Basic Accounting Principles

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Make more money than you spend to sell or manufacture products. The chief accountant in many offices is called the controller. Deciding on the timing of revenue and expenses and putting definite values on these factors require judgments, estimates, and interpretations. Depreciation refers to spreading out the cost of a fixed asset over the years of its useful life to a business, instead of charging the entire cost to expense in the year the asset was purchased. Many people use a CPA to do their returns; others do it themselves. The chief executive of a business (usually the CEO in a publicly held corporation) has the primary responsibility to make sure that the financial statements have been prepared according to generally accepted accounting principles (GAAP) and the financial report provides adequate disclosures. A corporation is separate from its owners. Financial statement ratios are also useful because they enable the reader to compare a business’s current performance with its past performance or with another business’s performance, regardless of whether sales revenue or net income was bigger or smaller for the other years or the other business. ROE is also calculated for public corporations, but it plays a secondary role to other ratios. Accountants refer to these as compensatory effects. It’s a promise of case that the business will receive. Do you report it before or after any collection efforts are exhausted? .  . This is the gross margin divided by the sales revenue. However, changes in prepaid expenses are usually much smaller than changes in those other two asset accounts. This is where profit smoothing can come into play to manipulate earnings. The ROA ratio is determined by dividing the earnings before interest and income tax (EBIT) by the net operating assets. -Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. CEOs must now certify that their financial statements are faithful representations of the financial position and results of operations of their companies and rely more heavily on internal controls to detect any misstatement that would otherwise be contained in these financials. Variable costs vary proportionately with changes in production/ Relevant costs are essentially future costs that could be incurred, depending on what strategic course a business takes. General partners are subject to unlimited liability. An accounts is a separate record, or page for each asset and each liability. the more shares a business issues, the smaller the percentage of total owners’ equity each share represents.  . Many of them run their farms year to year by taking loans to plant the crops. Accounting Principles If everyone involved in the process of accounting followed their own system, or no system at all, there’s be no way to truly tell whether a company was profitable or not.  . What is the Sarbanes-Oxley Act? The Sarbanes-Oxley Act of 2002 is a United States federal law passed in response to the recent major corporate and accounting scandals including those at Enron, Tyco International, and WorldCom (now MCI). The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information. Another form of accounting that we all dread is the filing of annual federal income tax returns. . Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. It doesn’t matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. . A large number of public companies include only condensed financial information rather than comprehensive financial statements. While some of Quasar’s menu options are only mouse-accessible, the bulk of Quasar’s user interface is designed in such a way that you can keep you hands on the keyboard by using special shortcuts. So how is a small business owner to even begin a prudent savings program for long-term success? Realizing that your business needs a savings plan is the first step toward better management. The accountant records the sales revenue and the cost of goods sold for these sales in the year in which the sales were made and the products delivered to the customer. A business that spends a significant amount of money for employee training and development may delay these programs until the next year so the expense in the current year is lower. New investments are signs of growing or upgrading the production and distribution facilities and capacity of the business. Until the returns are made, the business records the shipments as if they were actual sales. Some companies have their own payroll departments; others outsource it to specialists. Additionally, the inventory capabilities go beyond simple record-keeping. That occurred when the business invested in those tangible assets. In a privately held company, this is also called owner’s equity, since anything that’s left over after all the bills are paid, to put it simply, belongs to the owners. It indicates how much net income was earned on each $100 of sales revenue. Over-recording sales revenue is the most common technique of accounting fraud. . What is their secret for operating profitably? * Think before you spend. The SEC does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company’s stock share if the company received an adverse opinion from its CPA auditor. Gains and Losses It would probably be ideal if business and life were as simple as producing goods, selling them and recording the profits. If you’re a business grossing $250,000 per month, the mere thought of saving over $1. Much of the information in an internal profit report is confidential and should not be divulged outside the business. Profit can be called different things, for a start. Accountants need to determine many other costs, in addition to product costs, such as the costs of the departments and other organizational