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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…

Measuring, interpreting, and communicating financial information to support internal and external decision making


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


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


(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


(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


Any things of value owned or leased by a business


Claims against a firm's assets by creditors


Portion of a company's assets that belongs to the owners after obligations to all creditors have been met


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


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


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


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

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