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Financial accounting

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a highly stylized system of information gathering, processing, and reporting

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GAAP

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Generally Accepted Accounting Principles

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SFAS

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Statements of Financial Accounting Standards

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IFRS

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International Financial Reporting Standards

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Accrual Accounting

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a conceptual framework for the preparation and auditing of financial statements and accounts.

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Cost accounting (managerial accounting)

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system for tracking the internal allocation and use of money & resources by an enterprise. involves budgeting, pricing, unity cost measurement, process cost measurement and job calculation costs.

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Tax accounting

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applies tax code to calculate taxable income and to asses values for the payent of other taxes -- rules based and formulaic

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Government accounting

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was created for administering contracts and tracking public resources. - used to track expenditures by public entities that receive appropriated funds

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Financial accounting

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includes cash-basis and accrual accounting

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SEC

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Securities and Exchange Commission

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AICPA

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American Institue of Certified Public Accountants

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APB

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Accounting Principles Board

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FASB

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Financial Accounting Standards Board (successor to APB)

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FAS

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Financial Accounting Standards or 'Standards'

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GOA

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Government Accounting Office

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The Big 4 Accounting Firms

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Deloitte & Touche, Ernst & Young, Price-Coopers, KPMG

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CPA

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Certified Public Accountant, licensed by states, only persons permitted to audit a companies financial reports and attest that those reports fairly present the financial position of the entity.

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CMA

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Certified Management Accountant

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CFA

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Certified Fraud Examiner

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CIA

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Certified Internal Auditor

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EA

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Enrolled Agent

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value proposition

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needed to start a business; essentially an arrangement that offers customers a good deal; a desirable product or service at a fair price

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Real capital

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the physical things a company needs to start a business, possibly: office space, retail space, supplies, inventory, printers, etc.

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Funding Plan

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document describing how much money the company needs, what they will do with the money, and what the people that provide that money will get for it

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underwriting

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process of finding money for new companies

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Basic Accounting Equation

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A = L + E (Assets = Liabilities + Equity) OR Assets = Financial Capital

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Duality principle

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everything we own must have a source

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Assets (made of)

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Current Assets + Long-Lived Assets

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Liabilities (made of)

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Current Liabilities + Long-term debt

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Equity (made of)

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Paid-in-capital + retained earnings

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Assets (definition)

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probable future economic benefits

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Liabilities (definition)

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likely future economic sacrifices

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FF&E

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Furniture, Fixtures, & Equipment

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PP&E

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Plant, property, and equipment

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P-in-K (Pink)

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Paid in Capital = initial amount contributed by investors in the early stages of the company and at intial offerings of it's stock

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Retained Earnings

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sum of business's earnings over life of the business that has not been distributed or paid out to investors

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Balance Sheet

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Reports A = L + E at a point in time

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Income Statement

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Revenue/Sales (Expenses) = Net Earnings/Profits or further Revenue (Direct Expenses) = Gross Profit (General Expenses) = Operating Profit (Interest Expense) = Pre-Tax Profit (Tax Expense) = Net Profit

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Trade credit

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delayed payment, like credit cards

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Loans

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Borrowed money

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Common stock

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shares sold to investors

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Liquidity

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allows creditors and investors to undo their transactions

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Capital Structure

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the combination of debt vs equity sold to finance a company

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Four financial statements

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Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Shareholder's Equity

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Form 10-K

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annual report for a publicly traded company

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Form 10-Q

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quarterly report for a publicly traded company

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single-step statement

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basic income statement that simply reports sales minus expenses

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Financial Performance

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bottom-line measure -- profits / net income

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Financial Position

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assets, liabilities, equity

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Direct expenses

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costs associated directly with revenue such as COGS, Sales commissions, shipping

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Periodic expenses

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costs based on a period of time, e.g. rent, salaries, insurance premiums, interest expense

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Indirect expenses

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other costs required to carry out the sales process but that are neither directly related to sales nor periodic, e.g. utilities, telephone, travel, advertising, training, supplies

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Operating expenses

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expenses related to business model

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Financing expenses

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related to aquiring capital to finance the business (ex: interest expense b/c loans are used to finance)

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Recurring expenses

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regular outflows that aren't related to operating expenses

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non-recurring expenses

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aka Losses, just one time expenses

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Multi-step income statement

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more detailed, separates out direct expenses from direct and periodic, and financing -- Sales (COGS) = Gross Profit (SG&A) = EBITDA (D&A) = EBIT (Interest) + Gains + (Losses) = EBT (Taxes) (+/- for unusual or infrequent items) = Income from Continuing Operations = Net Income

