Chapter 17 Accounting recording classifying summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial info Inputs include accounting docs sales docs purchasing docs shipping docs payroll records bank records travel records entertainment records Processing recording transferred to ledgers classified and summarized Outputs income statement balance sheet outside reports annual reports Managerial accounting provides info and analysis to managers inside the organization to assist them in decision making production cost marketing cost preparing and controlling budgets minimizing tax liabilities Financial accounting financial information and analyses are generated for people primarily outside the organization is it profitable Able to pay bills How much debt Annual report yearly statement of financial condition progress and expectations of the firm Private accountants work in a single firm government agency or nonprofit organization Public accountants provide accounting to individuals or businesses CPA accountants who have passed a series of exams established by the ALCPA and met a state s requirements for education and experience Bookkeeping recording of business transactions They divide a firm s transactions into meaningful categories an post them into a record book or computer program called a journal Doubly entry bookkeeping bookkeepers record all transactions in 3 places so they can check 1 list against the other for accuracy Ledger a specialized accounting book or program where all info is in one place Trail balance summary of all the info in the accountant ledgers Financial statement summary of all the financial transactions that have been occurred over a particular period balance sheets income statements statement of cash flows Fundamental accounting equation Assets liabilities owners equity Owned owed owner s claims Assets economic resources owned by a firm tangible or intangible Liquidity ease with which assets can be converted into cash Current assets items that can or will be converted into cash within one year Fixed assets long term assets that are relatively permanent such as land buildings or equipment Intangible assets long term assets that have no physical form but do have value such as patents trademarks and goodwill Liabilities what the business owes to others debts Accounts payable current liabilities a firm owes for merchandise or services purchased on credit certain date Notes payable short or long term liabilities that the firm promises to pay back by a Bonds payable long term liabilities that the firm must pay back Owner s equity amount of the business that belongs to the owners minus any liabilities of the owners Retained earnings accumulated earnings from the firm s profitable operations that are invested in the business Income statement financial statement that shows a firm s bottom line profit after costs expenses and taxes Net income net loss revenue left over or depleted Cost of goods sold measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale Gross profit how much a firm earned by buying and selling merchandise Operating expenses expenses a firm incurs in selling goods and services such as rent Depreciation the systematic write off of the cost of a tangible asset over its estimated salaries and supplies useful life FIFO first in first out LILO last in last out Statement of cash flows Reports cash receipts and cash disbursements related to the 3 major activities of a firm operations investments and financing Cash flow difference between cash coming in and cash coming out of a business Ratio analysis Assessment of a firm s financial condition using calculations and financial ratios developed from the firm s financial statements liquidity leverage performance activity Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations various resources Profitability ratios measure how effectively a firm s managers are using the firm s Activity ratios measure how effectively management is turning over inventory
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