business 2

• Public Accountants


  Certified public accountants
• Accounting scandals


  • Sarbanes-Oxley Act
  • Dodd-Frank Act
• Forensic accounting


  Certified fraud examiners
• Private Accounts


  Certified management accountants
• Bookkeeping


  Routine, day-to-day recording of business transactions. Much narrower and far more mechanical than accounting. Requires less training than accountants. Responsible for obtaining and recording the information accountants require to analyze a firm's financial position.
• Accounting


  Accountants usually have additional training that allow them to record, understand, interpret, and develop sophisticated accounting systems.
• Managers and owners use financial statements


  • To aid in internal planning and control
  • For external purposes such as reporting to the Internal Revenue Services, stockholders, creditors, customers, employees, and other interested parties
• Internal Uses of Accounting Information


  • Managerial accounting
  • Cash flow
  • Budget
  • Master budgets
• External Uses of Accounting Information

  • Accounting statements are used for filing income taxes, obtaining credit, and reporting results to stockholders and potential investors
  • Annual report
  • Audited financial statements
  • Stockholders
  • Banks and other lenders
  • Labor unions and employees
• Users of Accounting Information


  • Boards of directors
  • Owners, shareholders
  • Managers
  • Management Information systems
  • Business analytics
  • Internal control
  • Tax collecting agencies
  • Regulatory agencies
  • Special interest groups
  • Supply chain members
  • Financial analysts
  • Employees
  • Media
• Accounting Equation


  Assets = Liabilities + Owners' Equity
• Assets


  A firm's economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things
• Liabilities


  Debts that a firm owes to others
• Owners' Equity


  Equals assets minus liabilities and reflects historical values
• Double-Entry Bookkeeping


  A system of recording and classifying business transactions that maintains the balance of the accounting equation
• Accounting Cycle


  1. Examine source documents

  2. Record transactions

  3. Post transactions

  4. Prepare financial statements
• Journal


  A time-ordered list of account transactions
• Ledger


  A book or computer file with separate sections for each account
• Trial balance


  A summary of the balances of all the accounts in the general ledger
• Financial Statements


  • Income statement
  • Balance sheet
  • Statement of cash flows
• Financial statements must adhere to generally accepted accounting principles (GAAP)
• Equivalent Terms in Accounting

  • Revenues = Sales = Goods or services sold
  • Gross profit = Gross income = Gross earnings
  • Operating income = Operating profit = Earnings before interest and taxes (EBIT) = Income before interest and taxes (IBIT)
  • Income before taxes (IBT) = Earnings before taxes (EBT) = Profit before taxes (PBT)
  • Net income (NI) = Earnings after taxes (EAT) = Profit after taxes (PAT) = Income available to common stockholders = Earnings available to common stockholders
• Income Statement


  Shows an organization's profitability over a period of time. Offers one of the clearest pictures of the company's overall revenues and costs incurred to generate that revenue.
• Revenue


  The total amount of money received from the sale of goods and services, as well as from related business activities
• Cost of Goods Sold (COGS)


  The amount of money spent to buy or produce the products sold during the income statement period
• Gross Income (or Profit)


  Revenues minus the cost of goods sold required to generate revenues. Profit is the difference between what it costs to make and sell a product and what a customer pays for it.
• Expenses


  The costs incurred in the day-to-day operations of an organization, including selling, general, and administrative expenses (including depreciation), research, development, and engineering expenses, and interest expenses
• Depreciation


  A process where the costs of long-lived assets are spread out over the total number of accounting periods in which they are expected to be used
• Net Income


  The total profit (or loss) after all expenses, including taxes have been deducted from revenue
• Temporary Nature of Income Statement Accounts

  Gross profit, earnings before interest and taxes, and net income are the results of calculations made from the revenues and expenses accounts; they are not actual accounts. At the end of the accounting period, the dollar amount in revenue and expense accounts are moved to "retained earnings".
• Balance Sheet


  A "snapshot" of an organization's financial position at a given moment. Takes it name from its reliance on the accounting equation: assets must equal liabilities plus owners' equity.
• Balance Sheet Formats


  • Traditional format
  • Vertical format
• Current Assets


  Assets used or converted into cash within the course of a calendar year, such as accounts receivable
• Current Liabilities


  A firm's financial obligation to short-term creditors, which must be repaid within one year, such as accounts payable and accrued expenses
• Owners' Equity


  Includes the owners' contribution to the organization and income earned by the organization and retained to finance continued growth and development. Accounts listed as owners' equity vary dramatically from company to company, such as stock shares which represent ownership in a company.
• Statement of Cash Flows

  Explains how the company's cash changed from the beginning of the accounting period to the end, including cash from operating activities, financing activities, and investing activities.
• Liabilities


  A firm's financial obligation to short-term creditors, which must be repaid within one year
• Accounts payable


  The amount a company owes to suppliers for goods and services purchased with credit
• Accrued expenses


  An account representing all unpaid financial obligations incurred by the organization
• Owners' equity


  • The owners' contribution to the organization
  • Income earned by the organization and retained to finance continued growth and development