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SG&A

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Selling, General, or Administrative Expenses

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EBITDA

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Earnings before interest, taxes, depreciation, and amortization

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Margin

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sales / cost of sales

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Four fundamental accounting steps

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1. Collection 2. Measurement 3. Classification 4. Presentation

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Five core elements to accounting

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Assets, liabilities, equity, revenue, expense

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Two adjunct elements to accounting

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gains, loss

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Stock elements

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Assets, liabilities, equity at a point in time

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Flow elements

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assets, liabilities, equity over a period of time

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Carrying value

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aka book value, because value is carried on the books

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Costs

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must either represent expenses or assets; a business should only incur a cost if it believes that this cost will help generate sales

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The Matching Principle

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trying to match up incurred costs with the revenue they generate e.g. taking client out to lunch lands you a contract

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M&E

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meals and entertainment

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depreciation

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the transfer of a portion of an asset's cost from the balance sheet to sequential income statements

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cost-recovery process

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the expectation that revenue from sales will recover the cost of assets purchased to make sales

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cash

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can be commodity, is liquid, and is money capital (sometimes referred to as excess cash)

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working accounts

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current assets & liabilities, aka current accounts

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Goodwill

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the difference between the purchase price of a business less the fair market value of identifiable assets (basically everything that you can't really put a price tag on for the business)

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long-term liabilities

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obligations that stretch out beyond one year

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equity

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what a business owes it's investors, or the net worth of the business; net worth = net book value = assets - liabilities = equity

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Two major types of equity

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Paid-in-capital (Pink) and retained earnings

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IPR&D

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In-process R&D e.g. student currently getting an education

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Realization Principle

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1) seller & buyer agree on price 2) seller delivers good or service 3) seller has cash price or reasonable expectation of receiving cash price in near future

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AR

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accounts receivable or receivables -- credit sales; money owed to the company from prior period sales, when customers purchase but do not pay in-cash at POS

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front office activites

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transactions that reflect the earnings process, they generate revenue & expenses

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back office activities

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doing what is needed to make selling possible e.g. purchasing inventory, and collecting cash from customers who made purchases on credit, paying bills, etc

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The Entity Assumption

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a business is separate from its owners or other businesses

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Going Concern Assumption

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the business will operate indefinitely

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Monetary Unity Assumption

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transactions will be quantified in nominal dollars or other stable currency, unadjusted for inflation

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Period Assumption

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business activities will be reported over specific periods,

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The Cost Principle

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businesses will report amounts based on acquisition costs, rather than at fair market value

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FMV

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fair market value

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The Realization Principle or Revenue Principle

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that businesses will report revenue only when realized. when the transaction is complete (ie goods have been delivered)

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Disclosure Principle

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not all information relative to financial decision making is quantitative, it might rely on contingencies e.g. a pending lawsuit

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Objectivity Principle

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reported information should be based on objective evidence

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Materiality Principle

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Significance of a reportable item determines how it will be reported, thus small transactions are usually aggregated and reported together

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Comparability & Consistency Principle

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businesses should apply the same accounting choices year after year -- if you change, you have to change past reports so that they can be compared easily

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Convergence project

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the US initiative to move away from GAAP to the IFRS's

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IBD

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Interest bearing debt

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SCF

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Statement of Cash Flows

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DB

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Depreciable Basis

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Revenue recognition

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Determining when a sales activity generates revenue (typically when the product has been delivered, the price is known by both buyer & seller, and the seller has a reasonably high expectation of collecting cash from the buyer)

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Expense recognition

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determines when and what costs should be subtracted from revenue to determine profits in a specific period (guided by the matching principle)

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Just-in-time-purchasing

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when products are bought by the company selling at the same time as they are bought by the customer, so they basically 'miss' the balance sheet because they never get entered into the inventory account

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Amortization

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the process by which accountants recognize the expense of using an asset whose cost has been capitalized and classified as an asset.

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CAPEX

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capital expenditure

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LIFO

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last costs in, first costs out -- this means that the last costs added to inventory during the accounting period are the first costs added to COGS

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FIFO

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first costs in, first costs out

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Greshman's Law

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The bad driving out the good

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Agency Problem or Agent-Principal conflict

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when agent's (people representing the Principal's interests) pursue persona benefits in conflict with the owner/principals objectives

UCSD Econ 4 Terms – Financial Accounting – Flashcards

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