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Business in Action Ch 17 BUSN100 Financial Information and Accounting Concepts

After studying this chapter, you will be able to 1 Define accounting and describe the roles of private and public accountants 2 Explain the impact of accounting standards such as GAAP and the Sarbanes- Oxley Act on corporate accounting 3 Describe the accounting equation and explain the purpose of double- entry bookkeeping and the matching principle 4 Identify the major financial statements and explain how to read a balance sheet 5 Explain the purpose of the income statement and statement of cash…
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Measuring, interpreting, and communicating financial information to support internal and external decision making
accounting
Area of accounting concerned with preparing financial information for users outside the organization
financial accounting
Area of accounting concerned with preparing data for use by managers within the organization
management accounting
Recordkeeping; the clerical aspect of accounting
bookkeeping
In-house accountants employed by organizations and businesses other than a public accounting firm; also called corporate accountants
private accountants
Highest- ranking accountant in a company, responsible for overseeing all accounting functions
controller
(CPAs) Professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination
certified public accountants
Professionals who provide accounting services to other businesses and individuals for a fee
public accountants
Formal evaluation of the fairness and reliability of a client's financial statements
audit
(GAAP) U. S. standards and practices used by accountants in the preparation of financial statements
generally accepted accounting principles
Independent accounting firms that provide auditing services for public companies
external auditors
Board. international financial reporting standards ( IFRS) Accounting standards and practices used in many countries outside the United States
International Accounting Standards
Informal name of comprehensive legislation designed to improve integrity and accountability of financial information
Sarbanes-Oxley
Any things of value owned or leased by a business
assets
Claims against a firm's assets by creditors
liabilities
Portion of a company's assets that belongs to the owners after obligations to all creditors have been met
owners'equity
Basic accounting equation stating that assets equal liabilities plus owners' equity
accounting equation
Method of recording financial transactions requiring two offsetting entries for every transaction to ensure that the accounting equation is always kept in balance
double-entry bookkeeping
Fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period
matching principle
Accounting method in which revenue is recorded when a sale is made and expense is recorded when it is incurred
accrual basis
Accounting method in which revenue is recorded when payment is received and expense is recorded when cash is paid
cash basis
Accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life
depreciation
Transferring net revenue and expense account balances to retained earnings for the period
closing the books
Statement of a firm's financial position on a particular date; also known as a statement of financial position
balance sheet
Twelve- month accounting period that begins on January 1 and ends on December 31
calendar year
Any 12 consecutive months used as an accounting period
fiscal year
Cash and items that can be turned into cash within one year
current assets
Assets retained for long- term use, such as land, buildings, machinery, and equipment; also referred to as property, plant, and equipment
fixed assets
Obligations that must be met within a year
current liabilities
Obligations that fall due more than a year from the date of the balance sheet
long- term liabilities
The portion of shareholders' equity earned by the company but not distributed to its owners in the form of dividends
retained earnings
Financial record of a company's revenues, expenses, and profits over a given period of time; also known as profit- and- loss statement
income statement
Costs created in the process of generating revenues
expenses
Profit earned or loss incurred by a firm, determined by subtracting expenses from revenues; casually referred to as the bottom line
net income
Cost of producing or acquiring a company's products for sale during a given period
cost of goods sold
Amount remaining when the cost of goods sold is deducted from net sales; also known as gross margin
gross profit
All costs of operation that are not included under cost of goods sold
operating expenses
Earnings before interest, taxes, depreciation, and amortization; a simpler and more direct measure of income
EBITDA
Statement of a firm's cash receipts and cash payments that presents information on its sources and uses of cash
statement of cash flows
Ratio between net income after taxes and net sales; also known as profit margin
return on sales
Ratio between net income after taxes and total owners' equity
return on equity
Measure of a firm's profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding
earnings per share
Current assets minus current liabilities
working capital
Measure of a firm's short- term liquidity, calculated by dividing current assets by current liabilities
current ratio
Measure of a firm's short- term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities; also known as the acid- test ratio
quick ratio
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
inventory turnover ratio
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
accounts receivable
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 owners' equity
debt-to-equity ratio
Measure of a firm's ability to carry long- term debt, calculated by dividing total liabilities by total assets
debt-to-assets ratio