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Chapter 4

Business Chapter #4 Notes.doc

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Department
Biology
Course
BIOL 376
Professor
All Professors
Semester
Fall

Description
Business Chapter #4 – Understanding Accounting Issues Accounting – A comprehensive system for collecting, analyzing, and communicating financial information Bookkeeping – Recording accounting transactions Accounting Information System (AIS) – An organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports There are numerous users of accounting information: - Business managers use accounting information to set goals, develop plans, set budgets and evaluate future prospects - Employees and unions use accounting information to get paid and to plan for and receive such benefits as health care, insurance, vacation time and retirement pay - Investors and creditors use accounting information to estimate returns to stockholders, to determine a company’s growth prospects, and to decide if the company is a good credit risk before investing or lending - Taxing authorities use accounting information to plan for tax inflows, to determine the tax liabilities of individuals and businesses, and to ensure that correct amounts are paid in a timely fashion - Government regulatory agencies rely on accounting information to fulfill their duties; the provincial securities commissions, for example, require firms to file financial disclosures so that potential investors have valid information about a company’s financial status Controller – The individual who manages all the firm’s accounting activities Financial Accounting System – The process whereby interested groups are informed about the financial condition of a firm Managerial (Management) Accounting – Internal procedures that alert managers to problems and aid them in planning and decision making Chartered Accountant (CA) – An individual who has met certain experience and education requirements and has passed a licensing examination; acts as an outside accountant for other firms Certified General Accountant (CGA) – An individual who has completed an education program and passed a national exam; works in private industry or a CGA firm Certified Management Accountant (CMA) – An individual who has completed a university degree, passed a national examination, and completed a strategic leadership program; works in industry and focuses on internal management accounting Audit – An accountant’s examination of a company’s financial records to determine if it used proper procedures to prepare its financial reports Forensic Accountant – An accountant who tracks down hidden funds in business firms, usually as part of a criminal investigation Generally Accepted Accounting Principles (GAAP) – Standard rules and methods used by accountants in preparing financial reports Management Consulting Services – Specialized accounting services to help managers resolve a variety of problems in finance, production scheduling, and other areas Private Accountant – An accountant hired as a salaried employee to deal with a company’s day- to-day accounting needs The Accounting Equation  Assets = Liabilities + Owners’ equity Asset – Anything of economic value owned by a firm or individual. Assets include land, buildings, inventory, and payments due the company (accounts receivable). Liability – Any debt owned by a firm or individual to others Owners’ Equity – Any positive difference between a firm’s assets and its liabilities; what would remain for a firm’s owners if the company were liquidated, all its assets were sold, and all its debts were paid Assets – Liabilities = Owners’ equity If a company’s assets exceed its liabilities, owners’ equity is positive; if the company goes out of business, the owners will receive some cash (again) after selling assets and paying off liabilities. If liabilities outweigh assets, owners’ equity is negative; assets are insufficient to pay off all debts. Owners’ equity consists of two sources of capital: 1. The amount that the owners originally invested 2. Profits earned by and reinvested in the company Double Entry Accounting System – A bookkeeping system, developed in the fifteenth century and still in use, that requires every transaction to be entered in two ways – how it affects assets, and how it affects liabilities and owners’ equality – so that the accounting equation is always in balance Financial Statement – Any of several types of broad reports regarding a company’s financial status; most often used in reference to balance sheets, income statements, and/or statements of cash flows Balance Sheets – A type of financial statement that summarizes a firm’s financial position on a particular date in terms of its assets, liabilities, and owners’ equity Current Assets – Cash and other assets that can be converted into cash within a year Liquidity – The ease and speed with which an asset can be converted to cash; cash is said to be perfectly liquid Marketable securities purchased as short term investments are slightly less liquid but can be sold quickly if necessary. Marketable securities include stocks or bonds of other companies, government securities, and money market certificates. There are three other important non liquid assets held by many companies: accounts receivable, merchandise inventory, and prepaid expenses. Accounts Receivable – Amounts due to the firm from customers who have purchased goods or services on credit; a form of current asset Merchandise Inventory – The cost of merchandise that has been acquired for sale to customers but is still on hand Prepaid Expense – Includes supplies on hand and rent paid for the period to come Fixed Assets – Assets that have long-term use or value to the firm such as land, buildings, and machinery Depreciation – Distributing the cost of a major asset over the years in which it produces revenues; calculated by each year subtracting the asset’s original value divided by the number of years in its productive life Intangible Assets – Non physical assets such as patients, trademarks, copyrights, and franchise fees that have economic value but whose precise value is difficult to calculate Goodwill – The amount paid for an existing business beyond the value of its other assets Current Liabilities – Any debts owed by the firm that must be paid within one year Accounts Payable – Amounts due from the firm to its suppliers for goods and/or services purchased on credit; a form of current liability Long Term Liabilities – Any debts owed by the firm that are not due for at least one year Paid in Capital – Any additional money invested in the firm by the owners Retained Earnings – A company’s net profits less any dividend payments to shareholders Income (Profit and loss) statement – A type of financial statement that describes a firm’s revenues and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period Revenues – Expenses = Profit (or loss) The income statement is divided into three major categories: revenues, cost of goods sold, and operating expenses Revenues – Any monies received by a firm as a result of selling a good or service or from other sources such as interest, rent, and licensing fees Cost of Goods Sold – Any expenses directly involved in producing or selling a good or service during a given time period Gross Profit ( or Gross Margin) – A firm’s revenues (gross sales) less its cost of goods sold For companies with low gross margins, product costs are a big expense. If a company has a high gross margin, it probably has low cost of goods sold but high selling and administrative expenses Operating Expenses – Costs incurred by a firm other than those included in cost of goods sold Selling Expenses – result from activities related to selling the firm’s goods or services. Operating Income – Compares the gross profit from business operations against operating expenses Net Income (net profit or net earnings) – A firm’s gross profit less its operating expenses and income
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