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Intro to Business Ch 8

Accounting
A system for recognizing, organizing, analyzing and reporting information about the financial transactions that affect an organization.
Financial Accounting
The branch of accounting that prepares financial statements for use by owners, creditors, suppliers and other external stakeholders.
GAAP (generally accepted accounting principles)
A set of accounting standards that is used in the preparation of financial statements.
FASB (Financial Accounting Standards Board)
The private board that establishes the generally accepted accounting principles used in the practice of financial accounting.
Balance Sheet
A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm’s assets, liabilities and owner’s equity.
Accounting equation
Assets+ Liabilities + Owner’s Equity
Assets
Resources owned by a firm
Liabilities
Claims that outsiders have against a firm’s assets
Owner’s equity
The claims a firm’s owners have against their company’s assets (often called “stockholders’ equity” on balance sheets of corporations.)
Income Statement
The financial statement that reports the revenues, expenses, and net income that result from a firm’s operations over an accounting period.
Revenue
Increases in a firm’s assets that result from the sale of goods, provision of services, or other activities intended to earn income.
Accrual-basis accounting
The method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce.
Expenses
Resources that are used up as he result of business operations
Net income
The difference between the revenue a firm earns and the expenses it incurs in a given time period.
Statement of cash flows
The financial statement that identifies a firm’s sources and uses of cash in a given accounting period.
Horizontal Analysis
Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends.
Managerial (or management) accounting
The branch of accounting that provides reports of accounting that provides reports and analysis to managers to help them make informed business decisions.
Cost
The value of what is given in exchange for something
Out-of-pocket cost
A cost that involves the payment of money or other resources.
Implicit Cost
The opportunity cost that arises when a firm uses owner-supplied resources
Fixed Costs
Costs that remain the same when the level of production changes within some relevant range.
Variable Cost
Costs that vary directly with the level of production
Direct costs
Costs that are incurred directly as the result of some specific cost object
Indirect Costs
Costs that are the result of a firm’s general operations and are not directly tied to any specific cost object.
Activity-based Costing (ABC)
A technique to assign product costs based on links between activities that drive costs and the production of specific products.
Budgeting
A management tool that explicit shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period.
Operating Budgets
Budgets that communicate an organization’s sales and production goals and the resources needed to achieve these goals.
Financial budgets
Budgets that focus on the firm’s financial goals and identify the resources needed to achieve these goals
Master budget
A presentation of an organization’s operational and financial budgets that represents the firm’s overall plan of action for a specified the period.
In Accounting, _____ want to know _____.
Owners- whether the firm made a profit or loss
Creditors- want to make sure the firm can pay back the loans they took
Employees- if the company is performing well enough to provide job security or a pay raise
IRS- amount of taxable income the firm earns
The goal of GAAP
to ensure that the information generated by financial accounting is relevant, reliable, consistent and comparable.
Balance Sheet
Purpose:
-shows the value of a firm’s assets at a particular point in time and and identifies the claims that owners and outsiders have against those assets.
Key Components:
-assets: things of value -liabilities: claims that outsiders have against firm’s assets -owner’s equity: claims that the owners of a firm have against it’s assets
Basic Relationship:
Assets= Liabilities + Owner’s Equity
Income Statement
Purpose:
Reports the profit or loss earned by the firm over a period of time
Key Components:
-revenues: increases in cash and other assets that the firm earns from its operations -expenses: the cash and other resources used up to generate revenue -net income: the profit or loss earned by a firm in a given time period
Basic Relationship:
Revenues – Expenses = Net income
Statement of Cash
Purpose:
Shows how and why the amount of cash held by the firm change over a given period of time, by identifying the cash flows from the three sources: operations, investments, and financing
Key Components:
-operations: the cash flows that arise from producing and selling goods and services -investments: the cash flows resulting from buying and selling financial securities of other companies -financing: cash a firm receives from selling its own securities, and cash the firm disburses to pay dividends and interest

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