Understanding Business Chapter 17: Understanding Accounting and Business Information – Flashcards
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The purpose of a trial balance is to...
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ensure that the figures in the account ledgers are correct and balanced
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The three key financial statements prepared by accountants are the balance sheet, the statement of cash flows, and the ....
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income statement
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Tyler works as an accountant for a mid-sized retail store. He has just completed a successful trial balance. Tyler's next task is likely to be...
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preparing the store's balance sheet and other major financial statements
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Accountant Alan Winger has just completed the balance sheet, income statement, and statement of cash flows for his company. The next step in the accounting cycle involves...
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analyzing the firm's financial statements to evaluate the financial condition of the firm.
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Collins Enterprises is building a new manufacturing facility and has taken out a 30-year mortgage with Frontier Financial in the amount of $350,000 to finance his project. This mortgage would be shown as a(n) ______ _______ on the company's balance sheet.
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long-term liability
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The financial statement that summarizes the revenue and expenses and resulting net income (or loss) over a specified time period is called the .....
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income statement
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Not paying dividends to your shareholders; These undistributed profits are referred to as...
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retained earnings
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According to the fundamental equation, the value of assets the firm owns equals the amount of money the firm owes to others plus .....
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owners' equity
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The balance sheet shows liabilities of $5,000,000 and owners' equity of $5,237,000. According the the fundamental equation....
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assets equal $10,237,000
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The statement of cash flows reports cash receipts and cash disbursements that is not related to,,,,
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cash generated thru the cost of goods sold (gross margin)
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The part of the business that belongs entirely to the creditors is called:
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liabilities
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Managers need information to make decisions. Which type of information arranges this data in such a way?
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managerial accounting
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It is mandated that a public firm fully disclose its financial data once a year in their:
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annual report
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Although a firm may list a large dollar value of assets, how would a bank evaluate if the company was able to repay a loan?
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by analyzing the firm's balance sheet and income statement
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Measurements of a firm's liquidity, debt, and assets could be created in a(n)...
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current ratio
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If Tom and Tony each had a corporation, then what set of rules would prevent them from creating unique formats of information in their financial statements?
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GAAP
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The principles that accountants must follow in order to assure that a firm's accounting information is accurate are abbreviated as:
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GAAP
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What are some benefits of using computers of accounting purposes? (3pts)
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information can be posted from journals instantaneously; computers can handle large amounts of financial information; software can help if no strong accounting support is available;
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Term is to phrase: (1) Accounting (4pts): (2) Bookkeeping: (3) Accounting cycle: (4) Trial balance:
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(1) classifying, summarizing, interpreting, and reporting (2) recording (3) series of six steps (4) summary of data in ledgers
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What are 2 advantages of the using of computers to maintain and compile accounting information? (2pts)
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speed; handle large amounts of data
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6 steps in the accounting cycle beginning to end:
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(1) analyze source documents (2) record transactions in journals (3) transfer journal entries to a ledger (4) take a trial balance (5) prepare financial statements (6) analyze financial statements
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The _________ shows all of a firm's revenues, costs, and whether it made a profit or loss during a specific period.
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income statement
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What term describes the cost of merchandise the firm sells?
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cost of goods sold
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A company's ________ summarize all of the transactions that have occurred over a particular period or point in time
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financial statements
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If financial management is the heartbeat of competitive businesses, what keeps that heartbeat stable?
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accounting information
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The statement of cash flows reports cash receipts and disbursements related to ______, investments, and financing
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operations
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The major accounts on the balance sheet include: (3 pts)
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liabilities; owners' equity; assets
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Rent, salaries, supplies, utilities, and insurance are examples of ______ expenses that are general expenses
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operating
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Examples of profitability ratios include: (3pts)
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return on sales; basic earnings per share; return on equity
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A current bill that a company owes to others that is the result of buying merchandise on credit is called:
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accounts payable
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In order to be a certified management accountant a person must: (3pts)
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be certified by the Institute of Certified Management Accountants; pass a qualifying exam; meet educational requirement;
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What is the meaning of bonds payable?
