Afm 131 Module 8; Understanding Accounting & Financial Information

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accounting

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the recording, classifying, summarizing & interpreting of financial events to provide management & other interested parties the financial information they need to make good decisions

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accounting system consists of

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inputs, processing and outputs

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Inputs include

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accounting documents, sales docs, purchasing docs, shipping docs, payroll records, bank records, travel records, entertainment records

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processing includes

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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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outputs includes

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financial statements, balance sheet, income statement, cashflow statement, other reports

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major purposes of the accounting system

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-help managers make well informed decisions

-report financial information about the firm to interested stake holders, eg employees, owners, creditors etc

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5 key working areas of accounting

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managerial accounting, financial accounting, compliance (auditing), tax accounting, governmental & non-for-profit accounting

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managerial accounting

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provides information & analyses to managers inside the organization to assist them in decision making

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financial accouting

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information & analyses it generates are for people primarily outside the oranization

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annual reports

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yearly statement of the financial condition, progress & expectations of an organization

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compliance

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reviewing & evaluating the records used to prepare a company's financial statements

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independent audit

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an evaluation & unbiased opinion about the accuracy of a company's financial statements

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people interested in audit

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public, governments, owners & financial institutions, forensic accounting; new area of accounting that focuses its attention on fraudulent activity

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tax accounting

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an accountant trained in tax law & responsible for responsible for preparing tax returns or developing tax strategies

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governmental & not-for-profit accounting

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support organizations that don't generate profit but rather serve rate payers tax payers & others according to a duly approved budget

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private accountants

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an accountant who works for a single firm, government agency or non-profit organization

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public accountant

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an accountant who provides his or her accounting services to individuals or businesses on a fee basis

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3 types of accounting designations

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chartered accountant, certified management accountant, certified general accountant

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6 steps of the accounting cycle

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1. analyze source documents (sales, slips, travel, records, etc)

2. record transactions in journals

3. transfer journal entries to ledger

4. take a trial balance

5. prepare financial statements

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bookkeeping

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the recording of business transactions

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accountants

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classify & summarize financial data provided by bookkeepers & then interpret the data & report the information to management

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journal

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record book where accounting data are first entered

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double-entry bookkeeping

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concept of every business transaction affecting at least two accounts

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accounts

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different types of assets, liabilities, & owners' equity

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fundamental accounting equation

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assets= liabilities + owners' equity

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ledger

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specialized accounting book in which information from accounting journals is accumulated into accounts & posted so that managers confined all of the information about a specific account in one place

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trial balance

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a summary of all of the data in the account ledgers to show whether the figures are correct & balanced

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financial statements

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a summary of all of the transactions that have occurred over a particular period

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key financial statements

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balance sheet, income statement, cash flow statement

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balance sheet

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reports firm's financial position on a specific date, end of period

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income statement

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summarizes revenues, cost of goods & expenses for specific period of time & highlights profit at loss for firm during this period

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cashflow statements

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provides summary of money coming into & out of firm during period

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assests

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economic resources (things of value) owned by a firm

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liduidity

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how fast an asset can be converted into cash

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3 categories of liquidity

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current assets, capital assets, intangible asssets

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current assets

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items that can or will be converted into cash

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capital assets

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assets that are relatively permanent, such as land, buildings, & equipment

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intangible assests

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long-term assets, that have no real physical form

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liabilities

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what the company owes to others

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4 types of liabilities

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1. accounts payable

2. notes payable

3. bonds payable

4. taxes payable

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accounts payable

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current liabilities are bills a company owes to others for merchandise or services purchased on credit but not yet paid for

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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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are long-term liabilities that represent money lent to a firm that must be paid back

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taxes payable

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include sales takes GST & HST collected & income tax payable

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owners' equity

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amount of the business that belongs to the owners minus any liabilities owed by the business

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retained earnings

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accumulated earnings from a firm's profitable operations that remains in the business & not paid out to shareholders as dividends

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income statement

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shows firm's profit after costs, expenses, & taxes' summarizes all of the resources that have been earned, all of the resources that were used up & the resulting net income

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net income or net loss

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revenue left over after all costs & expenses, including taxes are paid

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net sales equation

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net sales= gross sales-returns, discounts & 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 & supplies used for producing items for resale

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operating expenses

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costs involved in operating a business, such as rent, utilties & salaries

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bottom line

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net income the firm incurred from revenue minus sales returns, costs, expenses & taxes over a period of time

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operations

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cash transactions associated with running the business

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investing

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cash used in or provided by the firm's investing activities

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financing

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cash raised from the issuance of new debt or equity capital or cash used to repay loans or company dividends

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cash flow

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difference between cash coming in & cash going out of the business

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amortization

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the systematic write off of the cost of a tangible asset over its estimated useful life

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matching principle

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revenues are recorded with earned & expenses are recorded when incurred

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FIFO (first in first out)

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accounting method for calculating cost of inventory; it assumes that the first goods to come in are the first to go out

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LIFO (last in first out)

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accounting method for calculating cost of inventory; it assumes that the last goods to come in are the first to go out

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ratio analysis

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assessment of a firm's financial condition & performance through calculations & interpretations of financial ratios developed from the firm's financial statements

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liquidity

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how fast an asset can be converted to cash

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current ratio equation

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=current assets/current liabilities (2 is considered safe)

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acid-test ratio equation

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=(cash+marketable securities+receivables)/current liabilities (1:1 ratio is ideal)

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leverage (debt) ratios

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degree which a firm relies on borrowed funds in operations

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debt to owner's equity

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=total liabilities/ owners' equity

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Basic earnings per share ratio

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=net income after taxes/ avg number of common shares outstanding

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diluted EPS

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profit earned for each share of outstanding common stock but considers stock options, warrants, preferred stock & convertible debt securities, converted into common stock

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return on sales

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=net income/ net sales

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return on equity

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=net income/ avg total owner's equity

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inventory turnover

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=cost of goods sold/ avg inventory