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Terms in this set (238)

A measure of both a company's efficiency and its short-term financial health. The XXXX ratio is calculated as:

CURRENT ASSETS/ CURRENT LIABILITIES- Indicates if the company has enough short term assets in order to cover its liabilities.

If the ratio is less than one then they have negative working capital.

A high XXXX ratio isn't always a good thing, it could indicate that they have too much inventory or they are not investing their excess cash.

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations
Included in this category are Accounts Receivable (open account customer balances resulting from sales) and customer Notes (principal and interest resulting from sales) that are formalized agreements and evidenced in writing. Short term temporary loans and advances are also included. An allowance for estimated uncollectible amounts is also provided.

■Accounts Receivable
This account will normally have a sub ledger that contains a record for each customer or client.
■ Allowance For Bad Debts (Contra Account)
Used to record customer accounts that may not be collected.
■Trade Notes Receivable - Current principal portion
■ Interest Receivable
■ Other Receivables ■ Short Term Owner Loans and Advances
■ Short Term Employee Loans & Advances
■ Short Term Travel and Expense Advances

The accounts set up in the inventory section depend on the type of business. Is the business a service, retailer, wholesaler or manufacturer ? For retailers and wholesalers an inventory sub ledger is usually maintained to keep track of each individual product. Manufacturing types of businesses usually and Service types of businesses occasionally maintain sub legers for projects, jobs, and processes.

■ Manufacturer ■ Raw Materials
■ Manufacturing Supplies
■ Work In Process ■ Direct Labor
■ Direct Material
■ Manufacturing Costs ■ Direct Labor
■ Direct Material
■ Manufacturing Overhead - Actual ■ Indirect Labor
■ Supervision Salaries
■ Fringe Benefits
■ Manufacturing Supplies
■ Small Parts
■ Perishable Tools
■ Utilities
■ Depreciation
■ Rent
■ Leases
■ Repairs & Maintenance
■ Insurance
■ Property Taxes

■ Overhead Costs Applied

■ Finished Goods

■ Retailer or Wholesaler ■ Merchandise Inventory
■ Store Supplies

■ Service ■ Work In Process - Projects / Jobs
■ Completed / Unbilled Projects / Jobs

■ Common To All ■ Office Supplies

■ Prepaid Expenses
Prepaid Expenses are assets created by the early payment of cash or assuming a liability. They expire and are charged to expenses based on the passage of time, usage, or other factors. All Prepaid Expenses could be recorded in a single account or separate accounts could be used for each different type.

■ Prepaid Insurance
■ Prepaid Rent
■ Prepaid Advertising
■ Prepaid Interest
■ Other Prepaid Expenses

■ Other Current Assets
This category includes other current assets that do not neatly fit into any of the other categories. The amounts must be deemed collectible in a relatively short period of time (operating cycle).

■ Notes Receivable - Current principal portion of Long-term Notes
■ Other Current Assets

■ Long-Term Investments
Investments that are intended to be held and not converted into cash for an extended period of time (longer than the operating cycle). Reported at current market value by using an allowance for unrealized market gains and losses.

■ Stocks
■ Bonds
■ Other Long Term Investments
■ Valuation Allowance for Market Value Fluctuations
Property, Plant, and Equipment
Assets of a durable nature that are used to provide current and future economic benefits to the business.
These accounts will normally have a sub ledger that contains a record for each parcel of land, building, or piece of machinery and equipment along with depreciation calculations and amounts.

■ Land
■ Buildings
■ Accumulated Depreciation - Buildings (Contra Account)
■ Building Improvements
■ Accumulated Depreciation - Building Improvements (Contra Account)
■ Machinery and Equipment
■ Accumulated Depreciation - Machinery and Equipment (Contra Account)
■ Office Equipment
■ Accumulated Depreciation - Office Equipment (Contra Account)
■ Computer Equipment
■ Accumulated Depreciation - Computer Equipment (Contra Account)
■ Vehicles
■ Accumulated Depreciation - Vehicles (Contra Account)
■ Furniture and Fixtures
■ Accumulated Depreciation - Furniture and Fixtures (Contra Account)
■ Leasehold Improvements
■ Accumulated Amortization - Leasehold Improvements (Contra Account)
■ Computer Software
■ Accumulated Amortization - Computer Software (Contra Account)
■ Other Property, Plant, or Equipment
■ Accumulated Depreciation - Other Property, Plant, or Equipment

■ Other Noncurrent Assets
All assets that are noncurrent and that do not fit neatly into any of the other categories.

