| Term | Definition |
|---|
| accounting | the information system that identifies, records, and communicates the economic events of an organization to interested users |
| annual report | a report prepared by corporate management that presents financial information including financial statements, notes, a management discussion and analysis section, and an independent auditor's report |
| assets | resources owned by a business |
| auditor's report | a report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards |
| balance sheet | a financial statement that reports the assets and claims to those assets at a specific point in time |
| basic accounting equation | assets = liabilities + stockholders' equity |
| certified public accountant | an individual who has met certain criteria and is thus allowed to perform audits of corporations |
| common stock | term used to describe the total amount paid in by stockholders for the shares they purchase |
| comparative statements | a presentation of the financial statements of a company for more than one year |
| corporation | a business organized as a separate legal entity having ownership divided into transferable shares of stock |
| dividends | payments of cash from a corporation to its stockholders |
| expenses | the cost of assets consumed or services used in the process of generating revenues |
| income statement | a financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time |
| liabilities | the debts and obligations of a business; they represent the amounts owed to creditors |
| management discussion and analysis | a section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations |
| net income | the amount by which revenues exceed expenses |
| net loss | the amount by which expenses exceed revenues |
| notes to the financial statements | items that clarify information presented in the financial statements, as well as expand upon it where additional detail is needed |
| partnership | a business owned by two or more persons associated as partners |
| retained earnings | the amount of net income retained in the corporation |
| retained earnings statement | a financial statement that summarizes the amounts and causes of changes in retained earnings for a specific period of time |
| revenues | the increase in assets that result from the sale of a product or service in the normal course of business |
| sole proprietorship | a business owned by one person |
| stockholders' equity | the stockholders' claim on total assets |
| limited liability company | a business organized as a separate legal entity under an operating agreement, usually between two or more people |
| forms of business organization | includes sole proprietorship, partnership, corporation, and limited liability company |
| sole proprietorship advantages | form of business that is simplest to establish, owner-controlled, and has tax advantages |
| partnership advantages | form of business that is simple to establish, has shared control, tax advantages, and broader skills and resources than some business types |
| corporation advantages | form of business where it is easier to transfer ownership, easier to raise funds, has no personal liability |
| limited liability company advantages | form of business that is easy to establish, has no personal liability, and has tax advantages |
| users of financial information | includes internal users such as marketing managers, production supervisors, finance directors, and company officers; includes external users such as creditors, investors, and taxing authorities |
| types of business activities | includes financing activities, investing activities, and operating activities |
| classified balance sheet | A balance sheet that contains a number of standard classifications or sections |
| comparability | Ability to compare the accounting information of different companies because they use the same accounting principles |
| conservatism | When preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets or income |
| consistency | a company uses the same accounting principles and methods from year to year |
| cost principle | assets be recorded at their cost |
| current Assets | assets that a company expects to convert to cash or use up within one year |
| current liabilities | obligations that the company is to pay within the coming year |
| current ratio | A measure used to evaluate a company's liquidity and short-term debt-paying ability; computed as current assets divided by current liabilities |
| debt to total assets ratio | Measures the percentage of total financing provided by creditors; computed as total debt divided by total assets |
| earnings per share | The net income earned on each share of common stock. We compute this by dividing net income by the average number of common shares outstanding during the year |
| economic entity assumption | Every economic entity can be separately identified and accounted for |
| Financial Accounting Standards Board | The primary accounting standard-setting body in the United States |
| free cash flow | The cash remaining from operations after adjusting for capital expenditures and dividends |
| full disclosure principle | Companies disclose all circumstances and events that would make a difference to financial statement users |
| generally accepted accounting principles | A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes |
| going concern assumption | The business will remain in operation for the foreseeable future |
| International Accounting Standards Board | An accounting standard-setting body that issues standards adopted by many countries outside of the United States |
| liquidity | Ability to pay obligations expected to become due within the next year or operating cycle |
| liquidity ratios | The short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash |
| long-term investments | Investments in stocks and bonds of other corporations that are normally held for many years. This category also includes investments in long-term assets such as land or buildings that a company is not currently using in its operating activities |
| long-term liabilities | Obligations that a company expects to pay after one year |
