Understanding Business Chapter 17: Understanding Accounting and Business Information

Flashcard maker : Lily Taylor
Most of the financial information about an organization is based on information generated from accounting records. The reports and financial statements prepared by accountants… (1pt)
provide information that can be used by decision-makers both inside and outside the organization
Cole is an accountant with a large public company. As an account, his responsibilities include… (2pts)
summarizing and interpreting financial information needed by his firm’s managers
An accounting system would not be used for…
determining the most profitable target market segment for the company’s new product line
One of the main duties of bookkeepers is to…
record business transactions in journals
The purpose of a trial balance is to…
ensure that the figures in the account ledgers are correct and balanced
The three key financial statements prepared by accountants are the balance sheet, the statement of cash flows, and the ….
income statement
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…
preparing the store’s balance sheet and other major financial statements
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…
analyzing the firm’s financial statements to evaluate the financial condition of the firm.
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.
long-term liability
The financial statement that summarizes the revenue and expenses and resulting net income (or loss) over a specified time period is called the …..
income statement
Not paying dividends to your shareholders; These undistributed profits are referred to as…
retained earnings
According to the fundamental equation, the value of assets the firm owns equals the amount of money the firm owes to others plus …..
owners’ equity
The balance sheet shows liabilities of $5,000,000 and owners’ equity of $5,237,000. According the the fundamental equation….
assets equal $10,237,000
The statement of cash flows reports cash receipts and cash disbursements that is not related to,,,,
cash generated thru the cost of goods sold (gross margin)
The part of the business that belongs entirely to the creditors is called:
liabilities
Managers need information to make decisions. Which type of information arranges this data in such a way?
managerial accounting
It is mandated that a public firm fully disclose its financial data once a year in their:
annual report
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?
by analyzing the firm’s balance sheet and income statement
Measurements of a firm’s liquidity, debt, and assets could be created in a(n)…
current ratio
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?
GAAP
The principles that accountants must follow in order to assure that a firm’s accounting information is accurate are abbreviated as:
GAAP
What are some benefits of using computers of accounting purposes? (3pts)
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;
Term is to phrase:
(1) Accounting (4pts):
(2) Bookkeeping:
(3) Accounting cycle:
(4) Trial balance:
(1) classifying, summarizing, interpreting, and reporting
(2) recording
(3) series of six steps
(4) summary of data in ledgers
What are 2 advantages of the using of computers to maintain and compile accounting information? (2pts)
speed; handle large amounts of data
6 steps in the accounting cycle beginning to end:
(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
The _________ shows all of a firm’s revenues, costs, and whether it made a profit or loss during a specific period.
income statement
What term describes the cost of merchandise the firm sells?
cost of goods sold
A company’s ________ summarize all of the transactions that have occurred over a particular period or point in time
financial statements
If financial management is the heartbeat of competitive businesses, what keeps that heartbeat stable?
accounting information
The statement of cash flows reports cash receipts and disbursements related to ______, investments, and financing
operations
The major accounts on the balance sheet include: (3 pts)
liabilities; owners’ equity; assets
Rent, salaries, supplies, utilities, and insurance are examples of ______ expenses that are general expenses
operating
Examples of profitability ratios include: (3pts)
return on sales; basic earnings per share; return on equity
A current bill that a company owes to others that is the result of buying merchandise on credit is called:
accounts payable
In order to be a certified management accountant a person must: (3pts)
be certified by the Institute of Certified Management Accountants; pass a qualifying exam; meet educational requirement;
What is the meaning of bonds payable?
long-term liabilities that represent money lent to the firm that must be paid back
Return on sales is: (equation)
net income divided by net sales
Retained earnings
accumulated earnings not paid out to stockholders
Businesses that are not incorporated identify the investment of the sole proprietors thru the ____ account
capital
A certified management accountant (CMA) must be certified by the Institute of Certified Management Accountants and provides information to managers _______ the organization
inside
The key working areas of accounting include: (5pts)
tax accounting; auditing; managerial accounting; government and not-for-profit accounting; financial accounting
Which ration is the cost of goods divided by the average inventory?
