Chapter 17

-Accounting: The process of collecting, recording, classifying,

summarizing, reporting and analyzing financial activities.
-Managerial accounting: Accounting that provides financial information
that managers inside the organization can use to evaluate and make
decisions about current and make decisions about current and future
operations.
-Financial accounting: Accounting that focuses on preparing external
financial reports that are used by outsiders such as lenders, suppliers,
investors, and government agencies to assess the financial strength of a
business.
-Generally accepted accounting principles (GAAP): The financial
accounting standards followed by accountants in the USA when
preparing financial statement.
-Annual Report: A yearly document that describes a firms financial
status and usually discusses the firms activities during the past year
and its prospects for the future.
-Public Accountants: Independent accountants who serve organizations
and individuals on a fee basis.
-Auditing: The process of reviewing the records used to prepare financial
statement and issuing a formal auditors opinion indicating whether the
statements have been prepared in accordance with accepted accounting
rules.
-Private accountants: Accountants who are employed to serve one
particular organization.
-Sarbanes-oxley act: Act passed in 202 that sets new standards for
auditor independence, financial disclosure and reporting, and internal
controls; establishes an independent oversight board; and restricts the
type of nonaudit services auditors can provide audit clients.
-Assets: Things of value owned by a firm. (resources of a company)
-Liabilities: What a firm owes to its creditors; also called debts.
(companys obligations)
-owners equity: The total amount of investment in the firm minus any
liability; also called net worth.

Assets Liabilities = Owners equity

-accounting cycle: The process of generating financial statements,

beginning with a business transaction and ending with the preparation of
the report.
1 step: Analyze business transaction documents
2 step: Record business transactions in journal
3 step: Post journal entries to ledgers
4 step: Prepare trial balance
5 step: Prepare financial statements and management reports
from account data.
6 step: Analyze reports
-balance sheet: A financial statement that summarizes a firms financial
position at a specific point in time.
-current assets: Assets that can or will be converted to cash within the
next 12 months. (cash, marketable securities, accounts receivable,
inventory)
-fixed assets: Long-term assets used by a firm for more than a year such
as land, buildings, and machinery. ( Land & buildings, machinery &
equipment, furniture and fixtures)
-depreciation: The allocation of an assets original cost to the year in
which it is expected to produce revenues.
-intangible assets: Long- term assets with no physical existence, such as
patents, copyrights, trademarks and goodwill. (Patents, copyrights,
trademarks and goodwill)
-current liabilities: Short- term claims that are due within a year of the
date of the balance sheet. (accounts payable, notes payable, accrued
expenses, income taxes payable and current portion of long-term debt)
-long term liabilities: Claims that come due more than one year after the
date of the balance sheet. (bank loans, mortgages on buildings, and
companys bonds sold to others)
-retain earnings: The amounts left over from profitable operations since
the firms beginning; equal to total profits minus all dividends paid to
stockholders.
-income statement: A financial statement that summarizes a firms
revenues and expenses and shows its total profit or loss a period of time.

-revenues: The dollar amount of a firms sales plus any other income it
received from sources such as interest, dividends and rents.
-gross sales: The total dollar amount of a companys sales.
-net sales: The amount left after deducing sales discounts and returns
and allowances from gross sales.
-expenses: The costs of generating revenues.
-costs of goods sold: The total expense of buying or producing a firms
good services.
-gross profit: The amount a company earns after paying to produce or
buy its products but before deducing operating expenses.
-operating expenses: The expenses of running a business that are not
directly related to producing or buying its products.
-net profit (net income): The amount obtained by subtracting all of a
firms expenses form its revenues, when the revenues are more than the
expenses.
-net loss: The amount obtained by subtracting all of a firms expenses
form its revenues, when the expenses are more than the revenues.
-statement of cash flows: A financial statement that provides a summary
of the money flowing into and out of a firm during a certain period,
typically one year.
-ratio analysis: The calculation and interpretation of financial ratios using
data taken from the firms financial statements in order to assess its
condition and performance.
-liquidity ratios: Ratios that measure a firms ability to pay its short-term
debts as they come due.
-current ratios: The ratio of total current assets to total current liabilities;
used to measure a firms liquidity.
-acid-test (quick) ratio: The ratio of total current assets excluding
inventory to total current liabilities; used to measure a firms liquidity.
-net working capital: The amount obtained by subtracting total current
liabilities from total current assets; used to measure a firms liquidity.
-profitability ratios: Ratios that measure how well a firm is using its
resources to generate profit and how efficiently it is being managed.

-net profit margin: The ratio of net profit to net sales; also called return
on sales. It measures the percentage of each sales dollar remaining after
all expenses, including taxes, have been deducted.
-Return on equity(ROE): The ratio of net profit to total owners equity;
measures the return that owners receive on their investment in the firm.
-Earning per share (EPS): The ratio of net profit to the number of shares
of common stock outstanding; measures the number of dollars earned
by each share of stock.
-Activity ratios: Ratios that measures how well a firm uses it assets.
-debt ratios: Ratios that measure the degree and effect of a firms use of
borrowed funds (debt) to finance its operations.

Chapter 18

-Money: Anything that is acceptable as payment for goods and

services.
-Scarcity: Money should be scarce enough to have some value but not so
scarce as to be unavailable. Too much money in circulation increases
prices(inflation. Government control the scarcity of money by limiting
the quantity of money circulation.
-durability: Any item used as money must be durable. (metals coins
which last more time)( a banana is useless when it spoils)

-portability: Money must be easily moved around. (large or bulky stuff

cant be transported easily)
-divisibility: Money must be capable of being divided into smaller parts.
Divisible forms of help make transactions of all sizes and amounts
possible.
-functions of money: Medium of exchange, standard of value and store of
value.
- federal reserve system: The central bank of the United States. It
consists of 12 district banks, each located in a major U.S. city.
-open market operations: Purchase or sale of
U.S. government bonds.
-reserve requirement: Cash amount for
banks to hold.
-discount rate: Interest rate charged by Fed
to member banks.

chapter 19
Financial Management: The art and science of managing a firms
money so that it can meet its goals.
Cash Flows: The inflows and outflows of cash for a firm.
Financial Mangers responsibilities and activities:
-

Financial Planning: Prepare a financial plan which projects,

revenues and expenditures
Investment: Investing the firms funds in projects and securities
Financing: Obtaining funding for the firms operations and
investments.

The goal of the financial manager: Is to maximize the value of the

firm to its owners.
Forecasting the future: Projections of future developments within the
firm.

Budgets: Formal written forecasts of revenues and expenses

that set spending limits based on operational forecasts; include
cash budgets, capital budgets, and operating budgets.

Cash budgets: budgets that forecast a firms cash flows and outflows
and help the firm plan for cash surpluses and shortages.
Capital budget: Budgets that forecast a firms outlays for fixed assets
(plan and equipment), typically covering a period.
How organization use funds:

Short-term expenses support the firms day-to-day activities

with current selling and production activity. (cash
management, accounts receivable, inventory)
Long-term: expenses are typically for fixed assets. Funds are
used in long-lived assets, such as: machinery, building,
equipment, and information system.(capital expenditures,
capital budgeting, )

Obtaining short-term financing: Firm raise funds by borrowing

money(debt), sell ownership shares(equity), and retain earnings (profits).

Short-term loans come due within one year

Long-term loans have maturity greater than one year.

MLA
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