| materiality | The constraint of determining whether an item is large enough to likely influence the decision of an investor or creditor |
| monetary unit assumption | Only those things that can be expressed in money are included in the accounting records |
| operating cycle | The average time that it takes to purchase inventory, sell it on account, and then collect cash from customers |
| property, plant, and equipment | Assets with relatively long useful lives that a company is currently using in operating the business |
| ratio | The mathematical relationship between one quantity and another. The relationship is expressed in terms of either a percentage, a rate, or a simple proportion |
| ratio analysis | The relationship among selected items of financial statement data |
| relevant | The quality of information that indicates the information makes a difference in a decision |
| reliability | The quality of information that gives assurance that it is free of error and bias |
| Securities and Exchange Commission | The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies |
| solvency | Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity |
| statement of stockholders' equity | A financial statement that presents the factors that caused stockholders' equity to change during the period, including those that caused retained earnings to change |
| working capital | The difference between the amounts of current assets and current liabilities |
| account | An individual accounting record of increases and decreases in a specific asset, liability, or stockholders' equity item |
| accounting information system | The system of collecting and processing transaction data and communicating financial information to decision makers |
| accounting transactions | Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity |
| chart of accounts | A list of a company's accounts |
| credit | The right side of an account |
| debit | The left side of an account |
| double-entry system | the two-sided effect of each transaction is recorded in appropriate accounts |
| general journal | the most basic form of journal |
| general ledger | Contains all the assets, liabilities, and stockholders' equity accounts |
| journalizing | Entering transaction data in the journal |
| journal | Place where transactions are initially recorded. Transactions are initially recorded in chronological order |
| ledger | The entire group of accounts maintained by a company |
| posting | The procedure of transferring journal entries to ledger accounts |
| T account | The basic form of an account |
| trial balance | Report that lists accounts and their balances at a given time |
| accrual basis accounting | Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, rather than in the periods in which the company receives or pays cash |
| accrued expenses | Expenses incurred but not yet paid or recorded at the statement date |
| adjusted trial balance | A list of accounts and their balances after all adjustments have been made |
| adjusting entries | Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed |
| book value | The difference between the cost of any depreciable asset and its related accumulated depreciation |
| cash-basis accounting | Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays out cash |
| closing entries | Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings |
| contra asset account | The account is offset against an asset account (e.g., Office Equipment) on the balance sheet |
| earnings management | The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income |
| fiscal year | An accounting time period that is one year long |
| income summary | A temporary account used in closing revenue and expense accounts |
| matching principle | It dictates that efforts (expenses) be matched with accomplishments (revenues) |
| permanent accounts | Balance sheet accounts whose balances are carried forward to the next accounting period |
| post-closing trial balance | A list of permanent accounts and their balances after a company has journalized and posted closing entries |
| prepaid expenses | Expenses paid in cash and recorded as assets before they are used or consumed |
| prepayments | Expenses paid in cash and recorded as assets before they are used or consumed |
| revenue recognition principle | Companies recognize revenue in the accounting period in which it is earned |
| reversing entry | The beginning of the next accounting period; this entry is the exact opposite of the adjusting entry made in the previous period |
| temporary accounts | Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period |
| time period assumption | An assumption that the economic life of a business can be divided into artificial time periods |
| unearned revenues | Companies record cash received before revenue is earned by increasing (crediting) a liability account |
| useful life | The length of service of a productive asset |
| work sheet | Multiple-column form that may be used in the adjustment process and in preparing financial statements |
| contra revenue account | An account that is offset against a revenue account on the income statement |
| cost of goods sold | The total cost of merchandise sold during the period |
| gross profit | The excess of net sales over the cost of goods sold |
| gross profit rate | Gross profit expressed as a percentage by dividing the amount of gross profit by net sales |
| net sales | Sales less sales returns and allowances and sales discounts |
| periodic inventory system | Companies do not keep detailed inventory records of the goods on hand throughout the period |
| perpetual inventory system | Companies maintain detailed records of the cost of each inventory purchase and sale |
| purchase allowance | A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise |
| purchase discount | A cash discount claimed by a buyer for prompt payment of a balance due |
| purchase invoice | Document that indicates the total purchase price and other relevant information |
| purchase return | A return of goods from the buyer to the seller for cash or credit |
| sales discount | A reduction given by a seller for prompt payment of a credit sale |
| sales invoice | A document that provides support for credit sales |