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long-term liabilities that represent money lent to the firm that must be paid back
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Return on sales is: (equation)
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net income divided by net sales
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Retained earnings
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accumulated earnings not paid out to stockholders
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Businesses that are not incorporated identify the investment of the sole proprietors thru the ____ account
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capital
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A certified management accountant (CMA) must be certified by the Institute of Certified Management Accountants and provides information to managers _______ the organization
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inside
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The key working areas of accounting include: (5pts)
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tax accounting; auditing; managerial accounting; government and not-for-profit accounting; financial accounting
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Which ration is the cost of goods divided by the average inventory?
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the inventory turnover ratio
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the ratios that measure the effectiveness of a firm's management in using the assets that are available are called: (2pts)
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activity ratios; performance ratios
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Reviewing and evaluating records used to prepare a company's financial statements is referred to as:
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auditing
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What type of ratios measure how effectively a firm is using its various resources to achieve profits?
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profitability (performance) ratios
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A tax accountant has specialized and learned tax _______ and is responsible for preparing tax returns.
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law
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A certified management accountant:
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must pass a qualifying exam and be certified
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Managerial accounting is concerned with: (3pts)
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controlling; measuring production costs; preparing budgets
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An acid test ratio between _#_ and _#_ is usually considered satisfactory but could also be a sign of some cash flow problems.
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0.5; 1.0
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The primary users of government and not-for-profit accounting information are: (3pts)
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legislative bodies; citizens; special interest groups
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What are two examples of inputs to the accounting system?
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shipping documents; sales documents
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a company's ______ statements summarize all of the transactions that have occurred over a particular period or point in time.
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financial
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What are some things that would be shown on an income statement? (4pts)
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operating expenses; revenue; net income; cost of goods sold
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The area of accounting that provides information to managers inside the organization to assist them in decision making is called:
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managerial accounting
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Financial data from transaction documents are first recorded in a(n) _____. The data are then transferred into a(n) _____, so managers can find all the information about a single account in one place.
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journal; ledger
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_____ payable can be either short-term or long-term liabilities that a business promises to repay by a certain date.
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notes payable
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Government and not-for-profit accounting involves working for organizations whose purpose is to serve: (2pts)
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ratepayers; taxpayers
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A company's net sales minus cost of goods sold is called:
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gross profit
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The major activities of a firm shown on the statement of cash flows include: (3pts)
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operations; investments; financing
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Which financial statement shows the firm's profit after costs, expenses, and taxes?
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income statement
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The bottom line is another name for:
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net income or loss
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Common financial transactions include: (3pts)
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paying employees; acquiring insurance; buying and selling goods
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______ are cash used in or provided by the firm's investment activities.
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investments
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_____ income after taxes is the last line on the income statement
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net
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Accounting reports and ____ ____ are critical to understanding the health of a business
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financial statements
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The formula for the costs of goods sold:
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purchase price + freight charges + storage costs
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On the statement of cash flows financing activities would include: (3pts)
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paying past debt; taking on new debt; paying dividends
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Examples of profitability ratios include: (3pts)
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return on equity; basic earnings per share; return on sales
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Buying and selling goods and services, acquiring insurance, paying employees, and using supplies are all examples of:
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financial transactions
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What are the main types of financial ratios used in ratio analysis? (4pts)
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debt; activity ratios; profitability ratios; liquidity ratios
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The area of accounting that provides financial information and analysis to managers within the organization to assist them in decision making is called ____ accounting
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managerial
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_____ accountants are involved in generating financial information and analysis for the company's creditors, lenders, customers, suppliers, and government agencies, and the general public
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financial
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An evaluation and unbiased opinion of the accuracy of a firm's financial statements can be obtained after a _____ ____
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independent
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an important tool for investors used in determining the value of a stock is the amount of net income that belongs to each share of common stock. this is called:
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earnings per share (EPS)
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The four key types of ratios that investors monitor are....
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liquidity ratios; profitability ratios; leverage ratios; activity ratios
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The measure of how quickly an asset can be converted to cash is referred to as its...
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liquidity
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Leverage ratios are used to understand how much the company relies on ______ to fund its operations
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debt
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Analyzing a company's _____ ratio is one way in which an investor can tell if the company can pay off its short-term debts if there is a drop in sales revenue
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acid-test ratio
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accounting
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the recording, classifying, summarizing and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions
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what are the buying and selling goods and services, acquiring insurance, paying employees, and using supplies?
