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Accounting
- universal language of business
- converts raw data into something used to make business decisions
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General anounting conventions
accounting period, GAAP, accounting methods
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accounting period
length of time covered by a financial statement
usually 1 year and calendar year
can also have interm statements (less than a year reports)
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generally accepted accounting principles (GAAP)
set of accounting principles and procedures that guide the preparation of financial statements
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2 methods of accounting
cash= income and expenses are recorded when they are paid
accrual= income and expenses are recorded when they are incurred (once money comes in)
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Financial Statements: describes the financial health of a company
balance sheet
income statement
statement of cash flow
statement of owners equity
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balance sheet
statement of business financial position
one point in time
assets= liabilities + owners equity
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Assets
tangible or intangible
current or fixed
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tangible vs intangible assets
tangible= have physical form
intangible= are not physical but still have value
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current vs fixed assets
current= asset expected to be sold in less than 1 year ( cash, CD, accounts, inventory)
fixed= asset expected to be sold in more than 1 year (building, computer, equipment)
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liquidity
how quickly assets can be converted into cash
on balance sheet listed in decreaseing order of liquidity (most liquid first)
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Liabilities
a debut that needs to be re paid
current or fixed
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current vs fixed liabilities
current= items that must be paid in less than 1 year (salary, income tax)
fixed= items that must be paid back in more than 1 year (mortgage, loan)
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Owners equity
owners equity= total assets - total liabilities
2 souces- contributed cash and retained earnings
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contributed cash
the amount invested in a business by the owner
money the owner puts into the business
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retained earnings
income earned through operations
profit that is re invested into the company
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income statement
profit and loss statement
shows weather a business made a profit
over a specific period in time
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income statement
revenues- expenses= net income
sales/revenue
cost of goods sold (COGS)
gross profit
expenses
net income
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net sales or revenue
the dollar value of the merchandise sold (amount sold)
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cost of goods sold
the cost of obtaining inventory for the pharmacy
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gross profit
total revenue remaining after subtracting out the COGS
gross profit = sales - COGS
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Expenses
any other expenditures excuding COGS
fixed and variable
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fixed vs variable expenses
fixed= cannot easily be changed (mortgage)
variable= things you can easily change (advertising)
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statement of cash flows
shows cash in and out over a specific period of time
assess short term ability of the business to pay its bills (liquidity of the business)
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Cash flow components
operating activities
investing actvities
financing activities
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operating activities
transactions that determine net income
sales and production of product
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investing activities
impact long term assets
purchase of land or equipment
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financing activities
influences long term liabilities and owners equity
banks and dividends
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Statement of owners equity
net income
net loss
dividends paid out
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Retained earnings
income earned through operations that is not given to shareholders in the form of dividends
over a period of time
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