units of the business; the cost of the retirement plan for the company’s employees; the cost of marketing and advertising; the cost of restructuring the business or the cost of a major recall of products sold by the company, should that ever become necessary. The P/E ratio gives you an idea of how much you’re paying in the current price for stock shares for each dollar of earning. To prepare a reasoned and thoughtful budget, an accountant must start with a broad-based critical analysis of the most recent actual performance and position of the business by the managers who are responsible for the results. It’s a critical function. Items can be grouped into various categories and the groups can be nested many levels deep. . Many publicly owned businesses make their required filings with the SEC, but they present very different annual financial reports to their stockholders. Lawsuits and other legal actions can cause extraordinary losses or gains as well. As computer systems make information timelier, internal auditors help managers to base their decisions on actual data, rather than personal observation. Other information is voluntary and not strictly required legally or according to GAAP. Disclosure Financial statements are the backbone of a complete financial report. It’s not derived from one element or another. However, the amount of money in accounts receivable is included in the total sales revenue for that same period. Specific job duties vary widely among the four major fields of accounting: public, management, and government accounting and internal auditing. An auditor judges whether the business’s accounting methods are in accordance with generally accepted accounting principles (GAAP). The P/E ratio gives you an idea of how much you’re paying in the current price for stock shares for each dollar of earning. Much of the information in an internal profit report is confidential and should not be divulged outside the business. One transaction can affect several accounts. What is earnings per share Publicly owned companies must report earnings per share (EPS) below the net income line in their income statements. Promotions can be created and discounts can be given based on date, customer, or store location. CEOs must now certify that their financial statements are faithful representations of the financial position and results of operations of their companies and rely more heavily on internal controls to detect any misstatement that would otherwise be contained in these financials. The reasons for growing a financial nest egg are strong. Audits are one means of keeping misleading financial reporting to a minimum. In the real business world, you generally can’t enjoy growth in revenue without incurring additional expenses. When considering any new business expense, including marketing and sales activities, evaluate the increased earnings you expect to bring in against its cost before you proceed to make a purchase. Private businesses don’t have to report EPS because stockholders focus more on the business’s total net income. Many people use a CPA to do their returns; others do it themselves. The intelligent design of Quasar’s user interface allows for quick and easy data entry. Much of the time, a business hasn’t collected its receivables in full by the end of the fiscal year, especially for such credit sales that could be transacted near the end of the accounting period. Investigation may also occur in civil matters. But unless a CPA has done an audit, he or she has to be very careful not to express an opinion of the external financial statements. There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be chaos! . What is financial window dressing? Financial managers can do certain things to increase or decrease net income that’s recorded in the year. How to analyze a financial statement It’s obvious financial statement have a lot of numbers in them and at first glance it can seem unwieldy to read and understand. The intelligent design of Quasar’s user interface allows for quick and easy data entry. Profit is also sometimes called taxable income. Review your books monthly and see where you can trim expenses and reroute the savings to a separate account. In reporting depreciation expense, a business can use a short-life method and load most of the expense over the first few years, or a longer-life method and spread the expense evenly over the years. Some things that companies do that can constitute fraud are: –Not listing prepaid expenses or other incidental assets –Not showing certain classifications of current assets and/or liabilities –Collapsing short- and long-term debt into one amount. In other circumstances, a business might decide to discontinue certain product lines. Profit making activities are reported in the income statement; financing and investing activities are found in the statement of cash flows. Many CPAs consider this just one stepping stone to their careers. The business can put off recording some of its bad debts expense until the next reporting year. Named after sponsors Senator Paul Sarbanes (D-Md. Or a business may engage in channel stuffing. This will also help to keep you on track with cash flow and other financial issues. Businesses are expected to maintain a minimum 2:1 current ratio, which means its current assets should be twice its current liabilities. Every step in the production process has to be tracked carefully from start to finish. Try to remember that you didn’t build your business overnight and you cannot build a savings account instantly either. Who wouldn’t want a career that offers such stability, excitement, and financial rewards? In short, forensic accounting requires the most important quality a person can possess: the ability to think. The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit. As