Accounting
a system of maintaining records of a company's operations and communicating that information to decision makers
Financial Accounting
information provided for external users
Dividends
distributions to owners
Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Income Statement
Reports the company's revenues and expenses over an interval of time
Revenues
amount earned from selling products or services to customers
Expenses
costs of providing products or services
Net Income
revenues - expenses
Statement of Stockholders' Equity
summarizes the changes in stockholders' equity over an interval of time; stockholders equity= common stock+ retained earnings
Common Stock
amount paid to purchase stock
Retained Earnings
cumulative net income that has been retained in business rather than distributed to owners; the earnings not paid out in dividends
Balance Sheet
presents the financial position of the company on a particular date
Assets
resources that are expected to provide future benefits
Liabilities
amounts owed to creditors (payables)
Statement of Cash Flows
Measures activities involving cash receipts and cash payments over an interval on time. Explains net change in cash during a period; can be classified into three categories (operating, investing, and financing)
Generally accepted accounting principles (GAAP)
the rules of financial accounting
Securities and Exchange Comission (SEC)
only covers public and reported companies- not private companies; the 1934 act gives the SEC power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to creditors and investors
Auditors
Trained individuals hired by a company as an independent party to verify accuracy of that company's financial statements
Role of Auditors
help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements; Help investors and creditors in their decisions by adding credibility to the financial statements.
Ethics
moral code for evaluating right and wrong behavior.
Sarbanes-Oxley Act of 2002 (SOX)
big scandals resulted in this act; SOX increased accountability of corporate executives, imposed stiffer penalties, provided stricter regulation of auditors and what services they can provide.
Corporation
a company that is legally separate from its owners; have limited liability
Limited Liability
prevents stockholders from being held personally responsible for the financial obligations of the corporation; shareholders can lose no more that the amount they invested in the company
Stockholder's equity
owner's claim to resources (stockholders are the owners)
Journal Entry/ Journal
format used for recording transactions; provides a chronological record of all transactions
Posting
process of transferring the debit and credit info from the journal to individual accounts in the general ledger
General ledger
includes all accounts used to record the company's transactions
T-account
a simplified form of a general ledger account
Trial Balance
a list of all accounts and their balances at a particular date
paid-in capital
the amount invested by stockholders
Authorized stock
shares available to sell
Redeemable
Shares can be returned to the corporation at a predetermined price
Issued stock
shares actually sold
Cummulative
Shares receive priority for future dividends if dividends are not paid in a given year
Outstanding stock
Shares held by investors
Angel Investors
wealthy individuals in the business community willing to risk investment funds on a promising business venture
Treasury Stock
The corporation's own stock that it reaquired
Time Value of Money
interest causes the value of money received today to be greater than the value of that same amount of money in the future
Simple Interest
interest you earn you earn on the initial investment only; simple interest= initial investment x interest rate x time
Compound Interest
interest you can earn on the initial investment and on previous interest
Future value of a single amount
tells us the value today of receiving some larger amount in the future
Present Value of a single amount
tells us the value today of receiving some larger amount in the future
Discount rate
the rate at which we would be willing to give up current dollars for future dollars
Annuity
if we are to receive or pay the same amount each period; ex: monthly payments of car loans, house loans, apartment rent, etc.
Bonds
a formal debt instrument (a way to borrow money-it is a contractual agreement); borrower repays the principal or face amount, at a specified maturity date; most common form of corporate debt
Secured Bonds
if the bond faults you have some security- costs more
Unsecured Bonds
don't have a specified collateral
Term Bonds
payment in full at the end of loan term
Serial Bonds
installment payments over a series of years
Callable Bonds
redeemable by issuer at specified price
Convertible Bonds
investor can convert bond into stock
Market Interest Rate
true interest rate used by investors to value bond issue (the actual market rate right now); the higher the market interest rate, the lower the bond issue price will be
Stated Interest Rate
rate quoted in bond contract used to calculate cash interest payments
Carrying Value
bonds payable at issue price; if cv increases so does interest expense; if CV decrease, interest expense decreases; the amount actually owed in that period
Interest Expense
carrying value x market rate
Interest Payment
face amount x stated rate; if a bond is sold at below or above the value that you bought it for then it is going to be that much more or less than the interest payment
Retired Bonds
buy back of bonds from the investors (generally bonds are retired at maturity rate)
Early extinguishment of debt
retirement of debt before its scheduled maturity
Leases
contractual arrangement between lessor (owner) and lessee (user) to provide the right to use an asset for a specified period of time
Operating Leases
lessor owns the assets and the lessee simply uses that asset temporarily; ex: rent expense and rent revenue
Capital Leases
lessee buys an asset and borrows the money through a lease to pay for the asset
Default risk
refers to the possibility that a company will be unable to pay the bonds face amount or interest payment as they become due; market rate is based on this
Discount
bonds issued below face amount; stated<market
Premium
occurs when the issue price of a bond is above its face amount; stated>market
amortization schedule
provides a summary of the cash paid, interest expense, and changes in carrying value for each semiannual period
return on assets
measures the amount of income generated for each dollar invested in assets
return on equity
indicates their ability to generate earnings from the resources that owners provide
Recurring Costs
property tax and property insurance; these are expensed; not part of the cost of equipment
Basket purchases
purchase of more than one asset for one purchase price; for one price, you are buying several things (lump sum)
Depletion
allocation of the cost of a natural resource over its service life (identical to the activity-based method of recording depreciation)
Patents
exclusive right to manufacture a product or to use a process
copyrights
exclusive right of protection given to the creator of a published work
Trademarks
word, slogan, or symbol that distinctively identifies a company, product, or service
Franchises
local outlets that pay for the exclusive right to use the franchisor's name and to sell its products
Goodwill
represents the value of a company as a whole, over and above the value of its identifiable net assets; any successful business has goodwill; the only time you will ever see good will on a balance sheet is if someone purchases it
Capitalize
if it increases future benefits
Expense
If it benefits only the current period
Depreciation
the process of allocating to an expense the cost of an asset over its service life
Book value (CV)
original cost - current balance in accumulated depreciation
Service life
how long the company expects to receive benefits from the asset before disposing of it
Residual value (salvage value)
the amount the company expects to receive from selling the asset at the end of its service life
Impairment
occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (the value has really crashed)
Tangible Assets
assets in this category include land, land improvements, buildings, equipment, and natural resources
Intangible Assets
assets in this category include patents, trademarks, copyrights, franchises, and goodwill; lack of physical substance
Credit Sales
transfer products and services to a customer today and collecting payment in the future; aka sales on account or services on account
Accounts Receivable
cash owed to the company by its customers from sales on account
Notes Receivable
formal credit arrangements evidenced by a written debt instrument, or note
Net Revenues
a company's total revenues less any discounts, returns, and allowances; aka net sales
Contra Revenue Account
opposite balance to that of its related revenue account
Sales Discount
reduced from the amount to be paid by a credit customer if payment is made within a specified period of time; increases sales volume, accelerate payments, reduce bad debts but reduce cash collected
Bad debt expense
uncollectible accounts expense or provision for doubtful accounts
Allowance for uncollectible accounts
asset account representing the amount of accounts receivable that we do not expect to collect
Internal Control
control environment; sets overall ethical tone of company- management philosophy
Seperation of duties
authorizing, recording and maintaining control of related assets should be separated (receiving and disbursing cash separate from recording
Collusion
two or more people acting together to circumvent internal controls
Bank Reconciliation
matching the balance of cash in the bank account with the balance of cash in the company's own records; timing differences and errors
NSF checks
customers' checks written on "nonsuffcient funds" otherwise known as bad checks