the inventory turnover ratio
the ratios that measure the effectiveness of a firm’s management in using the assets that are available are called: (2pts)
activity ratios; performance ratios
Reviewing and evaluating records used to prepare a company’s financial statements is referred to as:
auditing
What type of ratios measure how effectively a firm is using its various resources to achieve profits?
profitability (performance) ratios
A tax accountant has specialized and learned tax _______ and is responsible for preparing tax returns.
law
A certified management accountant:
must pass a qualifying exam and be certified
Managerial accounting is concerned with: (3pts)
controlling; measuring production costs; preparing budgets
An acid test ratio between _#_ and _#_ is usually considered satisfactory but could also be a sign of some cash flow problems.
0.5; 1.0
The primary users of government and not-for-profit accounting information are: (3pts)
legislative bodies; citizens; special interest groups
What are two examples of inputs to the accounting system?
shipping documents; sales documents
a company’s ______ statements summarize all of the transactions that have occurred over a particular period or point in time.
financial
What are some things that would be shown on an income statement? (4pts)
operating expenses; revenue; net income; cost of goods sold
The area of accounting that provides information to managers inside the organization to assist them in decision making is called:
managerial accounting
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.
journal; ledger
_____ payable can be either short-term or long-term liabilities that a business promises to repay by a certain date.
notes payable
Government and not-for-profit accounting involves working for organizations whose purpose is to serve: (2pts)
ratepayers; taxpayers
A company’s net sales minus cost of goods sold is called:
gross profit
The major activities of a firm shown on the statement of cash flows include: (3pts)
operations; investments; financing
Which financial statement shows the firm’s profit after costs, expenses, and taxes?
income statement
The bottom line is another name for:
net income or loss
Common financial transactions include: (3pts)
paying employees; acquiring insurance; buying and selling goods
______ are cash used in or provided by the firm’s investment activities.
investments
_____ income after taxes is the last line on the income statement
net
Accounting reports and ____ ____ are critical to understanding the health of a business
financial statements
The formula for the costs of goods sold:
purchase price + freight charges + storage costs
On the statement of cash flows financing activities would include: (3pts)
paying past debt; taking on new debt; paying dividends
Examples of profitability ratios include: (3pts)
return on equity; basic earnings per share; return on sales
Buying and selling goods and services, acquiring insurance, paying employees, and using supplies are all examples of:
financial transactions
What are the main types of financial ratios used in ratio analysis? (4pts)
debt; activity ratios; profitability ratios; liquidity ratios
The area of accounting that provides financial information and analysis to managers within the organization to assist them in decision making is called ____ accounting
managerial
_____ accountants are involved in generating financial information and analysis for the company’s creditors, lenders, customers, suppliers, and government agencies, and the general public
financial
An evaluation and unbiased opinion of the accuracy of a firm’s financial statements can be obtained after a _____ ____
independent
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:
earnings per share (EPS)
The four key types of ratios that investors monitor are….
liquidity ratios; profitability ratios; leverage ratios; activity ratios
The measure of how quickly an asset can be converted to cash is referred to as its…
liquidity
Leverage ratios are used to understand how much the company relies on ______ to fund its operations
debt
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
acid-test ratio
accounting
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
what are the buying and selling goods and services, acquiring insurance, paying employees, and using supplies?
financial transactions
What are the purposes of accounting? (2pts + 9 such as pts)
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)
accounting system
the method used to record and summarize accounting data into reports;
the inputs to an accounting system include…. (2 pts)
sales documents; other documents
The data are… (3pts)
recorded, classified, and summarized
Then, they’re put into ____ ____ ____ such as the ______, _______, & _______.
summary financial statements; income statement; balance sheet; statement of cash flows
#1 (accounting system)
Inputs: Accounting documents (name a few of the 7 examples)
Sales documents, purchasing documents, shipping documents, payroll documents, payroll records, bank records, travel records, entertainment records
#2 (accounting system)
Processing:
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
#3 (accounting system)
Outputs: Financial statements (5pts)
Balance sheet, income sheet, statement of cash flows, other reports, (e.g. annual reports)
what is the language of business?
accounting
The five key working areas of accounting:
managerial accounting; financial accounting; auditing accounting; tax accounting; government and not-for-profit accounting
managerial accounting
accounting used to provide information and analyses to managers inside the organization to assist them in decision making
what is managerial account concerned with? 3pts
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.