the sold proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all it liabilities, the creditors to whom your business owes money can come after your personal assets. But of course these have definitions like everything else. They might include automatic deposits, or refunds or other electronic deposits. Other deductions include personal ones, such as for retirement, vacation, sick pay or medical benefits. An adverse audit opinion says that the financial statements of the business are misleading. The acid-text ratio is calculated by dividing the liquid assets by the total current liabilities. Profit and Loss It might seem like a no-brainer to define just exactly what profit and loss are. A large number of public companies include only condensed financial information rather than comprehensive financial statements. . The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. To do this, all the accounts need to be up to date. The mission of GAAP over the years has been to standardize accounting methods in order to bring about uniformity across all businesses. Without a careful examination of the evidence supporting the amounts reported in the financial statements, the CPA is in no position to give an opinion on the financial statements prepared from the accounts of the business. Instead of an audit, which they can’t really afford, many smaller businesses have an outside CPA come in on a regular basis to look over their accounting methods and give advice on their financial reporting. What is acid test ratio and ROA ratio? Investors calculate the acid test ratio, also known as the quick ratio or the pounce ratio. After completing an audit examination, the CPA prepares a short report stating that the business has prepared its financial statements, according to generally accepted accounting principles (GAAP), or where it has not. Making a profit in a business involves several variable, not just increasing the amount of cash that flows through a company, but management of other assets as well. One business applies the accounting methods in a conservative manner, and another business applies the methods in a more liberal manner. When reporting long-term debt, however, both the total amounts and the repayments on long-term debt during a year are generally reported in the statement of cash flows. –The Securities and Exchange Commission (SEC) mandates disclosure of a broad range of information for publicly held companies. One business applies the accounting methods in a conservative manner, and another business applies the methods in a more liberal manner. One partnership created by Enron, Chewco Investments (named after the Star Wars character Chewbacca) allowed Enron to keep $600 million in debt off of the books it showed to the government and to people who own Enron stock. Without a careful examination of the evidence supporting the amounts reported in the financial statements, the CPA is in no position to give an opinion on the financial statements prepared from the accounts of the business. In a privately held company, this is also called owner’s equity, since anything that’s left over after all the bills are paid, to put it simply, belongs to the owners. Beyond carrying out the fundamental tasks of the occupation-preparing, analyzing, and verifying financial documents in order to provide information to clients-many accountants now are required to possess a wide range of knowledge and skills. As it’s used in the term balance sheet, it refers to the balance of the two opposite sides of a business, total assets on one side and total liabilities on the other. The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit. Fortunately, there are several excellent software packages that can help you manage this important function. Taxable income – This is the balance of income that’s subject to taxes after personal exemptions and deductions are factored in. With this change, Enron began to function more as a middleman than a traditional energy supplier, trading in energy contracts instead of buying and selling natural gas. It’s not enough for the accountant to add back depreciation for the year to bottom-line profit. It’s what our economy is founded on. Opportunities for qualified forensic accounting professionals abound in private companies. Likewise if your own legal fees and damages or fines are excessive, then these can significantly impact the income statement. When considering any new business expense, including marketing and sales activities, evaluate the increased earnings you expect to bring in against its cost before you proceed to make a purchase. Both scenarios can be equally devastating. this period, the business pays cash for next period’s prepaid expenses, which affects this period’s cash flow, but doesn’t affect net income until the next period. Some things that companies do that can constitute fraud are: –Not listing prepaid expenses or other incidental assets –Not showing certain classifications of current assets and/or liabilities –Collapsing short- and long-term debt into one amount. The hypothetical amount of taxable income, if the accounting methods used were used in the tax return is calculated. If it’s a good year, a profitable one, then they can pay off their loan; if not, they might have to carry the loan over, and accrue more interest charges. However, the balance of an account, such as the asset, liability, revenue and expense accounts, refers to the amount in the account after recording increases and decreases in the account, just like the balance in your checking account. Invested capital is only of the factors that are used in allocating and distributing profits. this period, the business pays cash for next period’s prepaid expenses, which affects this period’s cash flow, but doesn’t affect net income until the