Business Chapter 8

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Accounting

the system within a business for converting raw data from source documents (like invoices, sales receipts, bills, and checks) into information that will help a manager make business decisions

Assets

any resource that a business owns and expects to use to its benefit

Liabilities

a debt owed by a business to another organization or individual

Owner's Equity

the amount of money the owner of a business would receive if all of the assets were sold and all of the liabilities were paid

Double-entry Accounting

an accounting system in which every business transaction is recored in an asset account and a liability or owner's equity account so that the system will balance

Single-entry Accounting

an accounting system in which the flow of income and expenses is recorded in a running log, basically like a checkbook

Accrual-Basis Method

a method of accounting in which income and expenses are recorded at the time they are incurred rather than when they are paid

Cash-Basis Method

a method of accounting in which income and expenses are recorded at the time they are paid, rather than when they are incurred

Generally Accepted Accounting Principles (GAAP)

standards established so that all businesses produce comparable financial statements

Journal

a chronological record of all financial transactions of a business

General Ledger

a record of all financial transactions divided into accounts and usually compiled at the end of each month

Income Statement

a financial statement that shows the revenue and expenses of a firm, allowing you to calculate the profit or loss producedd in a specific period of time

Common-size Financial Statement

a financial statement that includes a percentage breakdown of each time

Balance Sheet

a financial statement that shows a firm's assets, liabilities, and owner's equity

Statement of Cash Flow

a financial statement that shows the cash inflows and outflows of a business

Pro Forma Financial Statements

financial statements that project when a firm's financial condition will be in the future

Financial Ratios

calculations that compare important financial aspects of a business

Benchmarketing

a comparison of a firm's financial ratios to industry leaders

Industry Average Analysis

a comparison of firm's financial ratios to the industry averages

Trend Analysis

a comparison of a single firm's present performance with its own past performance, preferably for mroe than two years

Liquidity Ratios

financial ratios used to measure a firm's ability to meet its short-term obligations to creditors as they come due

Current Ratio

a financial ratio that measures the number of times the firm can cover its current liabilites with its current assets

Quick Acid-Test Ratio

a financial ratio that measures the firm's ability to meet its current obligations with the most liquid of its current assets

Activity Ratios

financial ratios that measure the speed with which various assets accounts are converted into sales or cash

Inventory Turnover

an activity ratio that measures the liquidity of the firm's inventory - how quickly goods are sold and replenished

Average Collection Period

a measure of how long it takes a firm to convert a credit sale (internal store credit, not credit card sales) into a usable form (cash)

Fixed Asset Turnover

an activity ratio that measures how efficiently a firm is using its assets to generate sales

Total Asset Turnover

an activity ratio that measures how efficiently the firm uses all of its assets to generate sales; a high ratio generally reflects good overall management

Leverage Ratios

Financial ratios that measure the extent to which a firm uses debt as a source of financing and its ability to service that debt

Debt Ratio

a leverage ratio that measures the proportion of a firm's total assets that is acquired with borrowed funds

Times Interest Earned

a leverage ratio that calculates the firm's ability to meet its interst requirements

Profitability Ratios

financial ratios that are used to measrue the ability of a company to turn sales into profits and to earn profits on assets and owner's equity committed

Net Profit Margin

a profitability ratio that measures the percentage of each sales dollar that remains as profit after all expenses, including taxes, have been paid

Return on Assets

a profitability ratio that indicates the firm's effectiveness in generating profits from its available assets; also known as return on investment

Return On Equity

a profitabilty ratio that measures the return the firm earned on its owners investment in the firm

Cash Flow

the sum of net income plus any noncash expenses, such as depreciation and amortization, or the difference between the actual amount of cash a company brings in and the actual amount of cash a company disburses in a given time period

Cash-to-Cash Cycle

the period of time from when money is spent on raw materials until it is collected on the sale of a finished good

Cash Budgets

a plan for short-term uses and sources of cash

Aging Schedules

a listing of a firm's accounts recievable according to the length of time they are outstanding

Macro-Aging Schedule

A list of accounts receivable by age category

Micro-Aging Schedule

a list of accounts recievable showing each customer, the amount that customer owes, and the amount that is past due

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