What is a CMA? 2pts
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.
Why is being a CMA or managerial accounting important? 3pts
b/c of growing emphasis on global competition, outsourcing, and organizational cost-cutting
financial accounting
#accounting information and analyses prepared for people outside the organizaiton
How does it contrast managerial accounting?
the financial information and analyses it generates are for people primarily outside the organization
Where does the information that financial accountants generate go to? (name a few of the 10 examples)
not only company owners, managers, and employees, but also to creditors and lenders, employee unions, customers, suppliers, government agencies, and the general public
Questions external users ask like ¨is the organization profitable?¨ or ¨how much debt is owed is answered where?
in the annual report
annual report
a yearly statement of the financial condition, progress, and expectations of an organization
– condition, progress, expectation; yearly
Why is there more in an annual report now than ever?
stakeholders demand it
CPA 2pts
certified public accountant; an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (#AICPA)
What do CPAs find careers doing? 3pts
being a public accountant or private accountant or fill other financial position
FASB
Financial Accounting Standards Board; the defines the generally accepted #accounting principles;
GAAP
generally accepted accounting principles that accountants must follow;
What caused Sarbanes-Oxley-Act (#Sarbox) to pass?
Scrutiny (close surveillance) in the #accounting industry being intensified leads Congress to pass this
What does the #Sarbanes-Oxley-Act (#Sarbox) do?
created new govt reporting standards for publicly traded companies.
AICPA 2pt
American Institute of Certified Public Accountants (#AICPA); established examinations for potential CPAs
#PCAOB aka #Public-Company-Accounting-Oversight-Board 2pt
charged with overseeing AICPA; created by congress
Major provisions of Sarbox 6pt
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

the 2008 financial crisis lead to the passing of what two acts?
#Dodd-Frank-Wall-Sreet-Act & #Consumer-Protection-Act
#Dodd-Frank-Wall-Sreet-Act
increased financial regulation affecting accounting by increasing the power of #PCAOB (#Public-Company-Accounting-Oversight-Board) to oversee auditotrs of dealers in securities markets.
auditing
the job of reviewing and evaluating the information used to prepare a company’s financial statement
private accountants often perform ___ audits while public accountants also conduct _____ audits
internal; independent
what guarantees that the organization is carrying out proper #accounting procedures and financial reporting?
private accountants
what is a public accountant?
an accountant who provides accounting services to individuals or businesses on a fee basis
accounting scandals make people question what?
accounting firms doing both auditing and consulting
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
true… Sarbanes Oxley Act (Sarbox)
what is an auditors job?
not only examine the financial health of an organization but also its operational efficiencies and effectiveness.
Certified-internal-auditor (CIA) 2pts
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
What is the job of an auditor? 3pts
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
Six steps of the accounting cycle & identify whether it is accounting or bookkeeping
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)
What is the difference between bookkeeping and accounting and accounting? 6pts
Bookkeeping is part of accounting and includes the systematic recording of data. Accounting include classifying, summarizing, interpreting, and reporting data to management.
What are journals and ledgers? 4pts
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)
How do computers help accountants? 7pts
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.
What is a balance sheet?
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
What are the major accounts of the balance sheet? (3 terms + a brief definition + equation… 7pts)
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
What is an income statement? 3pts; What are the formulas used to prepare the income statement?
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)

What is a statement of cash flows? 7pts
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.
What are the four key categories of ratios?
the four key categories of ratios are liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios
What is the major value of ratio analysis to the firm?
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.
tax accountant
an accountant trained in tax law and responsible for preparing tax returns or developing tax strategies
Why is the job of being a tax accountant always challenging?
tax policies are always changing
#Government-and-not-for-profit-accounting
#accounting-system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget
Government and not for profit accounting is an accounting system ______ by federal, state, and local governments
required
Who sets the government accounting standards?