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financial transactions
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What are the purposes of accounting? (2pts + 9 such as pts)
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to help managers make well-informed decisions; report financial information about the firm to interested stakeholders, such as employees, owners, creditors, suppliers, unions, community activists, investors, and the government (for tax purposes)
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accounting system
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the method used to record and summarize accounting data into reports;
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the inputs to an accounting system include.... (2 pts)
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sales documents; other documents
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The data are... (3pts)
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recorded, classified, and summarized
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Then, they're put into ____ ____ ____ such as the ______, _______, & _______.
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summary financial statements; income statement; balance sheet; statement of cash flows
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#1 (accounting system) Inputs: Accounting documents (name a few of the 7 examples)
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Sales documents, purchasing documents, shipping documents, payroll documents, payroll records, bank records, travel records, entertainment records
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#2 (accounting system) Processing:
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1. Entries are made into journals: recording 2. The effects of these journal entries are transferred or posted into ledgers: classifying 3. All accounts are summarized
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#3 (accounting system) Outputs: Financial statements (5pts)
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Balance sheet, income sheet, statement of cash flows, other reports, (e.g. annual reports)
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what is the language of business?
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accounting
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The five key working areas of accounting:
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managerial accounting; financial accounting; auditing accounting; tax accounting; government and not-for-profit accounting
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managerial accounting
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accounting used to provide information and analyses to managers inside the organization to assist them in decision making
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what is managerial account concerned with? 3pts
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measuring and reporting costs of production, marketing, and other functions; preparing budgets (#planning); checking whether or not units are staying within their budgets (#controlling); and designing strategies to minimize taxes.
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What is a CMA? 2pts
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a certified management accountant; a professional accountant who has met certain educational and experience requirements, passed a qualifying exam, and been certified by the Institute of Certified Management Accountants.
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Why is being a CMA or managerial accounting important? 3pts
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b/c of growing emphasis on global competition, outsourcing, and organizational cost-cutting
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financial accounting
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#accounting information and analyses prepared for people outside the organizaiton
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How does it contrast managerial accounting?
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the financial information and analyses it generates are for people primarily outside the organization
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Where does the information that financial accountants generate go to? (name a few of the 10 examples)
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not only company owners, managers, and employees, but also to creditors and lenders, employee unions, customers, suppliers, government agencies, and the general public
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Questions external users ask like ¨is the organization profitable?¨ or ¨how much debt is owed is answered where?
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in the annual report
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annual report
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a yearly statement of the financial condition, progress, and expectations of an organization - condition, progress, expectation; yearly
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Why is there more in an annual report now than ever?
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stakeholders demand it
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CPA 2pts
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certified public accountant; an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (#AICPA)
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What do CPAs find careers doing? 3pts
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being a public accountant or private accountant or fill other financial position
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FASB
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Financial Accounting Standards Board; the defines the generally accepted #accounting principles;
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GAAP
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generally accepted accounting principles that accountants must follow;
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What caused Sarbanes-Oxley-Act (#Sarbox) to pass?
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Scrutiny (close surveillance) in the #accounting industry being intensified leads Congress to pass this
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What does the #Sarbanes-Oxley-Act (#Sarbox) do?
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created new govt reporting standards for publicly traded companies.
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AICPA 2pt
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American Institute of Certified Public Accountants (#AICPA); established examinations for potential CPAs
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#PCAOB aka #Public-Company-Accounting-Oversight-Board 2pt
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charged with overseeing AICPA; created by congress
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Major provisions of Sarbox 6pt
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Prohibits #accounting firms from providing certain non-auditing work (such as consulting services) to companies they audit Strengthens the protection for whistle-blowers who report wrongful actions of company officers; Requires company CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation of securities reporting (e.g. earnings misstatements); Prohibits corporate loans to directors and executives of the company; Establishes the five-member #Public-Company-Accounting-Oversight-Board (#PCAOB) under the #Securities-and-Exchange-Commission (#SEC) to oversee the #accounting industry; Stipulates that altering or destroying key audit documents will result in felony charges and significant criminal penalties
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the 2008 financial crisis lead to the passing of what two acts?
