MGTA02H3 Chapter Notes - Chapter 4: Gross Profit, Deferral, Current Liability

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1 Apr 2013
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Chapter 4: Understanding Accounting Issues
Terms:
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
Controller: the individual who manages all the firm’s accounting activities
Financial Accounting System: the process whereby interested groups are kept 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 experiences 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 focusses
on internal management accounting
Audit: an accountant’s examination of a company’s financial records to determine if it used proper
procedures to prepare tis 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
Asset: anything of economic value owned by a firm or individual
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Liability: any debt owned by a firm or individual to others
Owner’s 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
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’ equity – so that the accounting equation is always in balance
Financial Statements: 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 Sheet: a type of financial statement that summarizes a firm’s financial position on a particular
date in terms of its assets, liabilities, and owner’s 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
Accounts Receivable: amount 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 Expenses: 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 patents, 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
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