Term
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Definition
| Managers and other people inside the company |
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Term
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Definition
| Parties outside the firm such as investors and banks. |
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Term
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Definition
| developing accounting information for internal decision makers. |
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Term
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Definition
Name
Balance Sheet
At Date
Unit of Measure
Assets(Cash, A/R, Inventory, Plant, Land=Total Assets)
Liab(A/P, N/P=Total Liab)
S.E.(Capital, Retained Earnings=TotalSE) |
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Term
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Definition
| the economic resources that the company owns and the source of financing for those resources. |
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Term
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Definition
Name
Income Statement
For the Year ended Date
Unit of Measure
Revenue(Sales=TR)
Expenses(COGS, Selling, general, and administrative expenses, interest exp=Total Exp)
Pretax Income
Income tax Expense
Net Income |
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Term
| Statement of Retained Earnings |
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Definition
Name
SORE
For the Year Ended Date
Unit of Measure
Beginning Retained(Jan,1,20**)
Net Income for year
minus Dividends for year
Retained Earnings, End of year |
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Term
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Definition
Name
Statement of Cash Flows
For the Year ended date
Unit of Measure
Cash Flows from operating Expense
(Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes)
Net Cash flow from operating expenses
Cash Flows from investing Activity
(Cash paid to purchase equip)
Net CF from investing Activites
Cash Flows from Financing Activities
(Cash received from bank loan
Cash paid for dividends)
Net CF from financing activities
Net (Increase/Decrease) in cash
Cash at beginning of year
Cash at end of year |
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Term
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Definition
| provide supplemental info about the financial condition of a company without which the financial statements cannot be fully understood |
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Term
| Price/earnings ratio(P/E ratio) |
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Definition
Market Price/ Net income
How much a stock is selling over its earnings per share
Higher is better |
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Term
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Definition
| rules that are used to develop financial information |
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Term
| Generally Accepted Accounting Principles(GAAP) |
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Definition
| are the measurement rules used to develop the information in financial statements |
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Term
| Securities and Exchange Commission(SEC) |
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Definition
| is the U.S. Government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements |
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Term
| Financial Accounting Standards Board(FASB) |
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Definition
| is the private sector body given the primary responsibility to work out the detailed rules that become generally accepting accounting principles |
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Term
| 3 Steps to ensure accuracy of reports |
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Definition
Systems of Controls
External Auditors
Board of Directors |
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Term
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Definition
| report of independent accountants or independent registered public accounting firm, describes the auditor's opinion of the fairness of the financial statements and the evidence gathered to support that opinion. |
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Term
| Certified Public Accountant(CPA) |
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Definition
| licensed by state on completion of requirements and only CPA can issue reports and have certain responsibilities that extend to the general public as well as to the specific business that pays for this service. |
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Term
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Definition
| examination of the financial reports to ensure that they represent what they claim and conform with GAAP |
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Term
| Public Company Accounting Oversight Board |
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Definition
| is the private sector body given the primary responsibility to issue detailed auditing standards |
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Term
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Definition
| users of accounting information |
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Term
| Separate Entity Assumption |
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Definition
| states that business transactions are separate from the transactions of the owners |
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Term
| Unit of Measure assumption |
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Definition
| states that accounting information should be measured and reported in the national monetary unit. |
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Term
| Continuity(going concern) Assumption |
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Definition
| states that businesses are assumed to continue to operate into the foreseeable future |
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Term
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Definition
| Order of liquidity, how soon an asset is expected to be turned into cash or used. |
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Term
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Definition
| assets that will be used or turned into cash within one year. Inventory is always current asset |
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Term
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Definition
| requires assets to be recorded at the historical cash equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange |
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Term
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Definition
Order of maturity
how soon an obligation is to be paid |
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Term
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Definition
| are obligations that will be paid in cash (or other current assets) or satisfied by providing cash, goods, or services within the coming year. |
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Term
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Definition
| place to record transactions that result from exchanges between two countries |
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Term
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Definition
| Related area of accounts that get updated after general journal entries |
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Term
| Operating(cash to cash) cycle |
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Definition
| is the time is takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers |
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Term
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Definition
| indicates that the long life of a company can be reported in shorter time periods |
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Term
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Definition
| records revenues when cash is received and expenses when cash is paid |
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Term
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Definition
| records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments |
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Term
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Definition
| that revenues are recognized when goods or services are delivered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured |
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Term
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Definition