Governmental Accounting Standards Board (GASB)
Why do not-for-profit accountants need to hire accountants?
to show contributors how their money is spent
accounting cycle
a six-step procedure that results in the preparation and analysis of the major financial statements.
the accounting cycle relies on the work of whom? 2pts
bookkeeper; accountant
bookkeeping
the recording of business transactions, is a basic part of financial reporting
How does accounting differ from bookkeeping? 7pts
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
How does bookkeeping word or what is the step process?
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

journal
the record book or computer program where #accounting data are first entered; a days transactions
the practice of writing every business transaction into two places
#double-entry-bookkeeping
#double-entry-bookkeeping requires entries where? 2pts
in the journal and the ledger
ledger
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
trial balance
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
financial statement
a summary of all the transactions that have occurred over a particular period
Why are the IRS, stockholders, banks, etc very interested in the financial statement?
it indicated the companys’ health
The key financial statements of a business are: 3pts
balance sheet; income statement; statement of cash flows
balance sheet 2pts
reports the firm’s financial condition on a specific date &
details what the company owns and owes on a certain day
income-statement 2pts
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
statement of cash flows
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
What’s the fundamental accounting equation?
Assets = Liabilities + Owners’ equity
What does Assets = Liabilities + Owners’ equity mean?
Your assets are now equal to what you owe plus what you own
In accounting, the fundamental accounting equation must always be _____
balanced/equal
fundamental-accounting-equation
Assets = Liabilities + Owners’ equity’this is the basis for the #balance-sheet
balance sheet 4pts
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
How do assets, liabilities, and equity pertain to a balance sheet or how are they expressed on a balance sheet? 7-14pts
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)
assets are = to or balanced with the liabilities and owners’ or _______ equity
stockholders’
(on a balance sheet) – assets is…. liabilities is…. and equity is….
assets = everything you own; liabilities = money owed; equity = subtracting assets with liabilities.
Balance sheets follow the accounting principles/guidelines of …
GAAP
assets
economic resources (things of values) owned by a firm, including goodwill
Assets includes _____
goodwill
goodwill
represents the value attached to factors such as reputation, location, and superior products
How do goodwill and balance sheets relate?
Goodwill is included when a firm acquires assets
liquidity
the ease with which an asset can be converted into cash
Speeder conversion of cash means _______ liquidity
higher
account recieveable
is an amount of money owed to the firm that expects to receive within one year
accounts receivable are considered a _____ _____ b/c they are easily converted
liquid asset
Three categories of assets: 3-6pts
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
liabilities
what the business owes to others (debts)
current liabilities
debts due in one year or less
long-term liabilties
debts not due for a year or more
Common liability accounts recorded on a #balance-sheet : 3-6pts
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)
Term for – not paid for yet
accounts payable
notes payable
short-term or long-term liabilities that a business promises to repay by a certain date
bonds payable
long-term liabilities that represent money lent to the firm that must be paid back
equity =
assets (the value of things you own) – liabilities (the amount of money you owe to others)
stockholders’ equity or shareholders’ equity
the value of what stockholders own in a firm (minus liabilities)
stockholders’ equity or shareholders’ equity is also known as
owners-equity
owners equity 2pts
the amount of the business that belongs to the owners minus any liabilities owed by the business; aka stockholders’ equity
formula for owners’ equity
assets – liabilities = owners’ equity
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
capital account
The #owners-equity account records…
the owners’ claims to funds they have invested in the firm (such as stock) and retained earnings
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
retained earnings
income statement 2pts
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.
net income or net loss
revenue left over after all costs and expenses including taxes are paid.