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#Dodd-Frank-Wall-Sreet-Act & #Consumer-Protection-Act
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#Dodd-Frank-Wall-Sreet-Act
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increased financial regulation affecting accounting by increasing the power of #PCAOB (#Public-Company-Accounting-Oversight-Board) to oversee auditotrs of dealers in securities markets.
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auditing
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the job of reviewing and evaluating the information used to prepare a company's financial statement
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private accountants often perform ___ audits while public accountants also conduct _____ audits
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internal; independent
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what guarantees that the organization is carrying out proper #accounting procedures and financial reporting?
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private accountants
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what is a public accountant?
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an accountant who provides accounting services to individuals or businesses on a fee basis
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accounting scandals make people question what?
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accounting firms doing both auditing and consulting
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True or false: the govt stepped in and put in place new rules about #auditing and #consulting to ensure the integrity of the #auditing process. 2pts
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true... Sarbanes Oxley Act (Sarbox)
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what is an auditors job?
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not only examine the financial health of an organization but also its operational efficiencies and effectiveness.
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Certified-internal-auditor (CIA) 2pts
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an accountant who has a bachelor's degree and two years of experience in #internal-auditing, and who has passed an exam administered by the #Institute-of-Internal-Auditors
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What is the job of an auditor? 3pts
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auditors review and evaluate the standards used to prepare a company's financial statements. An independent audit is conducted by a public accountant and is an evaluation and unbiased opinion about the accuracy of a company's financial statements
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Six steps of the accounting cycle & identify whether it is accounting or bookkeeping
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1. Analyze source documents (BK) 2. Record transactions in journals (BK) 3. transfer journal entries to ledger (BK) 4. take a trial balance (BK) 5. prepare financial statements (A) 6. Analyze financial statements (A)
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What is the difference between bookkeeping and accounting and accounting? 6pts
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Bookkeeping is part of accounting and includes the systematic recording of data. Accounting include classifying, summarizing, interpreting, and reporting data to management.
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What are journals and ledgers? 4pts
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Journals are the first place bookkeepers record transactions. Bookkeepers then summarize the journal entries by posting them to ledgers. Ledgers are specialized accounting books that arrange the transactions by homogeneous [Uniform in structure or composition throughout] groups (accounts)
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How do computers help accountants? 7pts
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Computers can record and analyze data and provide financial reports. Software can continuously analyze and test accounting systems to be sure they are functioning correctly. Computers can help decision making by providing appropriate information, but they cannot themselves make good financial decisions. Accounting applications and creativity are still human functions.
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What is a balance sheet?
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a balance sheet reports the financial position of a firm on a particular day. The fundamental accounting equation used to prepare the balance sheet is Assets = Liabilities + Owners' equity
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What are the major accounts of the balance sheet? (3 terms + a brief definition + equation... 7pts)
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Assets are economic resources owned by the firm, such as building and machinery. Liabilities are amounts the firm owes to creditors, bondholders, and others. Owners' equity is the value of everything the firm owns -- its assets minus any liabilities; thus, Owners' equity = Assets - liabilities
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What is an income statement? 3pts; What are the formulas used to prepare the income statement?
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an income statement reports revenues, costs, and expenses for a specific period of time; revenue - cost of goods = gross margin gross margin - operating expenses = net income before taxes net income before taxes - taxes = net income (or net loss)
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What is a statement of cash flows? 7pts
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Cash flow is the difference between cash receipts (money coming in) and cash disbursements (money going out). The statement of cash flows reports cash receipts and disbursements related to the firm's major activities: operations, investments, and financing.
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What are the four key categories of ratios?
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the four key categories of ratios are liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios
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What is the major value of ratio analysis to the firm?
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ratio analysis provides the firm with information about its financial position in key areas for comparison to other firms in its industry and its own past performance.
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tax accountant
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an accountant trained in tax law and responsible for preparing tax returns or developing tax strategies
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Why is the job of being a tax accountant always challenging?
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tax policies are always changing
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#Government-and-not-for-profit-accounting
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#accounting-system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget
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Government and not for profit accounting is an accounting system ______ by federal, state, and local governments
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required
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Who sets the government accounting standards?