| sales returns and allowances | Purchase returns and allowances from the seller's perspective. See definitions for purchase returns and purchase allowances |
| sales revenue | Primary source of revenue in a merchandising company |
| average cost method | An inventory costing method that uses the weighted average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold |
| consigned goods | Goods held for sale by one party although ownership of the goods is retained by another party |
| current replacement cost | The current cost to replace an inventory item |
| days in inventory | Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover ratio |
| FIFO method | Assumes that the earliest goods purchased are the first to be sold |
| finished goods inventory | Manufactured items that are completed and ready for sale |
| FOB shipping point | Freight terms indicating that the goods are placed free on board the carrier by the seller, and the buyer pays the freight cost; goods belong to the buyer while in transit |
| FOB destination | Freight terms indicating that the goods are placed free on board at the buyer's place of business, and the seller pays the freight cost; goods belong to the seller while in transit |
| inventory turnover ratio | A ratio that measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period |
| just-in-time inventory | Companies manufacture or purchase goods just in time for use |
| LIFO method | Assumes that the latest goods purchased are the first to be sold |
| LIFO reserve | For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO |
| lower of cost or market | A basis whereby inventory is stated at the lower of either its cost or its market cost as determined by current replacement cost |
| LCM | Lower of Cost or Market |
| raw materials | Basic goods that will be used in production but have not yet been placed into production |
| specific identification method | An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory |
| weighted average unit cost | Average cost that is weighted by the number of units purchased at each unit cost |
| work in process | The portion of manufactured inventory that has been placed into the production process but is not yet complete |
| available-for-sale securities | Securities held with the intent of selling them sometime in the future |
| change in accounting principle | When the principle used in the current year is different from the one used in the preceding year |
| comprehensive income | Income that includes all changes in stockholders' equity during a period except those changes resulting from investments by stockholders and distributions (dividends) to stockholders |
| discontinued operations | The disposal of a significant component of a business |
| extraordinary items | Events and transactions that meet two conditions: They are unusual in nature and infrequent in occurrence |
| horizontal analysis | A technique for evaluating a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place, expressed as either an amount or a percentage |
| leveraging | Borrowing money at a lower rate of interest than can be earned by using the borrowed money; also referred to as trading on the equity |
| payout ratio | Ratio that measures the percentage of earnings distributed in the form of cash dividends. It is computed by dividing cash dividends declared on common stock by net income |
| price-earnings ratio | A comparison of the market price of each share of common stock to the earnings per share, computed as the market price of the stock divided by earnings per share |
| pro forma income | Income that usually excludes items that the company thinks are unusual or nonrecurring |
| profitability ratios | Ratios that measure the income or operating success of an enterprise for a given period of time |
| quality of earnings | When a company provides full and transparent information that will not confuse or mislead users of the financial statements |
| return on common stockholders' equity ratio | A measure of the dollars of net income earned for each dollar invested by the owners, computed as income available to common stockholders divided by average common stockholders' equity |
| solvency ratios | Ratios that measure the ability of the enterprise to survive over a long period of time |
| sustainable income | The most likely level of income to be obtained in the future; calculated as net income adjusted for irregular items |
| times interest earned ratio | Ratio that indicates the company's ability to meet interest payments as they come due. It is computed by dividing income before interest expense and income taxes by interest expense |
| trading on the equity | Borrowing money at a lower rate of interest than can be earned by using the borrowed money |
| trading security | Securities bought and held primarily for sale in the near term to generate income on short-term price differences |
| vertical analysis | A technique for evaluating financial statement data that expresses each item in a financial statement as a percent of a base amount |
| profit margin ratio | A measure of the net income generated by each dollar of sales, computed as net income divided by net sales |
| bank reconciliation | The process of comparing the bank's balance with the company's balance, and explaining the differences to make them agree |
| bank statement | A statement received monthly from the bank that shows the depositor's bank transactions and balances |
| cash | Consists of coins, currency (paper money), checks, money orders, and money on hand or on deposit in a bank or similar depository |
| cash budget | Anticipated cash flows, usually over a one- to two-year period |
| cash equivalents | Short-term, highly liquid investments that can be converted to a specific amount of cash |
| deposits in transit | Deposits recorded by the depositor that have not been recorded by the bank |
| electronic funds transfers | Disbursement systems that use wire, telephone, or computer to transfer cash from one location to another |
| internal auditors | Company employees who evaluate on a continuous basis the effectiveness of the company's system of internal control |
| internal control | The plan of organization and all the related methods and measures adopted within a business to safeguard its assets and enhance the accuracy and reliability of its accounting records |
| NSF check | A check that is not paid by a bank because of insufficient funds in a customer's bank account |
| outstanding checks | Issued checks recorded by the company that have not been paid by the bank |
| petty cash fund | A cash fund used to pay relatively small amounts |
| restricted cash | Cash that is not available for general use, but instead is restricted for a particular purpose |
| Sarbanes-Oxley Act of 2002 | Law that forces companies to pay more attention to internal control |
| treasurer | Employee responsible for the management of a company's cash |
| accounts receivable | Amounts customers owe on account |
| aging the accounts receivable | The analysis of customer balances by the length of time they have been unpaid |
| allowance method | Method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period |
| average collection period | The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the receivables turnover ratio |
| bad debts expense | An expense account to record credit losses |
| cash (net) realizable value | The net amount a company expects to receive in cash |
| concentration of credit risk | Threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company |
| direct write-off method | A method of accounting for bad debts that involves expensing accounts at the time they are determined to be uncollectible |
| dishonored note | A note that is not paid in full at maturity |
| factor | A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers |
| maker | In a promissory note, the party making the promise to pay |
| notes receivable | Claims for which formal instruments of credit are issued as evidence of the debt |
| payee | The party to whom payment of a promissory note is to be made |
| percentage of receivables basis | A percentage relationship that management establishes between the amount of receivables and expected losses from uncollectible accounts |
| promissory note | A written promise to pay a specified amount of money on demand or at a definite time |
| receivables | Amounts due from individuals and companies. They are claims that are expected to be collected in cash |
| receivables turnover ratio | A measure of the liquidity of receivables, computed by dividing net credit sales by average net receivables |
| trade receivables | Notes and accounts receivable that result from sales transactions |
| accelerated depreciation method | Method produces higher depreciation expense in the early years than the straight-line approach |
| additions and improvements | Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a plant asset |
| amortization | The process of allocating to expense the cost of an intangible asset |
| asset turnover ratio | Ratio that indicates how efficiently a company uses its assets; calculated as net sales divided by average total assets |
| capital expenditures | Expenditures that increase the company's investment in plant assets |
| capital lease | A long-term agreement allowing one party (the lessee) to use another party's asset (the lessor); accounted for like a purchase |
| cash equivalent price | Price that is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable |
| copyrights | Intangible assets which give the owner the exclusive right to reproduce and sell an artistic or published work |
| declining balance method | A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the useful life of the asset |
| depreciable cost | Amount calculated as the cost of an asset less its salvage value |
| depreciation | The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner |
| franchise | A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to provide specific services, or to use certain trademarks or trade names, usually within a designated geographic area |
| goodwill | The value of all favorable attributes that relate to a business enterprise |
| impairment | A permanent decline in the market value of an asset |
| intangible assets | Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance |
| lessee | A party that has made contractual arrangements to use another party's asset without purchasing it |
| lessor | A party that has agreed contractually to let another party use its asset |
| license | Operating rights to use public property, granted by a governmental agency to a business enterprise |
| operating lease | A long-term agreement allowing one party (the lessee) to use another party's asset (the lessor); accounted for like a rental. |
| ordinary repairs | Expenditures to maintain the operating efficiency and expected productive life of the unit |
| patent | An exclusive right issued by the United States Patent Office that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant |
| plant assets | Resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers |
| research and development costs | Expenditures that may lead to patents, copyrights, new processes, and new products |
| return on assets ratio | A profitability measure that indicates the amount of net income generated by each dollar invested in assets; computed as net income divided by average assets |
| revenue expenditures | Expenditures that are immediately charged against revenues as an expense |
| straight line method | A method in which periodic depreciation is the same for each year of the asset's useful life |
| trade name | A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product. Also known as a trademark. |
| trademark | A word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product. Also known as a trade name. |
| units of activity method | A depreciation method where useful life is expressed in terms of the total units of production or the use expected from the asset |
| bond certificate | A legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual interest rate and the maturity date of the bonds |
| bonds | A form of interest-bearing note payable issued by corporations, universities, and governmental agencies |
| callable bonds | Bonds that the issuing company can retire at a stated dollar amount prior to maturity |
| capital lease | A type of lease whose characteristics make it similar to a debt-financed purchase and that is consequently accounted for in that fashion |
