For a rainy day
To put all one’s eggs in one basket
To miss the boat
To make both ends meet
To know the ropes
A wild goose chase
To flog (beat) a dead horse
To carry coals to New Castle
Text 7. ACCOUNTING
Accounting is the system business uses to measure its financial performance. It does this by recording and classifying sales, purchases, and other transactions and by providing ways to present these data so that company performance can be evaluated.
2. There are two distinct types of accounting: financial accounting and management accounting. Financial accounting deals with preparing information for the outside world (e.g., suppliers, banks, shareholders). Since users of such information compare it to similar data from other sources, financial recounting statements are prepared according to generally accepted accounting principles (GAAP). In contrast, management accounting deals with the internal needs of particular business firm and helps managers evaluate results and make decisions. The job of management accountant includes the preparation of budgets (a financial plan for a given time period) and the analysis of production costs.
3. Accountants can be divided into two basic groups: public accountants and private, or corporate, accountants. Public accountants operate independent of the business, and other organizations they serve. They prepare financial statements and report on the fairness of such statements, often performing an audit to evaluate the accuracy. Their report indicate whether the statements have been prepared in agreement with GAAP, and their detached position obligates them to be objective and, if necessary, critical.
4. Public accountants who meet a state’s requirements for education and experience and pass an examination become certified public accountants (CPAs). About half of all CPAs are in private practice. The industry is dominated by the “Big Eight” firms that together audit over 95% percent of all Fortune 500 companies. These rules instruct accountants to seek out fraud and to report irregularities.
5. Private accountants are employed by a business, government agency, or nonprofit corporation to supervise the accounting system and bookkeeping staff. Although many private accountants are CPAs, they may also certified management accountants (CMAs), which is comparatively new designation including that they have passed a test comparable in difficulty to the CPA exam. The job of the in-house accounting staff ranges from routine bookkeeping to the high-level decision making of the controller (or financial vice-president), the firm’s highest-ranking financial officer.
6. Accounting is not an exact science$ using the same data, different accountants could legitimately come up with a range of results. Some firms maintain two sets of records: one for the shareholders and one for tax purposes. However, most accountants do adhere to the generally accepted accounting principles.
7. The balance sheet is a statement of a firm’s financial position at one moment in time and includes all the elements in the accounting equation. At least once a year all companies prepare balance sheets. This is commonly done at the end of the calendar year, but some firms use a fiscal year, which may be any twelve consecutive months.
8. Assets on a balance sheet are usually divided into three types – current, fixed, and intangible – and are listed in order with ease which they can be converted into cash. Current assets include cash marketable securities (stocks and bonds), accounts receivable (amounts due from customers), notes receivable (signed and written promises to pay a definite sum, plus interest, usually on a certain date and a certain place), inventories, and pre-paid expenses (supplies on hand and services paid for but not yet used).
9. Fixed assets—sometimes called property, plant and equipment – consist of permanent investments in buildings, equipment, furniture and fixtures, transportation equipment, land and any other tangible property used in running a business. They have a useful life of more than a year and are not expected to be converted into cash. With the exception of land, fixed assets deprecate yearly. Deprecation (or amortization for intangible assets) is the allocation of the cost of a long-lived asset to the periods in which it is used to produce revenue. When a balance sheet is prepared, fixed assets are deprecated so that their current value, and not their original value, is portrayed. In this way, the cost of an asset is spread over a number of years.
10. Intangible assets include patents on a process or invention, the costs of starting a business, copyrights to written or reproducible material, and trademarks. Least tangible of all, but no less valuable as an asset, is goodwill, consisting mainly of the firm’s reputation, especially in its relations with its customers.
11. An organization’s liabilities (debts that a company has incurred) may be either current or long-term. Current liabilities are debts that will have to be paid within a year of the date of the balance sheet. These include accounts payable and accrued expenses. Debts falling due a year or more after the date of the balance sheet are long-term liabilities, such as leases or mortgages.
12. Owners’ equity is the investment of the owners in the business. Sole proprietorships list the owner’s equity under the owner’s name, and partnerships list each partner’s share of the business separately. In the case of a corporation, owners’ equity is the amount of common stock outstanding.
13. The income statement shows how a firm’s revenues compare with expenses over a given period of time. When expenses are subtracted from revenues the resulting profit or loss of a company is known as net income – the “bottom line”. Revenue may be recorded on either an accrual basis (recorded as soon as the sale is made) or a cash basis to avoid being taxed on money not as yet collected.
14. Companies must also account two types of operating expenses (or overhead): selling expenses and general expenses. Selling expenses are the costs of marketing and distributing products, including advertising and the salaries of sales personnel. In contrast, general expenses arise from the overall operation of a business and include office salaries, professional services (e.g. , accounting and legal fees), and deprecation of office equipment.
15. All public companies and many privately owned firms prepare a statement of cash flows in addition to the income statement and balance sheet. This statement summarizes the company’s receipts and disbursements for the areas of operations, investments, and financing. It also serves to indicate a firm’s liquidity (i.e., its ability to pay short-term obligations).
Comparing financial data from a year to year to detect changes is known as trend analysis. The examiner must consider both changes in the economy and how other firms in the same industry have fared. Trends may also be distorted by changes in the value of the dollar.
Ratio analysis compares two elements from the same years financial figures and shows how a firm is performing compared to other companies in the industry. For example, profitability ratios indicate how well a company is conducting its ongoing operations. The three most common ratios of this type are (1) return on investment (ROI), which is the net income a firm earns for every dollar of owner or stockholder investment, (2) return on sales, which is before-tax income per unit of sales, and (3) earnings per share, which compares how much profit a company earns for each share of outstanding stock.
18. Liquidity ratios indicate how quickly a company can pay its bills. One indicator of liquidity is a firm’s working capital, because it represents the amount of current assets remaining after payment of all current liabilities. Current assets divided by current liabilities is known as the current ratio. But some analysts consider the quick ratio (or aside-test ratio) a better indication of a company’s ability to pay immediate debts. In calculating the quick ratio , inventories are not included under the category of current assets.
19. How well a firm is managing its assets can be determined by activity ratios. The inventory turnover ratio is calculated by dividing cost of goods sold by the average value of inventory for a period. This tells a potential investor how quickly a firm’s inventory is turned into sales. While the “ideal” ratio varies with the type of operation< the general rule is that the quicker the inventory turns over, the better.
20. Debt ratios indicate how well a company can pay its long-term debts. The debt-equity ratio (total liabilities divided by stockholders’ equity) shows the extent to which a firm is financed by debt: the lower this ratio, the safer the firm is, from a lender viewpoint.