Name: Intro to Business CRN: T/Th 9:35 – 11:00 a.m. Date (The date the assignment is turned in) Chapter 16 Outline Getting to the Bottom Line: Basic Accounting Concepts Discuss how both managers and external stakeholders use financial information. Managers use financial information by accounting. They use this financial information to plan and control a company’s operation and make business decisions. They also use this information to help evaluate the business. External stakeholders to see where there invested money is being used and if it is a good investment. It is also used for both to make good decisions. Accounting – measuring, interpreting, and communicating financial information to support internal and external decision making Financial accounting – preparing financial information for users outside the organization Management accounting – preparing data for use by managers within the organization Describe what accountants do. Accountants design accounting systems, prepare financial statements, analyze and interpret financial information, prepare financial forecasts and budgets, and prepare tax returns. Some accounts specialize in tax accounting, cost accounting, and financial analysis.
records the revenue when the cash is received and with accrual the company records the revenue when the sale is made. Double-entry bookkeeping - way of recording financial transactions that requires two entries for every transaction so that the accounting equation is always kept in balance Matching principle – fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period Accrual basis – accounting method in which revenue is recorded when a sale is made and expense is recorded when it is incurred Cash basis – accounting method in which revenue is recorded when payment is received and expense is recorded when cash is paid Deprecation – accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life Close the books – the act of transferring net revenue and expense account balances to retained earnings for the period Explain the purpose of the balance sheet and identify its three main sections. The purpose of the balance sheet is to show a snapshot of the company’s financial position on a particular date. The balance sheets three main sections are the assets of the company on one side and on the other the liabilities and owner’s equity. Balance sheet – statement of a firm’s financial position on a particular date; also known as a statement of financial position
Profitability ratios – ratios that measure the overall financial performance of a firm Return on sales – ratio between net income after taxed and net sales Return on investment (ROI) – ratio between net income after taxes and total owner’s equity; also known as return on equity Earnings per share – measure of profitability calculated by dividing net income after taxed by the average number of shares of common stock outstanding Liquidity ratios – ratios that measure a firm’s ability to meet its short term obligations when they are due Working capital – current assets minus current liabilities Current ration – measure of a firm’s short term liquidity, calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities Quick ratio – measure of a firm’s short term liquidity, calculated by adding cash, marketable securities, and receivables, the dividing that sum by current liabilities Activity ratio – ratios that measure the effectiveness of the firm’s use of its resources Inventory turnover ratios – measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period