next period. Otherwise the president of chief officer of the business should clearly warn the shareholders that GAAP have not been followed in one or more respects. They might include automatic deposits, or refunds or other electronic deposits. What are other ratios used in financial reporting The dividend yield ratio tells investors how much cash income they’re receiving on their stock investment in a business. In December 2000, Enron claimed to have tripled its profits in two years. Every step of the income statement reports the deduction of an expense. About GAAP While many businesses assume that accountants are bound by generally accepted accounting practices and that these are inviolate, nothing could be further from the truth. A financial report requires disclosures. Building Cash Reserves Building a financial cushion for your business is never easy. A corporation’s “birth certificate” is the legal form that is filed with the Secretary of State of the state in which the corporation is created, or incorporated. A business is free to select whichever method it wants. New investments are signs of growing or upgrading the production and distribution facilities and capacity of the business. Opportunities for qualified forensic accounting professionals abound in private companies. Bookkeeping Basics Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing the financial affairs of a business. P/E ratios vary from industry to industry and from year to year. A business may realize a financial leverage gain, meaning it earns more profit on the money it has borrowed than the interest paid for the use of the borrowed money. These are junior partners who have ownership rights to the profits of the business, but they don’t generally participate in the high-level management of the business. Most business borrow money for both short terms and long terms. It can deliberately deceive its investors and lenders with false or misleading numbers in its financial report. Accountants use an asset account called accounts receivable to record the total amount owed to the business by its customers who haven’t paid the balance in full yet. A partnership or LLC agreement specifies how profits will be divided among the owners. At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon. It can’t really wait until customers actually return products for repair or replacement, should be forecast as a percent of the total products sold. . It means exactly what it says in that it’s the cost that a business pays for the products it sells to customers. Its profit, therefore, would be overstated. . When this debt did not show up in Enron’s reports, it made Enron seem much more successful than it actually was. A business could be under some financial distress but overall still be judged a going concern. It is calculated by dividing the current assets by the current liabilities. . Another form of accounting that we all dread is the filing of annual federal income tax returns. It is calculated by dividing the current assets by the current liabilities. Estimates have to be made at times, and they require good faith efforts towards accuracy. Any business that sells products needs to know its product costs and depending on what is being manufactured and/or sold, it can get complicated. This will also help to keep you on track with cash flow and other financial issues. Owners of a corporation are called stockholders because they own shares of stock issued by the corporation. But an income statement is truly the sum of its parts, and they all need to be considered carefully, consistently and accurately. Other items in an income statement include inventory write-downs. This can be compared with the interest rate on high-grade debt securities that pay interest, such as Treasure bonds and Treasury notes, which are the safest. To sum up, the price/earnings ratio, or P/E ratio is the current market price of a capital stock divided by its trailing 12 months’ diluted earnings per share (EPS) or its basic earnings per share if the business does not report diluted EPS. . Likewise if your own legal fees and damages or fines are excessive, then these can significantly impact the income statement. It must have a legal name, just like a person. Beyond carrying out the fundamental tasks of the occupation-preparing, analyzing, and verifying financial documents in order to provide information to clients-many accountants now are required to possess a wide range of knowledge and skills. What is a corporation? Most businesses start out as a small company, owned by one person or by a partnership. Some should also be invested. When the business acquires products, the cost of them goes into what’s called an inventory asset account. For example, cost of goods sold is recorded with a decrease to the inventory asset and depreciation expense is recorded with a decrease to the book value of fixed assets. Again the timing of when bad debts are reported is crucial. The intelligent design of Quasar’s user interface allows for quick and easy data entry. The intelligent design of Quasar’s user interface allows for quick and easy data entry. Information provided by the forensic accountant may be the most effective way of obtaining convictions. The FASB develops broad accounting concepts as well as standards for financial reporting. . This is the only ratio that a public business is required to report, although most public companies report a few others as well. In this capacity, the forensic accounting professional quantifies damages sustained by parties involved in legal disputes and can assist in resolving disputes, even before they reach the courtroom. For example, when you go to a grocery store, a small portion of the price you pay for eggs or bread goes toward the cost of the buildings, the machinery, bread