Accounting terms from Module 1 and Chapter 1
Terms
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- Fixed Assets
-
Tangible, relatively long-lived resources. The business has acquired these assets ordinarily in order
to use them in the production of other goods and services. These assets will wear out and be replaced over the long run; therefore, each year they are depreciated (a paper loss in the value of fixed assets). - Revenues
- Increases in equity generated by sales - often called "net sales"
- Expenses
- Reductions in equity incurred to earn revenue
- Solvency
- Having enough money to pay bills as they come due
- Net Income
- The extent to which net sales generated during the accounting period exceeded expenses incurred in producing the sales. Also called "earnings" or "profits"
- Net Sales
-
Increases in equity generated by sales - often called "net sales"
Often called "revenues" or "net revenues" - Cost of goods sold
- Often called "cost of sales", includes all expenses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.
- Accrual accounting
- Revenue is recognized at the time of sale, not when the customer pays. Liabilities recognized when liability accrued, not when paid
- Imputed
- Estimated
- MD&A
- Management discussion and analysis. One type of formal financial reporting.
- Equity financing
- Resources contributed to the company by its owners along with any income retained by the company - no legal obligation to repay
- Creditor financing
- Resources contributed from nonowners - legal obligation to repay
- Investing creditors
- Those who primarily finance investing activities (such as bank lenders). Obligations are generally interest bearing and legally binding
- Operating creditors
- Those who primarily finance operating activities (such as suppliers). Obligations are generally non-interest bearing.
- Investing activities
- acquisition and disposition of assets that a company uses to produce and sell its products and services
- Operating assets
- resources devoted to executing a company's primary operating activities
- Nonoperating (financial) assets
- resources devoted to nonoperating activities, excess resources held for future expansion of unexpected needs
- Operating activities
- The use of company resources to produce, promote, and sell products and services
- Input markets
- Suppliers of materials and labor
- Output markets
-
Customers of products and services, generate operating revenues (operating sales) to customers. Also generate some
operating expenses such as marketing and distributing products and services to customers - Operating expenses (costs)
- Expenses such as inventory, salaries, materials, and logistics
- Operating income
- (also operating profit or operating earnings)when operating revenues exceed operating expenses.
- Contributed capital
- net amount contributed by shareholders, includes preferred stock, common stock, and additional paid-in capital
- Retained earnings
-
(falls under earned capital) The amount of income retained in the business and not distributed to shareholders in the form
of dividends. Includes cumulative net income or loss, minus dividends - Earned capital
- the combination of retained earnings and accumulated other comprehensive income
- Net profit margin
- income to sales ratio
- Asset turnover
-
sales / average assets
Tells how efficient a company is in generating sales from its assets. The higher the number, the more efficient the company. - Market efficiency
- Markets are efficient if at any given time current stock prices reflect information that determines those prices.
- ROA (Return on Assets)
-
Net income / average assets
or
net income / average assets = profit margin x asset turnover - profit margin equation
- net income / sales
- Profit Margin
- Net income / sales. Net income / revenue. Indicator of profitability. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage.