function devised to provide decision makers with the information they need. responsible for recognizing, measuring, recording, reporting
designed to provide understandable, relevant, and reliable information. these are based on internal control, correct application of rules and effective communication of results.
relates to the ability to capture all business transactions and detect and prevent fraud.
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).
attempts to meet the information needs of a business managers by looks at the the details of business transaction
Public Company Accounting Oversight Board
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.
it means that accountants should not overstate the value of an asset or understate the value of a liability or debt.
when a business transaction is recognized only when cash is received or cash is paid out.
recognizes business transactions when they occur, regardless of whether or not the transaction immediately affects cash. e.g. credit card.
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
amounts owned to the business. accountants must estimate and report how much will be and not be collected.
Property, Plant, Equipment PP&E
fixed tangible assets. these assets are typically reported at cost or what the business originally paid for these assets.
is like depreciation, it its an adjustment to the value of the intangible asset and an expense.
when goodwill loses its value, the accountant will reduce the value on the balance sheet and record an expense called impairment.
claim, debt on the business. represents amounts that individuals or organizations have lent to the business.
short term liabilities that are due to be repaid in one year or less. include account payable, estimated liabilities (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.
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.
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.
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.
when owners decide they do not want to let the business retain earnings, the business pays the earnings to the owners.
it answers: how has the business used the economic resources to create a net income or loss in a given period?
Earnings before interest and taxes EBIT
gross profits less operating expenses = EBIT
also known as operating profit.
net income or loss
taxable income less tax expense. net income or loss belongs to the owners of the business
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.
cash provided by or used in buying and selling long term activities. eg you receive cash when you buy a building.
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.
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.
cost that do not vary with the amount sold. you incur fixed costs whether you have sales or not.
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.
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??
how did the business finance its assets??
totals assets/total owner's equity = financial leverage