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Units 2+3
Principles of Financial and Managerial Accounting - D196
| Term | Definition |
|---|---|
| 3 functions of an accounting system | analysis, bookkeeping, evaluation |
| SEC (Securities and Exchange Commission) | The US organization that monitors the financial accounting disclosures of companies (both U.S. and foreign) whose stocks trade on U.S. stock exchanges |
| balance sheet | Shows the financial position of an organization’s assets, liabilities, and equity at a specific date in time |
| FASB (Financial Accounting Standards Board) | The US organization that sets accounting standards for publicly listed companies |
| summarize the effects of transactions | The third step in the financial accounting cycle |
| analyze transactions | The first step of the financial accounting cycle |
| prepare reports | The fourth step in the financial accounting cycle |
| record the effects of transactions | The second step in the financial accounting cycle |
| 4 steps in the financial accounting cycle | analyze transactions, record the effects of transactions, summarize the effects of transactions, prepare reports |
| statement of cash flows | Shows the amount of cash inflows and outflows for an organization’s operating, investing, and financing activities |
| Accounting | the language of business |
| income statement | Shows the profitability of an organization by comparing revenues and expenses for a period of time |
| Basic Accounting Equation | Assets = Liabilities + Owner's Equity (ALE) (Note that the “Owner’s Equity” applies to a sole proprietorship, partnerships refer to “Partner’s Equity,” while a corporation uses “Stockholders’ Equity.”) |
| ALE: Assets = Liabilities + Equity | Assets are what we own. Liabilities are what we owe. Equity is the amount that is invested in the company (aka, by the owners) |
| Examples of asset accounts: | cash, accounts receivable, inventory, and equipment |
| Chart of Accounts (COA) | includes the name of the account and a reference number, which are part of every single journal entry. The COA is typically organized in the following order – Assets, Liabilities, Equity, Revenues, and Expenses |
| revenues | generate additional monetary resources, usually cash, when a product or service is sold through normal business operations |
| expenses | Expenses are the costs incurred in normal business operations to generate revenues |
| dividends | represent money distributed to the stockholders of an organization. As dividends reflect payments to the owners, a transaction involving dividends paid reduces owners’ equity |
| equity section of the balance sheet | NOTE: Revenues, expenses, and dividends impact the equity section of the Balance Sheet, through the closing entries made, at the end of every accounting period. Revenues increase equity, while expenses and dividends paid decrease equity |
| A common-size income statement | is generated by dividing all financial statement amounts for a given year by sales for that year |
| For the balance sheet, common-size financial statements | are generated by dividing each balance sheet item by total assets for that year |
| A common-size income statement | reveals the number of pennies of each expense for each dollar of sales |
| Examining trends across time (horizontal analysis) | allows us to determine how expenses are changing relative to sales on the income statement |
| compare companies of different sizes (vertical analysis) | Comparing the performance of two companies in similar industries at the same point in time requires the use of use common-size financial statements so that you can compare companies of different sizes |
| asset | economic resource owned or controlled by a company |
| liability | economic obligation to deliver assets or provide a service |
| equity | equal to total assets minus total liabilities; represents the book value of the owners’ assets after the liability obligations have been satisfied; stems from direct owner investment and past profits retained in the business |
| Format—in the balance sheet | assets and liabilities are typically separated into current and long-term items with data for both the current and the preceding year reported for comparison |
| limitations | the balance sheet reflects assets acquired at their historical cost, thus frequently ignoring changes in value and gradual development of intangible assets |
| net income | equal to revenues minus expenses; represents the net amount of assets created through business operations during a particular period of time |
| format - in the income statement | usually several years of income statement data are reported side by side for comparison |
| Operating activities | activities that are part of a company’s day-to-day business; examples include collecting cash from customers, paying employees, and purchasing inventory |
| Investing activities | activities involving the purchase and sale of long-term assets such as buildings, trucks, and equipment |
| Financing activities | activities surrounding acquiring the capital needed to purchase the company’s assets; examples include getting cash from loans, repaying loans, receiving invested cash from owners, and paying dividends |
| format - in the cash flows statement | usually several years of cash-flow data are reported side by side for comparison |
| Articulation | the three primary financial statements tie together as follows: The income statement explains the change in the retained earnings balance in the balance sheet The statement of cash flows explains the change in the cash balance in the balance sheet |
| The notes to the financial statements | Contain additional info not included in the financial statements themselves Explain the company’s accounting assumptions + practices |
| The notes to the financial statements | Provide details of financial statement summary numbers + additional disclosure about complex events Report supplementary information required by the SEC or the FASB |
Created by:
drister05
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