| requires that expenses be recorded when incurred in earning revenue |
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Term
| how are financial statements prepared |
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Definition
I/S=Revenues - Exp = NI
SRE=Beg RE + NI - Div = End RE
B/S=Assets= Liab + S.E.(Capital + RE)
SCF=Change in Cash(asset) |
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Term
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Definition
| is the difference between its acquisition cost and accumulated depreciation, its related contra account. |
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Term
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Definition
| previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned. First(Cash-Unnearned Revenue), Adjusting(Unnearned Revenue-Revenue) |
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Term
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Definition
| previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account. First(A/R-Revenue) Adjusting(Cash-A/R) |
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Term
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Definition
| previously recorded acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the asset to generate revenue. First(Asset-Cash) Adjusting(Expense-Asset) |
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Term
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Definition
| previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account. First(Payable, Cash) Second(Expense, Payable) |
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Term
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Definition
Net Income Available to the Common Stockholders/Weighted Average Number of Shares of Common Stock outstanding
during the period
Most widely used ratio |
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Term
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Definition
Net Income/Net Sales(Operating Revenues)
Higher is better |
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Term
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Definition
| Retained Earnings + All Credits Below Retained Earnings - All Debits Below Retained Earnings. Put all temporary accounts at 0 |
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Term
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Definition
| elected by the shareholders to represent their interests, is responsible for maintaining the integrity of the company's financial reports. |
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Term
| Unqualified(Clean) Audit option |
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Definition
| auditors statement that the financial statements are fair presentations in all material respects in conformity with GAAP |
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Term
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Definition
| use accounting reports and info gathered from executives to to make reports that include forecasts of future quarters and annuals as well as other info. |
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Term
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Definition
| predictions of earnings for future accounting periods |
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Term
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Definition
| a quick, unbiased reaction to information |
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Term
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Definition
| allow investors to gather their own information about the company and monitor recommendations of a variety of analysts. |
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Term
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Definition
| managers of pension, mutual, endowment, and other funds that invest on the behalf of others. |
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Term
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Definition
| include individuals who purchase shares in companies |
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Term
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Definition
| include suppliers and financial institutions that lend money to companies |
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Term
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Definition
| suggests that the benefits of accounting for and reporting information should outweigh the costs. |
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Term
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Definition
| can influence a decision, it is timely and has predictive and/or feedback value. |
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Term
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Definition
| accurate, unbiased, and verifiable |
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Term
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Definition
| can be compared over time because similar accounting methods have been applied. (within same company) |
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Term
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Definition
| allows comparisons across businesses because similar accounting methods have been applied. (across same industry) |
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Term
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Definition
| are amounts that are large enough to influence a user's decision |
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Term
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Definition
| suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses. |
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Term
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Definition
| written public news announcement normally distributed to major news services. |
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Term
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Definition
| difference from expected earnings |
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Term
| Principal components of the financial sections includes: |
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Definition
1)Summarized financial data for a 5-10 year period
2)Management's Discussion and Analysis of Financial Condition and Results of Operations and Disclosures about Market Risk
3)The 4 Basic Financial Statements
4)Notes(Footnotes)
5)Reports of Independent Accountants(Auditor's Opinion) and the Management Certification
6)Recent Stock price information
7)Summaries of the unaudited quarterly financial data
8)Lists of Directors and officers of the company and relevant addresses |
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Term
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Definition
| annual report that publicly traded companies must file with SEC |
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Term
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Definition
| the quarterly report that publicly traded companies must file with SEC |
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Term
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Definition
| used by publicly traded companies to disclose any material event not previously reported that is important to investors (auditor changes, mergers) |
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Term
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Definition
| have no physical existence and a long life, examples are patents, trademarks, copyrights, franchises, and goodwill from purchasing other companies. |
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Term
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Definition
| legal amount per share established by the board of directors; it establishes the minimum amount a stockholder must contribute and has no relationship to the market price of the stock. |
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Term
| Additional Paid in Capital |
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Definition
| is the amount of contributed capital less the par value of stock. |
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Term
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Definition
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Term
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Definition
| equals net sales less costs of goods sold and other operating expenses. |
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Term
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Definition
| revenues minus all expenses except income tax |
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Term
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Definition