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Governmental Accounting Standards Board (GASB)
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Why do not-for-profit accountants need to hire accountants?
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to show contributors how their money is spent
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accounting cycle
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a six-step procedure that results in the preparation and analysis of the major financial statements.
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the accounting cycle relies on the work of whom? 2pts
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bookkeeper; accountant
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bookkeeping
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the recording of business transactions, is a basic part of financial reporting
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How does accounting differ from bookkeeping? 7pts
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classifying and summarizing financial data provided by bookkeepers, and then interpreting the data and reporting the information to management. Also suggesting strategies for imporving the firm's financial condition and prepare financial analyses and income tax returns
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How does bookkeeping word or what is the step process?
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First: divide all the firm's transactions into meaningful categories such as sales documents, purchasing receipts and shipping documents, being very careful to keep the information organized and manageable Then: record financial data from the orginal transaction documents into a record book or computer program called a #journal
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journal
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the record book or computer program where #accounting data are first entered; a days transactions
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the practice of writing every business transaction into two places
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#double-entry-bookkeeping
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#double-entry-bookkeeping requires entries where? 2pts
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in the journal and the ledger
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ledger
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a specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place
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trial balance
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step in the #accounting-cycle; a summary of all the financial data in the account #ledger s that ensures the figures are correct and balanced
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financial statement
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a summary of all the transactions that have occurred over a particular period
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Why are the IRS, stockholders, banks, etc very interested in the financial statement?
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it indicated the companys' health
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The key financial statements of a business are: 3pts
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balance sheet; income statement; statement of cash flows
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balance sheet 2pts
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reports the firm's financial condition on a specific date & details what the company owns and owes on a certain day
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income-statement 2pts
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summarized revenues, cost of goods, and expenses (including taxes) for a specific period and highlights the total profit or loss the firm experienced during that period & shows the revenue a firm earned selling its products compared to its selling costs (profit or loss) over a specific period of time
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statement of cash flows
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provides a summary of money coming into and going out of the firm & It tracks a company's cash receipts and cash payments highlights the difference between cash coming ing and cash going out of a business
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What's the fundamental accounting equation?
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Assets = Liabilities + Owners' equity
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What does Assets = Liabilities + Owners' equity mean?
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Your assets are now equal to what you owe plus what you own
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In accounting, the fundamental accounting equation must always be _____
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balanced/equal
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fundamental-accounting-equation
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Assets = Liabilities + Owners' equity'this is the basis for the #balance-sheet
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balance sheet 4pts
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financial statement that reports a firm's financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners' equity
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How do assets, liabilities, and equity pertain to a balance sheet or how are they expressed on a balance sheet? 7-14pts
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1. Current assets items that can be converted to cash within one year 2. Fixed assets items such as land, buildings, and equipment that are relatively permanent 3. Intangible assets items of value such as patents and copyrights that don't have a physical form 4. Current liabilities payments that are due in one year or less 5. Long-term liabilities payments not due for one year or longer 6. Owner's equity the value of what stockholders own in a firm (aka stockholder's equity)
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assets are = to or balanced with the liabilities and owners' or _______ equity
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stockholders'
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(on a balance sheet) - assets is.... liabilities is.... and equity is....
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assets = everything you own; liabilities = money owed; equity = subtracting assets with liabilities.
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Balance sheets follow the accounting principles/guidelines of ...
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GAAP
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assets
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economic resources (things of values) owned by a firm, including goodwill
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Assets includes _____
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goodwill
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goodwill
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represents the value attached to factors such as reputation, location, and superior products
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How do goodwill and balance sheets relate?
