WGU C213 Accounting for Decision Makers
WGU C213 Accounting for Decision Makers
Accounting
the recording of the day-to-day financial activities of a
company and the organization of that information into
summary reports used to evaluate the company's financial
status
Bookkeeping
the preservation of a systematic, quantitative record of an
activity
accounting system
used by a business to handle routine bookkeeping tasks
and to structure the information so it can be used to
evaluate the performance and financial status of the
business
Accounting information
Info that is intended to be useful in making decisions about
the future.
The balance sheet, the
What are the three primary financial statements?
income statement, and
the statement of
cashflows
External Users
Who is financial accounting information primarily prepared
for and used by?
Managerial Accounting
the name given to accounting systems designed for
internal users
Balance Sheet
Reports a company's assets, liabilities, and owners' equity
Income Statement
reports the amount of net income earned by a company
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during a period
Net income
the excess of a company's revenues over its expenses
statement of cash flows
reports the amount of cash collected and paid out by a
company in the following three types of activities:
operating, investing, and financing
FASB
Which private body establishes accounting rules in the
U.S.?
Financial Accounting
a private body established and supported by the joint
Standards Board (FASB)
efforts of the U.S. business community, financial analysts,
and practicing accountants
The Securities and
the organization that regulates U.S. stock exchanges and
Exchange Commission
seeks to create a fair information environment in which
(SEC)
investors can buy and sell stocks without fear that
companies are hiding or manipulating financial data
American Institute of
the professional organization of certified public
Certified Public
accountants (CPAs) in the United States
Accountants (AICPA)
Public Company
the organization that inspects the audit practices of
Accounting Oversight
registered audit firms and has statutory authority to
Board (PCAOB)
investigate questionable audit practices and to impose
sanctions such as barring an audit firm from auditing SECregistered companies
Internal Revenue
Gov't agency that establishes rules to define exactly when
Service (IRS)
income should be taxed. It has no role in setting financial
accounting rules; and a company's financial statements are
not used in determining how much tax the company must
pay
The International
Organization that was formed to develop a common set of
Accounting Standards
worldwide accounting standards. Its standards are
Board (IASB)
increasingly accepted worldwide, but FASB rules are still
the standard in the United States.
1. Rapid Advancements
Which 3 factors have combined to make right now a time
in the IT field
of significant change in accounting?
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2. the international
integration of
worldwide business
3. Increased scrutiny
associated with large
corporate accounting
scandals
Sarbanes-Oxley Act
A wave of accounting scandals starting in 2001 resulted in
this act, which increases U.S. federal government scrutiny
of the production of financial statements.
Balance Sheet
reports a company's financial position at a specified point
in time and lists the company's resources (assets),
obligations (liabilities), and net ownership interest (owners'
equity).
Assets
probable future economic benefits obtained or controlled
by a company as a result of past transactions or events
Liabilities
probable future sacrifices of economic benefits arising
from present obligations of a company to transfer assets or
provide services in the future as a result of past
transactions or events
Owners' equity
the residual interest in the assets of a company that
remains after deducting its liabilities
Assets = Liabilities +
What is the accounting equation?
Owners' Equity
By order of liquidity
In what order are assets typically listed on the balance
sheet?
Current and Long-term
Liabilities are divided into which 2 categories on the
balance sheet?
states that the financial
What is the entity concept?
results of an economic
entity should be
reported separately
from the financial
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results of other entities,
even though all those
entities may be
controlled by the same
person
(revenues-expense= net
Equation to calculate net income
income)
When work has been
According to accounting rules, when should revenue be
done and collectability
recognized?
of cash can be
reasonably assured
Operating activities
those activities that comprise the day-to-day operations of
a business.
Investing activities
The purchase and sale of long-term assets such as land
and equipment are known as _______________.
Financing activities
those activities through which cash is obtained from, or
repaid to, creditors and investors
information on the
What information do the notes to accounting statements
accounting assumptions
provide?
used in preparing the
statements and
supplemental
information not
included in the
statements themselves
1. Summary of
What are the 4 general types of accounting notes?
accounting policy
2. Additional info about
summary totals
3. Disclosure of info not
included in summary
4. Supplemental
disclosure required by
FASB or SEC
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Conservatism
the practice of recognizing all losses but not recognizing
gains until they are certain
Materiality
the concept that weighs whether a certain dollar amount is
large enough to make a difference to anyone
Articulation
the idea that the three primary financial statements are
interrelated
Debt Ratio
Percentage of funds needed to purchase assets that were
obtained through borrowing
Total Liabilities/
Total Assets
Current Ratio
Measure of liquidity; number of times current assets could
cover current liabilities
Current Assets/
Current Liabilities
Return on Sales Ratio
Number of pennies earned during the year on each dollar
of sales
Net Income/
Sales
Asset Turnover
Number of dollars of sales during the year generated by
each dollar of assets
Sales/
Total Assets
Return on Equity
Number of pennies earned during the year on each dollar
invested
Net Income/
Stockholder's Equity
Price-earnings Ratio
Amount investors are willing to pay for each dollar of
earnings; indication of growth potential
Market Value of Shares/
Net Income
1) to predict a
What are the two main purposes of financial statement
company's future
analysis?