■ Long Term Owner Loans & Advances
■ Long Term Employee Loans & Advances
■ Notes Receivable - Long-term principal portion of Long-term Notes
■ Security Deposits
■ Intangible Assets ■ Patents
■ Organization Costs
■ Goodwill
■ Accumulated Amortization (Contra Account)
Sale-Sell goods and/or services
Cash Sale-customer pays at the time of sale
The business gets cash or a check from their customer and gives up a product or service to their customer.

On Account Sale-business allows the customer time to pay
The business gets a promise to pay from their customer and gives up a product or service to their customer.

Purchase goods and/or services
Cash Purchase-business pays the supplier at the time of purchase
The business gets a product or service from their supplier and gives up cash or a check to their supplier.

On Account Purchase-supplier allows the business time to pay
The business gets a product or service from a supplier and gives up a promise to pay to their supplier.

Pay Supplier Charge Purchases -pay suppliers for products and/or services that we promised to pay for later (charge).
The business gets the amount of their promise to pay the supplier reduced and gives up cash or a check.

Receive Customer Charge Payments -receive payments from a customer that promised to pay us later (charge sale).
The business gets cash or a check from their customer and gives up (reduces the amount of) their customer's promise to pay.

Borrow Money (Loans) The business gets cash or equipment and gives up a promise to pay.

Repay a Loan
The business gets the amount of their promise to pay reduced and gives up cash or a check.

The business gets the owner's claim to the business assets reduced and gives up cash or a check.

The business gets services from their employees and gives up a check.

These common types of business transactions are the underlying basis for the use of specialized journals.
A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.

2. An accounting statement called the "statement of cash flows", which shows the amount of cash generated and used by a company in a given period. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength.

1. In business as in personal finance, cash flows are essential to solvency. They can be presented as a record of something that has happened in the past, such as the sale of a particular product, or forecasted into the future, representing what a business or a person expects to take in and to spend. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.

2. The statement of a business's cash flows is often used by analysts to gauge financial performance. Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

ROI = [(Payback - Investment)/Investment)]*100

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. XXXX is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Keep in mind that the calculation for XXXX and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.

For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different XXXX calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.