ovens, etc. Inventory and expenses Inventory is usually the largest current asset of a business that sells products. A business that spends a significant amount of money for employee training and development may delay these programs until the next year so the expense in the current year is lower. The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit. The cost of goods sold is one of the major expenses of businesses that sell goods, products or services. To do this, all the accounts need to be up to date. -Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. Remember that some budgeting is better than none. Profit smoothing crosses the line from choosing acceptable accounting methods from the list of GAAP and implementing these methods in a reasonable manner, into the gray area of earnings management that involves accounting manipulation. Diluted earnings are based on shares that are outstanding and shares that may be issued in the future in the form of stock options. If the inventory account is greater at the end of the period than at the start of the reporting period, the amount the business actually paid in cash for that inventory is more than what the business recorded as its cost of good sold expense. Gains and Losses It would probably be ideal if business and life were as simple as producing goods, selling them and recording the profits. Book value per share is calculated by dividing total owners’ equity by the total number of stock shares that are outstanding. it includes cash distributions by the business from profit to its owners. It can’t really wait until customers actually return products for repair or replacement, should be forecast as a percent of the total products sold. They will generally refer the reader to a more detailed SEC financial report for more specifics. It can also include items such as shelves and cabinets. When you no longer sell enough of a product at a high enough profit to make the costs of manufacturing it worthwhile, then it’s time to change your product mix. It doesn’t matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. 43 What’s the difference between private and public company reporting A public corporation is a business whose securities are traded on the public stock exchanges, such as the New York Stock Exchange and Nasdaq. the corporation has to keep a register, or list, of how many shares everyone owns. If the inventory account is greater at the end of the period than at the start of the reporting period, the amount the business actually paid in cash for that inventory is more than what the business recorded as its cost of good sold expense. The current ratio is a measure of a business’s short-term solvency, in other words, its ability to pay it liabilities that come due in the near future. The CPA comes in, does an audit of the business’s accounting system and methods and gives a report that is attached to the company’s financial statements. Variable costs vary proportionately with changes in production/ Relevant costs are essentially future costs that could be incurred, depending on what strategic course a business takes. If the amount they collected during the reporting period is greater than the credit sales made, then the accounts receivable decreased over the reporting period, and the accountant needs to add to net income that difference between the receivables at the beginning of the reporting period and the receivables at the end of the same period. A business could be under some financial distress but overall still be judged a going concern. They also keep track of assets such as a business’s property and equipment. Part of the total sales revenue of a business includes recover of cost invested in its fixed assets. Many publicly owned businesses make their required filings with the SEC, but they present very different annual financial reports to their stockholders. This drop triggered certain agreements with investors that made it necessary for Enron to repay their money immediately. In other words, they cause the assets and liabilities in a business. Every step of the income statement reports the deduction of an expense. Those companies whose stocks are listed on the New York Stock Exchange or Nasdaq must be audited by outside CPA firms. Standard deduction – some personal expenditures or business expenses can be deducted from your income to reduce the taxable amount of income. A business may realize a financial leverage gain, meaning it earns more profit on the money it has borrowed than the interest paid for the use of the borrowed money. If a business’s ROA is 14 percent and the interest rate on its debt is 8 percent, the business’s net gain on its capital is 6 percent more than what it’s paying in interest. Depreciation expense is that portion of the total cost of a business’s fixed assets that is allocated to the period to record the cost of using the assets during period. Most profit smoothing involves pushing some amount of revenue and/or expenses into other years than they would normally be recorded. . What is the Sarbanes-Oxley Act? The Sarbanes-Oxley Act of 2002 is a United States federal law passed in response to the recent major corporate and accounting scandals including those at Enron, Tyco International, and WorldCom (now MCI). At times, the forensic accountant may be hired by attorneys to investigate the financial trail of persons suspected of engaging in criminal activity. Budgeting requires good working models of profit performance, financial condition, and cash flow from profit. is not recorded as a cash outlay. –The Securities and Exchange Commission (SEC) mandates disclosure of a broad range of information for publicly held companies. This at the higher levels of accounting and in the organization.

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