profitability and cash
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flows
2) to identify and
improve potential
problem areas
financial ratios
relationships between two financial statement numbers
and are often used in analyzing and describing a
company's performance
financial docs that allow
Common-size financial statements
comparison of financial
statements across years
and between
companies and are
prepared by dividing all
financial statement
numbers by sales for
the year
Return on sales is
In terms of ROE, define profitability.
computed as net
income divided by sales
Asset turnover is
In terms of ROE, define efficiency.
computed as sales
divided by assets and is
interpreted as the
number of dollars in
sales generated by
each dollar of assets
Assets-to-equity ratio is
In terms of ROE, define leverage.
computed as assets
divided by equity and is
interpreted as the
number of dollars of
assets a company is
able to acquire using
each dollar invested by
stockholders
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the profitability of each
Margin
dollar in sales and
turnover is the degree
NOTE: Companies with a low margin can still earn an
to which assets are
acceptable level of return on assets if they have a high
used to generate sales
turnover.
current asset
an asset that is expected to be used within one year of the
balance sheet date
cash, accounts
What are the most common current assets?
receivable, and
inventory
Property, plant, and
What are the primary long-term assets?
equipment (PPE)
companies report the
Which intangible assets are reported on the balance
intangibles that they
sheet?
have purchased from
other companies but
not the intangibles that
they have developed
themselves
current liability
those obligations that are expected to be paid or
otherwise satisfied within one year
long-term bank loans,
What are 3 common sources of long-term debt?
mortgages, and bonds
Common stockholders
What is the difference between a common stockholder
are the true owners of a
and a preferred stockholder?
business; Preferred
stockholders give up
some of the rights of
ownership enjoyed by
common stockholders
in exchange for some of
the safety promised to
creditors
Retained Earnings
the cumulative amount of corporate profits that have been
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retained within the business rather than being paid out to
stockholders as dividends
treasury stock
the amount the corporation has spent to buy back its own
shares from stockholders
2 years, Comparative
How many years worth of balance sheets does a company
side-by-side format
usually provide and how are they typically formatted?
Cash
What is the first item that is usually listed on a U.S. balance
sheet?
Long-term assets
What is the first item that is usually listed on a non-U.S.
balance sheet?
working capital
The difference of current assets-current liabilities
Recognition (In terms of
the process of condensing all estimates and judgments
accounting)
into one number and reporting that one number in the
formal financial statements
disclosure
An alternative way to report information, describing details
in a narrative note
Transaction Analysis
is the process of determining how an economic event
impacts financial statements
Asset Mix
the proportion of total assets in each asset category that is
largely determined by the industry in which the company
operates
Income from
What is the best measure of sustainable profitability?
Continuing Operations
Gross Profit
the difference between the selling price of a product and
the cost of the product
Operating Income
gross profit minus all other expenses except for interest
and taxes; measures the performance of the fundamental
business operations conducted by a company
Income from
operating income minus interest expense, minus income
Continuing Operations
tax expense, and plus or minus other miscellaneous
revenue and expense items, and gains and losses from
peripheral transactions and events
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Net Income
income from continuing operations plus or minus the
results of discontinued operations and extraordinary items,
net of their respective income tax effects
Comprehensive Income
net income plus or minus adjustments for changes in
company wealth stemming from changes in certain
exchange rates, interest rates, or financial instruments'
values
Gains, Losses,
What are the 4 primary item categories listed on the
Revenues, and
income statement?
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Expenses
selling goods, providing
What are some common business activities that generate
services, Earning
revenue?
interest by providing
loans
cost of goods sold;
What are the key expense items commonly found on the
selling, general, and
income statement?
administrative expense,
depreciation expense,
income tax expense,
and interest expense
External
Do gains/losses reported on the income statement arise
from internal or external activities?
Income from
Which items are considered "below-the-line" items?
discontinued operations
and extraordinary items
Earnings per Share
the amount of net income associated with each share of
(EPS)
stock
When value has been
When should revenue be recognized on an income
delivered to customers
statement?
(typically only after the
required work has been
performed and after the
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collection of cash is
reasonably assured)
matching
the concept that states that an expense should be
recognized in the same period in which the revenue it was
used to generate is recognized
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