This flexibility has a downside, as XXXX calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.
Maintain an accurate check book, register or cash summary record.
• Make daily bank deposits and deposit your receipts intact (don't pay bills with cash out of your cash receipts).
• Make all disbursements by check whenever possible.
• Prepare Monthly Bank Reconciliations.
• Establish procedures for handling cash and insuring that all cash is properly accounted for and timely deposited in your bank.
• Establish relationships with banks and other lending resources so you already have in place a source you can go to for help if you experience a temporary cash shortage.
• Strive to pay your suppliers and creditors on time. By building a good credit record and establishing a good relationship they are more inclined to work with you if you encounter a temporary cash shortage.
• Establish Credit Terms and Policies applicable to your trade or business and investigate and continue to monitor customers that you sell to and grant credit terms. Notice I said continually monitor your customers credit status. Do you know why ? Few things in life stay the same. Just because a customer had great credit when you approved them does not necessarily mean that their business can't experience a down turn. If that happens their problems might also cause your business some problems in collecting what they owe you.
• If you have quite a few cash related transactions each day, you may want to prepare a daily cash status report. If you don't have a lot of daily banking transactions, you may just want to prepare the report on a weekly basis.
• Analyze your cash needs and prepare Cash Forecasts / Budgets to help identify possible future cash shortages and allows you the time needed to take corrective action(s).
1.Prepare a list of deposits in transit. Compare the deposits listed on your bank statement with the bank deposits shown in your cash receipts journal. On your bank reconciliation, list any deposits that have not yet cleared the bank statement. Also, take a look at the bank reconciliation you prepared last month. Did all of last month's deposits in transit clear on this month's bank statement? If not, you should find out what happened to them.
2.Prepare a list of outstanding checks. In your cash disbursements journal, mark each check that cleared the bank statement this month. On your bank reconciliation, list all the checks from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation you prepared last month. Are there any checks that were outstanding last month that still have not cleared the bank? If so, be sure they are on your list of outstanding checks this month. If a check is several months old and still has not cleared the bank, you may want to investigate further.
3.Record any bank charges or credits. Take a close look at your bank statement. Are there any special charges made by the bank that you have not recorded in your books? If so, record them now just as you would have if you had written a check for that amount. By the same token, if there are any credits made to your account by the bank, those should be recorded as well. Post the entries to your general ledger.
4.Compute the cash balance per your books.Foot the general ledger cash account to arrive at your ending cash balance.
5.Enter bank balance on the reconciliation. At the top of the bank reconciliation, enter the ending balance from the bank statement.
6.Total the deposits in transit. Add up the deposits in transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a subtotal.
7.Total the outstanding checks. Add up the outstanding checks, and enter the total on the reconciliation.
8.Compute book balance per the reconciliation. Subtract the total outstanding checks from the subtotal in step 6 above. The result should equal the balance shown in your general ledger.

If your bank reconciliation doesn't balance, you need to find the error or errors. Here are the possible causes of a bank balance error:

■Total outstanding checks added incorrectly. Double check your addition of the total outstanding checks.
■Total deposits in transit added incorrectly. Double check your addition of deposits in transit.
■Bank balance written down incorrectly. Did you start with the correct amount at the top of your reconciliation? Double check by comparing it to the month end balance on your bank statement.
■Failed to record all items clearing the bank statement. Look at your bank statement carefully. Are there any items, such as miscellaneous bank charges or automatic deposits or withdrawals, that were not recorded in your books?
■Journals added incorrectly. Double check your addition of cash receipts and cash disbursements.
■Failed to record a check or deposit. Did you record all checks and deposits in your journals? This should have been apparent when you were preparing your lists of deposits in transit and outstanding checks.
■Incorrectly recorded an amount. Compare each item on the bank statement with your journal entry for that item. Did you enter the correct amount?
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.

A high XXXX generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The XXXX also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
An expense incurred in carrying out an organization's day-to-day activities, but not directly associated with production. XXXX include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs, and taxes. These expenses are usually subdivided into selling expenses and administrative and general expenses. Also called non-manufacturing expenses.

Rent - Building
• Rent - Equipment
• Utilities
• Repairs and Maintenance
• Insurance
• Car and Truck Expenses
• Travel
• Entertainment
• Postage
• Office Supplies
• Advertising
• Marketing / Promotion
• Professional Fees
• Training and Development
• Bank Charges
• Credit Card Fees
Other Payments
Determine and Estimate any other payments that you anticipate will occur during your forecast period.
• Owner's Draws / Dividends
Include estimated amounts for any anticipated owner draws or payments of dividends to stockholders.

• Current Debt Payments
If you currently have any notes such as borrowings for equipment purchases you also need to include these payments (both principal and interest) as a Cash Payment in your Cash Forecast.

• Additional Equipment Needs
Speaking of equipment, if you do need additional equipment, whether you plan on borrowing or paying cash, you need to include the Cost of the Equipment as a Cash Payment in your Cash Forecast.

• Income, State, and other Business Taxes
Shucks, you wouldn't want to forget your friendly governments would ya ? You need to prepare estimates for any future income taxes, state business taxes such as franchise and excise taxes, and other business taxes that your specific type of business may be subject to.

• Any Other Miscellaneous Type of Cash Payment.
Include amounts for any other cash payments.