| contingencies | Events with uncertain outcomes, such as a potential liability that may become an actual liability sometime in the future |
| contractual interest rate | The rate used to determine the amount of cash interest the borrower pays and the investor receives |
| convertible bonds | Bonds that permit bondholders to convert them into common stock at their option |
| current liability | A debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer |
| discount | The difference between the face value of a bond and its selling price, when a bond is sold for less than its face value |
| effective interest method | Method where the amortization of bond discount or bond premium results in periodic interest expense equal to a constant percentage of the carrying value of the bonds |
| effective interest rate | Rate established when the bonds are issued and remains constant in each interest period |
| face value | In bonds, the amount due at the maturity date |
| market interest rate | The rate investors demand for loaning funds |
| maturity date | In bonds, the date that the final payment is due to the investor from the issuing company |
| mortgage notes payable | A long-term note secured by a mortgage that pledges title to specific units of property as security for the loan |
| notes payable | Obligations recorded in the form of written notes |
| off balance sheet financing | The intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its books |
| operating lease | A contractual arrangement giving the lessee temporary use of the property with continued ownership of the property by the lessor. Accounted for as a rental |
| premium | The difference between the selling price and the face value of a bond when a bond is sold for more than its face value |
| present value | The value today of an amount to be received at some date in the future after taking into account current interest rates |
| secured bonds | Bonds where specific assets of the issuer are pledged as collateral for the bonds |
| straight-line amortization method | Amortization method that allocates the same amount to interest expense in each interest period |
| time value of money | Term used to indicate the relationship between time and money—that a dollar received today is worth more than a dollar promised at some time in the future |
| unsecured bonds | Bonds that are issued against the general credit of the borrower |
| authorized stock | The amount of stock that a corporation is authorized to sell is indicated in its charter |
| cash dividend | A pro rata distribution of cash to stockholders |
| cumulative dividend | A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends |
| declaration date | The date when the board of directors formally authorizes the cash dividend and announces it to stockholders |
| deficit | A debit balance in retained earnings |
| dividend | A distribution by a corporation to its stockholders on a pro rata basis |
| dividends in arrears | Preferred dividends that were supposed to be declared but were not declared during a given period |
| legal capital per share | Amount of capital that must be retained in the business for the protection of corporate creditors |
| no par value stock | Capital stock that has not been assigned a value in the corporate charter |
| outstanding stock | The number of shares of issued stock that are being held by stockholders |
| paid-in capital | The amount stockholders paid to the corporation in exchange for shares of ownership |
| par value stock | Capital stock that has been assigned a value per share in the corporate charter |
| payment date | The date dividend checks are mailed to stockholders |
| preferred stock | Stock with contractual provisions that give it preference or priority over common stock in certain areas |
| privately held corporation | A corporation that usually has only a few stockholders and does not offer its stock for sale to the general public |
| publicly held corporation | A corporation that may have thousands of stockholders, and its stock is regularly traded on a national securities market such as the New York Stock Exchange |
| record date | Date when the company determines ownership of the outstanding shares for dividend purposes |
| retained earnings restrictions | These make a portion of the balance currently unavailable for dividends |
| return on common stockholders' equity | A measure of profitability from the stockholders' point of view; computed by dividing net income minus preferred stock dividends by average common stockholders' equity |
| stated value | The amount per share assigned by the board of directors to no-par stock |
| stock dividend | A pro rata distribution of the corporation's own stock to stockholders |
| stock split | The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share |
| treasury stock | A corporation's own stock that has been issued, fully paid for, and reacquired by the corporation and is being held in its treasury for future use |
| cash debt coverage ratio | The ratio of cash provided by operating activities to total debt as represented by average total liabilities |
| current cash debt coverage ratio | The ratio of cash provided by operating activities divided by average current liabilities |
| direct method | A method of determining net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis |
| financing activities | Activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends |
| indirect method | A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities |
| investing activities | Activities that include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans |
| operating activities | Activities that include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income |
| product life cycle | A series of phases in a product's sales and cash flows over time; these phases, in order of occurrence, are introductory, growth, maturity, and decline |
| statement of cash flows | A basic financial statement that provides information about the cash receipts and cash payments of an entity during a period, classified as operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances |
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