Business Assessment Check Ch 16 21 14 00 13 12 2012 Measure interpret communicate financial information to parties inside and outside firm to support decision making Gather record and interpret financial information to management Provide financial information on status and operations of firm for evaluation by outside parties Accounting Financing activities start and expand an organization Investing activities provide assets it needs to continue operating Operating activities focus on selling goods and services and paying expenses Define accounting Accounting the process of measuring interpreting and communicating financial information to enable people inside and outside the firm to make informed Describes the status and operation of an organization and aids in decision Who uses accounting information Businesses to learn more about what they should do with their financials Managers to help plan assess performance and control daily and long term What are the three business activities that involve accounting 1 financing activities provide necessary funds to start a business and expand it after it begins operating 2 investing activities provide valuable asset required to run a business 3 operating activities focus on selling goods and services but they also consider expenses as important elements of sound financial management FINANCING INVESTING OPERATING Accountants decisions making operations Public accountants Provide accounting services to other firms or individuals for a fee Involved in auditing tax statement preparation management consulting accounting system design Management accountants Collect and record financial transactions prepare financial statements interpret them for managers Government and not for profit accountants Analyze how effectively organization or agency is operating rather than its profits and losses List the three services offered by public accounting firm 1 auditing or examining financial records 2 tax preparation planning and related services 3 management consulting What tasks do management accountants perform Collect and record financial transactions and prepare financial statements GAAP Guidelines or standards that accountants follow Four basic requirements o Consistency o Relevance o Reliability o Comparability FASB independent body made up of accounting professionals o Responsible for evaluating setting and modifying GAAP U S Securities and Exchange Commission o Establishing and modifying accounting standards for public companies firms whos shares are traded in financial markets Define GAAP must adhere Generally accepted accounting principles Rules for accountants to follow What are the four basic requirements to which all accounting rules Consistency relevance reliability comparability What is the role played by the FASB Evaluate set and modify GAAP Accounting process Recording classifying summarizing data about transactions and using info to produce financial statements Transactions recorded in journals posted in ledgers summarized in accounting statements Assets liabilities owners equity Double entry bookkeeping Process by which accounting transactions are recorded Each transaction must have an offsetting transaction List the steps in the accounting cycle Recording classifying summarizing transactions produce financial statements What is the accounting equation Assets liabilities owner s equity Assets what a firm owns must always equal liabilities what a firm owes plus owner s equity Briefly explain double entry bookkeeping Process by which accounting transactions are recorded All transactions must have an offsetting transaction Balance sheet Shows financial position of company on particular date Three major classifications assets liabilities owners equity Income statement Shows results of firm s operations over specific period Focuses on firm s activities revenues and expenditures and resulting profit or loss during period Major components revenue cost of goods sold expenses and profit or loss Statement of owners equity end of current year Statement of cash flows Shows components of change in owners equity from end of prior year to Firm s cash receipts and cash payments during accounting period Outlines sources and uses of cash in the basic business activities of operating investing and financing List the four financial statements Balance sheet income statement statement of owner s equity statement of cash flows How is the balance sheet organized Left firm s assets in descending order of liquidity Right claims against firm s assets Claims listed in order of when they are due so liabilities are listed before owners equity Define accrual accounting Recognizes revenues and costs when they occur not when actual cash changes hands Liquidity ratios measure firm s ability to meet short term obligations Measure how effectively a firm uses its resources Assess overall financial performance of business Activity ratios Profitability ratios Leverage ratios Measure extent to which the firm relies on debt to finance its operations Financial ratios help managers and evaluators compare a firm s current financial info with that of previous years and with results for other firms in same industry List the four categories of financial ratios 1 liquidity ratios 2 efficiency activity ratios 3 leverage ratios 4 profitability ratios profit margin and debt ratio Define the following ratios current ratio inventory turnover net Current ratio current assets current liabilities Inventory turnover cost of goods sold average inventory Net profit margin net profit revenue or sales Debt ratio total liabilities total assets Financial guidelines for future periods reflecting expected sales revenues operating expenses cash receipts and outlays Represent management expectations for future occurrences based on Budget plans Serve as important planning and controlling tools by providing standards against which actual performance can be measured Cash budget estimates cash inflows and outflows over period of time What is a budget Planning and control tool that reflects firm s expected sales revenues operating expenses cash receipts and cash outlays How is a cash budget organized Prepared monthly 1 cash receipts cash sales and collection of past credit sales 2 cash outlay cash purchases payment of past credit purchases and operating expenses difference between cash receipts and cash outlay net cash flow Exchange rate Ratio at which a country s currency can be exchanged for other
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