1) discontinued operations
2) Extraordinary Items
3) Cumulative effect of changes in accounting methods. |
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Term
| Direct method of reporting cash flows from operating activities |
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Definition
| presents a reconciliation of net income on an accrual basis to cash flows from operations |
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Term
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Definition
Net Income/Average Stockholders equity
Higher is better |
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Term
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Definition
Avg Total Assets/Average Stockholders equity
Higher is better |
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Term
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Definition
Net Sales/Avg Total Assets
Higher is better |
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Term
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Definition
| is a short-term, highly liquid investment with an original maturity of less than three months |
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Term
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Definition
| reports components of cash flows from operating activities as gross receipts and gross payments(Cash received from customers and Dividends and interest on investments--cash paid for purchase of goods for resale and services, salaries and wages, income taxes, interest on liabilities) |
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Term
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Definition
| adjusts net income to compute cash flows from operating activities(net income +- Adjustments for noncash items/ Net Cash inflow(outflow) from operating activites) |
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Term
| Cash flows from investing activities |
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Definition
| inflows(Sale of property, plant, and equipment--sale or maturity of investments in securities) and Outflows(purchase of property, plant and equipment---purchase of investments in securities) |
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Term
| Cash flows from financing activities |
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Definition
| inflows(Borrowing on notes, mortgages, bonds---issuing stock) and outflows(repayment of principal to creditors--repurchasing stock from owners--dividends to owners) |
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Term
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Definition
Increase
1)Collect Accounts Receivable
2)Sale for Cash
3)Sell investment securities for cash
4)issue stock for cash
Decrease
1)Pay accounts payable
2)Prepay rent
3)Pay interest
4)Purchase equipment for cash
5)pay back debt to bank |
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Term
| Additions and Subtractions to Cash Flows from Operating Activities |
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Definition
When Item increases When Item Decreases
1)Deprec. and Ammort. + / NA
2)A/R - / +
3)Inventory - / +
4)Prepaid Expenses - / +
5)Accounts Payable + / -
6)Accrued Exp Pay. + / - |
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Term
| Additions and Subtraction from Investing Activities |
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Definition
1)Buy Property, Plant, equip Outflow
2)Sell Property, Plant, Equip Inflow
3)Purchse investments securities Outflow
4)Sale(Maturity) of Investment Inflow |
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Term
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Definition
| Cash Flows from Operating activities-Dividends-Capital Expenditures |
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Term
| Addition Subtraction from financing activity |
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Definition
1)Borrowing Cash from bank Inflow
2)Repayment of loan principal Outflow
3)Issuance of bonds for cash Inflow
4)Repayment of bond principal Outflow
5)Issuance of stock for cash Inflow
6)Repurchase of stock with cash Outflow
7)Payment of cash dividends Outflow |
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Term
| Noncash investing and financing activities |
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Definition
| are transactions that do not have direct cash flow effects, they are reported as a supplemental to the statement of cash flows in narrative or schedule form. |
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Term
| Three factors of investment |
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Definition
1)Economywide factors:overall health of economy
2)Industry Factors:Sometimes industry can be different from companies
3)Individual company factors:analysis of company |
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Term
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Definition
| Net Profit Margin * Asset Turnover * Financial Leverage |
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Term
| Two methods for making financial comparisons |
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Definition
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Term
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Definition
Net Income + Interest Expense (net of tax) / Avg. Total Assets
Compares income to the total assets used to earn the income
How efficiently assets are used to generate income
Higher is better
Compare to industry and history |
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Term
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Definition
Cash Flows from Operating Activities / Net Income
Evaluates the quality of a company’s earnings
Higher than 1 – high-quality earnings, each dollar of income is supported by one dollar or more of cash flow
Lower than 1 – lower-quality earnings |
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Term
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Definition
Cash + Cash Equivalents / Current Liabilities
Adequacy of available cash
Cash generated from operating activities
Higher is better but too high is uneconomical |
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Term
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Definition
Current Assets / Current Liabilities
Measures the cushion of working capital that companies maintain to allow for the inevitable unevenness in the flow of funds through working capital accounts
$ Current Assets for each $1 in Current Liabilities
Lower is better |
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Term
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Definition
Quick Assets / Current Liabilities
Stringent test of short-term liquidity
Quick assets include: cash, short term investments, and accounts receivable
Measures the safety margin that is available to meet a company’s current liabilities
$ Cash and Near-Cash Assets for every $1 in Current Liabilities
Higher is better
Compare to history and industry |
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Term
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Definition
Net Credit Sales / Avg. Net Receivables
High receivable turnover ratio suggests that a company is effective in its credit-granting and collection activities
Higher is better but too high can be bad because it could result in a loss of sales |
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Term
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Definition
Cost of Goods Sold / Avg. Inventory
Measures both operating and liquidity efficiency
Reflects the relationship of inventory to the volume of goods sold during the period
Higher is better but too high can be a problem as well
Compare to history and industry |
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Term
| Time interest earned ratio |
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Definition
Net Income + Interest Expense + Income Tax Expense/Interest Expense
Ability to make interest payments |
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Term
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Definition
Cash Flows from Operating Activities before Interest & Taxes/
Interest Paid (from statement of Cash Flows)
Compares the cash generated by a company to its cash obligations for the next period
$ Generated for every $1 of interest paid
Higher is better |
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Term
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Definition
Total Liabilities / Stockholder’s Equity
For every $1 of stockholder’s equity, $ of liabilities
Lower is less risky |
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Term
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Definition
Dividends per Share / Market Price per Share
