed cost

cost that do not vary with the amount sold. you incur fixed costs whether you have sales or not.

controller of comptroller

chief accountant in a business.

audit

its where an accounting firm comes into the business and reviews the business internal control and how the transactions

unqualified or clean audit opinion

auditors believe the financial statements fairly present the business's operations and activities

qualified or subject to audit opinion

auditors believe the financial statements fairly present the business' operations and activities except for select items.

adverse audit opinion

auditors believe they are not issuing an opinion on whether or not the financial statements fairly present the business operations and activities.

Certified Public Accountant CPA

they issue audit opinions and are licensed by a state.

Sarbanes Oxley SOX

law that requires that management to disclose the significant risks faced by a business. places more personal responsibility on management to provide fair and complete financial statements

Return on Equity ROE

net income/total owner's equity = ROE
what return did the business generate for its owners??

Retunr on Assets ROA

net income/how did the business us its assest to generate the net income?

financial leverage

how did the business finance its assets??
totals assets/total owner's equity = financial leverage

Roe decomposed

ROA*financial leverage=ROE

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