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Goodwill is included when a firm acquires assets
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liquidity
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the ease with which an asset can be converted into cash
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Speeder conversion of cash means _______ liquidity
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higher
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account recieveable
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is an amount of money owed to the firm that expects to receive within one year
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accounts receivable are considered a _____ _____ b/c they are easily converted
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liquid asset
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Three categories of assets: 3-6pts
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1, #current-assets - #term items that can or will be converted into cash within one year. include cash, accounts receivable, and inventory 2. #fixed-assets - #term long-term, relatively permanent e.g. land, building, equipment. (on a #balance-sheet they're referred to as property, plant, and equipment) 3. #intangible-assets - #term long0term, no physical form but have value. Patents, trademarks, copryrights, and goodwill
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liabilities
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what the business owes to others (debts)
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current liabilities
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debts due in one year or less
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long-term liabilties
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debts not due for a year or more
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Common liability accounts recorded on a #balance-sheet : 3-6pts
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1. #accounts-payable (current liabilities or bills the company owes to others for merchandise or services purchased on credit but not yet paid for) 2. #notes-payable (short-term or long-term liabilities that a business promises to repay by a certain date) 3. #bonds-payable (long-term liabilities that represent money lent to the firm that must be paid back)
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Term for - not paid for yet
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accounts payable
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notes payable
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short-term or long-term liabilities that a business promises to repay by a certain date
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bonds payable
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long-term liabilities that represent money lent to the firm that must be paid back
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equity =
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assets (the value of things you own) - liabilities (the amount of money you owe to others)
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stockholders' equity or shareholders' equity
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the value of what stockholders own in a firm (minus liabilities)
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stockholders' equity or shareholders' equity is also known as
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owners-equity
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owners equity 2pts
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the amount of the business that belongs to the owners minus any liabilities owed by the business; aka stockholders' equity
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formula for owners' equity
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assets - liabilities = owners' equity
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Term for - what owners' equity is in firms where sole proprietors and partners it means the value of everything owned by the business minus any liabilities of the owner(s), such as bank loans
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capital account
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The #owners-equity account records...
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the owners' claims to funds they have invested in the firm (such as stock) and retained earnings
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Term for - the accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends
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retained earnings
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income statement 2pts
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the financial statement that shows a firm's profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm (expenses), and the resulting net income or net loss.
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net income or net loss
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revenue left over after all costs and expenses including taxes are paid.
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#income-statement reports ____ ____ over a period of time.
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financial operations
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#income-statement determines...
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if the company is profiting or losing
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What does an income statement include? (5-10pts)
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1. Revenue: value of what's received from goods sold, services rendered, and other financial sources 2. Cost of goods sold: cost of merchandise sold or cost of raw materials or parts used for producing itmes for resale 3. Gross profit: how much the firm earned by buying or selling merchandise 4. Operating expenses: cost incurred in operating a business 5. Net income after taxes: profit or loss over a specific period after subtracted all costs and expenses, including taxes
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Although ___ is a part of revenue, one must not confuse them.
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sales
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____ refers to the total of all sales the firm completed
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gross sales
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net sales
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gross sales minus returns, discounts, and allowances
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cost of goods sold
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a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale
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cost of goods sold is also known as .......
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cost of goods manufactured
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Costs of goods sold compares how much a business ______ by selling merchandise and how much it _____ to make or buy the merchandise
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earned; spent
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The cost of goods includes: 2pts
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the purchase price + - any freight charges paid to transport goods - any costs associated with storing the goods
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it doesn't matter when a firm places a particular item in its inventory, but it does matter how an accountant _____ the cost of the item when the firm sells it
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records
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gross profit or gross margin 2pts
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how much a firm earned by buying (or making) and selling merchandise; #cost-of-goods-sold - #net-sales
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If there is no #cost-of-goods-sold then _____ could = #gross-profit (gross margin)
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net sales
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operating expenses
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costs involved in operating a business, such as rent, utilities, and salaries
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Other #operating-expenses that appear on an #income-statement are more complex e.g. _______
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depreciation
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___ is the systematic write-off of the cost of a tangible asset over its estimated useful life
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depreciation
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#operating-expenses can be classified as ___ or ___ expenses
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selling or general
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selling expenses
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are related to the marketing and distribution of the firm's goods or services, such as advertising, salespeople's salaries, and supplies
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___ are administrative expenses of the firm such as office salaries, depreciation, insurance, and rent
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general expenses
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After deducting all expenses, the firm's _____ can be determined
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#net-income-before-taxes
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#net-income-before-taxes is also known as (2pts)
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net earnings or net profit
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After distributing the taxes according to plan or allocating for taxes, the ______ is uncovered
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#bottom-line
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bottom line
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the #net-income or #net-loss the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time.