Higher is better
Compare to history and industry |
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Term
|
Definition
contractual obligation
Debt covenants
repayment
increased financial risk |
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Term
| benefits of incurring debt |
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Definition
tax advantage for interest
does not dilute ownership
financial leverage |
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Term
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Definition
hybrid between common stock and bonds
preferred dividends
no voting rights |
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Term
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Definition
regular interest payment
less risky than stocks
stockholders maintain control
interest expense is tax deductible
impact on earnings is positive |
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Term
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Definition
risk of bankruptcy
negative impact on cash flows |
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Term
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Definition
| when investors buy stock in a company they have limited liability |
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Term
| Benefits of being a stockholder in a corporation |
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Definition
voice in management
dividends
residual claim |
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Term
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Definition
| states in the articles of incorporation(corporation charter) |
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Term
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Definition
stock that has been previously sold and then bought back by the company
contra account to stockholders equity on balance sheet(debit balance) |
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Term
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Definition
| permanent amount of capital defined by state law that must remain invested in the business, serves as a cushion for creditors |
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Term
| Initial public offering(IPO) |
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Definition
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Term
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Definition
| account within accounts receivable or payable with name of individual company |
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Term
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Definition
| bases bad debt expense on an estimate of uncollectible accounts |
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Term
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Definition
| is the expense associated with estimated uncollectible accounts receivable |
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Term
| allowance for doubtful accounts |
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Definition
| is a contra-asset accounts containing the estimated uncollectible accounts receivable |
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Term
| percentage of credit sales method |
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Definition
| bases bad debt expense on the historical percentage of credit sales that result in bad debts |
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Term
| aging of accounts receivable method |
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Definition
| estimates uncollectible accounts based on the age of each account receivable |
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Term
| cost of goods sold equation |
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Definition
| beginning inventory+purchase-ending inventory |
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Term
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Definition
assumes that the first goods purchased are the first goods sold.
used for inventory with decreasing costs |
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Term
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Definition
assumes the most recently purchased unites are sold first.
used with inventory with increasing costs and normally results in lower income taxes |
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Term
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Definition
| uses the weighted average unit cost of the goods available fro sale for both cost of goods sold and ending inventory |
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Term
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Definition
| is a contra-asset for the excess of fifo over lifo inventory |
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Term
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Definition
Close ties between Enron & Arthur Anderson – sharing of office buildings, family gatherings & vacations
Tone at the top – too much pressure from top management
Performance review system – rating scale which would make you lose your job if you didn’t meet numbers
Mark to Market: industry practice (exception to historical cost) that allowed for present value of the stream of future inflows & expenses under a contract to be recognized as revenues & expenses
1)Business ethics
2)revenue recognition |
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Term
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Definition
Tone at the Top: Management set ambitious targets for revenues & earnings
Listed non-recurring revenue as recurring when they sold goods of their own network
Classified gains as revenues
Didn’t use full disclosure
8)Matching Principle
3)Revenue Recognition |
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Term
Waste Management(Case 4 and 5)
Basketing
Bundling |
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Definition
o Abandoned landfills that couldn’t get required permits were just added to current landfill costs so the expenses could be deferred (known as basketing)
o Took advantage of capitalization of interest on the landfills because they took so long to acquire the specific permits
o Capitalized on costs rather then record them as expenses in the period which they were incurred
o Made changes to estimated useful lives of their vehicles, containers and equipment with no real reason to change them except that is lessened the amount on depreciation expense in a given period
4)matching principle
5)matching principle
Commingling impaired or abandoned landfill project costs with the costs of a permitted site
Transferred unamoritized costs from landfill facilities that had closed earlier than expected to other facilities that were still in operation |
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Term
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Definition
o Overstatement of revenue
o Understatement of line costs: they released their line costs with no real reason or backing
matching principle |
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Term
|
Definition
o Offered discounts and incentives to get customers to order in that period instead of next one but they failed to disclose this information in their financial statements
o Bill & Hold of products were not requested by customers – basically they were shipping out products that had never been ordered by the customer
Revenue recognition |
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Term
| Fraud and Earnings management |
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Definition
Earnings Management: selecting accounting policies within the constraints of GAAP, with an eye toward maintaining a desired pattern of earnings (normally to the benefit of the company)
How to effect financial statements:
Increase earnings: accelerate revenues, defer/reduce expenses
Decrease earnings: accelerate expenses, defer/reduce revenue
Fraudulent Financial Reporting: intention, reckless conduct, whether by act of omission, that results in materially misleading financial statements – it is ILLEGAL behavior
Fraud Triangle: incentive, opportunity, rationalization
Impacts: creditors, owners, employees, accounting profession |
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Term
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Definition
act of congress signed in 2002 that was designed to protect investors by improving the accuracy and reliability of corporate disclosures
Creating of the PCAOB
New Roles for Audit Committees and Auditors
Criminal Penalties
Protection for Whistleblowers
Financial Reporting and Auditing Process Changes
Certification by CEO & CFO regarding validity of annual report |
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