#income-statement reports ____ ____ over a period of time.
financial operations
#income-statement determines…
if the company is profiting or losing
What does an income statement include? (5-10pts)
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
Although ___ is a part of revenue, one must not confuse them.
sales
____ refers to the total of all sales the firm completed
gross sales
net sales
gross sales minus returns, discounts, and allowances
cost of goods sold
a measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale
cost of goods sold is also known as …….
cost of goods manufactured
Costs of goods sold compares how much a business ______ by selling merchandise and how much it _____ to make or buy the merchandise
earned; spent
The cost of goods includes: 2pts
the purchase price +
– any freight charges paid to transport goods
– any costs associated with storing the goods
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
records
gross profit or gross margin 2pts
how much a firm earned by buying (or making) and selling merchandise;
#cost-of-goods-sold – #net-sales
If there is no #cost-of-goods-sold then _____ could = #gross-profit (gross margin)
net sales
operating expenses
costs involved in operating a business, such as rent, utilities, and salaries
Other #operating-expenses that appear on an #income-statement are more complex e.g. _______
depreciation
___ is the systematic write-off of the cost of a tangible asset over its estimated useful life
depreciation
#operating-expenses can be classified as ___ or ___ expenses
selling or general
selling expenses
are related to the marketing and distribution of the firm’s goods or services, such as advertising, salespeople’s salaries, and supplies
___ are administrative expenses of the firm such as office salaries, depreciation, insurance, and rent
general expenses
After deducting all expenses, the firm’s _____ can be determined
#net-income-before-taxes
#net-income-before-taxes is also known as (2pts)
net earnings or net profit
After distributing the taxes according to plan or allocating for taxes, the ______ is uncovered
#bottom-line
bottom line
the #net-income or #net-loss the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time.
¨Did the business earn or lose money in the specific reporting period?¨ is answered where?
at the bottom line
statement of cash flows
financial statement that reports cash receipts and disbursements related to a firm’s three major activities: operations, investments, and financing.
Three major activities of a firm: 3-6pts
#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
statement of cash flows includes: 3pts
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
Can a business increase sales and profits and still suffer cash flow problems?
yes
cash flow
the difference between cash coming in and cash going out of a business
Summarized, how do cash flow problems start? 2pts
buying goods on credits and the money to pay the credit back is coming on a later date
_____ measure how effectively a firm’s managers are using its various resources to to achieve profits
profitability (performance) ratios
Three of the more important ratios:
#earnings-per-share (#EPS)
#return-on-sales
#return-on-equity
EPS (earnings per share)
a revealing ratio bc earnings help stimulate the firm’s growth and provide for stockholders’ dividends.
#basic-earnings-per-share-ratios (#basic-EPS)
helps determine the amount of profit a company earned for each share of outstanding common stock
_____ 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.
#diluted-earnings-per-share-ratio (#diluted-EPS)
basic EPS =
#net-income-after-taxes / number of common stock shares outstanding
return on sales
tells us whether the firm is doing as well as its competitors in generating income from sales
return on sales =
#return-on-sales = #net-income / #net-sales
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
higher;
return on equity
indirectly measures risk by telling us how much a firm earned for each dollar invested by its owners.
return on equity =
#net-income-after-taxes / total #owners-equity
anything over __% return on equity is a reasonable return
15%
#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
profit
Converting the firm’s inventory to profits is a key _____ of management
function
activity ratios
tell us how effectively management is turning over inventory
________________ measures the speed with which inventory moves thru the firm and gets converted into sales
inventory turnover ratio
The more efficiently a firm sells or turns over its inventory, the ___ its revenue
higher
#inventory-turnover-ratio =
#cost-of-goods-sold / average inventory
#inventory-turnover-ratio
measures the speed with which inventory moves thru the firm and gets converted into sales
(Lower/higher) than average #inventory-turnover-ratio often indicates obsolete merchandise or poor buying practices
lower
____ 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
balance sheet
income statement accounts (3-6pts)
#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)
#financial-analysis begins where the #accounting #financial-statements _____
ends
_____ involves the review and evaluation of the records that are used to prepare the organization’s financial statements.
auditing
_____ is the accounting practice of recording each transaction in two places in the accounting journal.
double-entry bookkeeping
The Balance Sheet, the Statement of Cashflows, and the ___ are three key financial statements.
Income Statement
Debts owed by a business are called _____
liabilities
____ refers to how quickly an asset can be converted to cash
liquidity

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