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¨Did the business earn or lose money in the specific reporting period?¨ is answered where?
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at the bottom line
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statement of cash flows
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financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.
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Three major activities of a firm: 3-6pts
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#operations cash transactions associated with running the business #investments cash used in or provided by the firm's investment activities #financing cash raising by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends
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statement of cash flows includes: 3pts
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1. Cash receipts from sales, commissions, fees, interest, and dividends. Cash payments for salaries, inventories, operating expenses , interest, and taxes. 2. Includes cash flows that are generated thru a company's purchase or sale long-term operational assets, investments in other companies, and its lending activities. 3. Cash inflows and outflows associated with the company's own equity transactions or its borrowing activities
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Can a business increase sales and profits and still suffer cash flow problems?
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yes
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cash flow
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the difference between cash coming in and cash going out of a business
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Summarized, how do cash flow problems start? 2pts
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buying goods on credits and the money to pay the credit back is coming on a later date
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_____ measure how effectively a firm's managers are using its various resources to to achieve profits
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profitability (performance) ratios
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Three of the more important ratios:
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#earnings-per-share (#EPS) #return-on-sales #return-on-equity
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EPS (earnings per share)
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a revealing ratio bc earnings help stimulate the firm's growth and provide for stockholders' dividends.
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#basic-earnings-per-share-ratios (#basic-EPS)
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helps determine the amount of profit a company earned for each share of outstanding common stock
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_____ measures the amount of profit earned for each share of outstanding common stock, but also considers stock options, warrants, preferred stock, and convertible debt securities the firm can convert into common stock.
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#diluted-earnings-per-share-ratio (#diluted-EPS)
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basic EPS =
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#net-income-after-taxes / number of common stock shares outstanding
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return on sales
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tells us whether the firm is doing as well as its competitors in generating income from sales
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return on sales =
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#return-on-sales = #net-income / #net-sales
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The _____ the risk of failure or loss in an industry, the higher the return investors expect on their investment; they expect to be well compensated for shouldering such odds
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higher;
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return on equity
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indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners.
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return on equity =
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#net-income-after-taxes / total #owners-equity
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anything over __% return on equity is a reasonable return
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15%
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#profitability-ratios relate to ___ which is vital to the growth of a company. Thus #profitability-ratios are such closely watched measurements of company growth and management performance
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profit
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Converting the firm's inventory to profits is a key _____ of management
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function
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activity ratios
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tell us how effectively management is turning over inventory
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________________ measures the speed with which inventory moves thru the firm and gets converted into sales
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inventory turnover ratio
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The more efficiently a firm sells or turns over its inventory, the ___ its revenue
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higher
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#inventory-turnover-ratio =
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#cost-of-goods-sold / average inventory
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#inventory-turnover-ratio
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measures the speed with which inventory moves thru the firm and gets converted into sales
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(Lower/higher) than average #inventory-turnover-ratio often indicates obsolete merchandise or poor buying practices
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lower
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____ accounts #assets cash, #accounts-receivable, inventory, investments, equipment, land, buildings, vehicles, goodwill #liabilities #accounts-payable, #notes-payable, #bonds-payable, #taxes-payable #owners-equity capital stock, #retained-earnings, common stock, treasury stock
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balance sheet
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income statement accounts (3-6pts)
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#revenues sales revenue, rental revenue, commissions revenue, royalty revenue #cost-of-goods-sold cost of buying goods, cost of storing goods #expenses wages, rent, repaints, taxes, advertising, supplies, licenses, interest, storage, utilities (full list p485)
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#financial-analysis begins where the #accounting #financial-statements _____
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ends
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_____ involves the review and evaluation of the records that are used to prepare the organization's financial statements.
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auditing
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_____ is the accounting practice of recording each transaction in two places in the accounting journal.
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double-entry bookkeeping
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The Balance Sheet, the Statement of Cashflows, and the ___ are three key financial statements.
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Income Statement
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Debts owed by a business are called _____
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liabilities
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____ refers to how quickly an asset can be converted to cash
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liquidity
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