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Accounting equation  the process used to capture the effect of economic events; Assets = Liabilities + Owner's Equity.
Accounting Principles Board (APB)  the second private sector body delegated the task of setting accounting standards.
Accounts payable  obligations to suppliers of merchandise or of services purchased on open account.
Accounts receivable aging schedule  applying different percentages to accounts receivable balances depending on the length of time outstanding.
Accounts receivable  receivables resulting from the sale of goods or services on account.
Accounts  storage areas to keep track of the increases and decreases in financial position elements.
Accrual accounting  measurement of the entity's accomplishments and resource sacrifices during the period, regardless of when cash is received or paid.
Accruals  when the cash flow comes after either expense or revenue recognition.
Accrued interest  interest that has accrued since the last interest date.
Accrued liabilities  expenses already incurred but not yet paid (accrued expenses).
Accrued receivables  the recognition of revenue earned before cash is received.
Accumulated benefit obligation (ABO)  the discounted present value of estimated retirement benefits earned so far by employees, applying the plan's pension formula using existing compensation levels.
Accumulated other comprehensive income  amount of other comprehensive income (nonowner changes in equity other than net income) accumulated over the current and prior periods.
Accumulated postretirement benefit obligation (APBO)  portion of the EPBO attributed to employee service up to a particular date.
Acid-test ratio  current assets, excluding inventories and prepaid items, divided by current liabilities.
Acquisition costs  the amounts paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.
Activity-based method  allocation of an asset's cost base using a measure of the asset's input or output.
Actuary  a professional trained in a particular branch of statistics and mathematics to assess the various uncertainties and to estimate the company's obligation to employees in connection with its pension plan.
Additions  the adding of a new major component to an existing asset.
Adjusted trial balance  trial balance after adjusting entries have been recorded.
Adjusting entries  internal transactions recorded at the end of any period when financial statements are prepared.
Allocation base  the value of the usefulness that is expected to be consumed.
Allocation method  the pattern in which the usefulness is expected to be consumed.
Allowance method  recording bad debt expense and reducing accounts receivable indirectly by crediting a contra account (allowance for uncollectible accounts) to accounts receivable for an estimate of the amount that eventually will prove uncollectible.
American Institute of Accountants (AIA)/American Institute of Certified Public Accountants (AICPA)  national organization of professional public accountants.
Amortization  cost allocation for intangibles.
Amortization schedule  schedule that reflects the changes in the debt over its term to maturity.
Annuity  cash flows received or paid in the same amount each period.
Annuity due  cash flows occurring at the beginning of each period.
Antidilutive securities  the effect of the conversion or exercise of potential common shares would be to increase rather than decrease, EPS.
Articles of incorporation  statement of the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors.
Asset retirement obligations (AROs)  obligations associated with the disposition of an operational asset.
Asset turnover ratio  measure of a company's efficiency in using assets to generate revenue.
Assets  probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Assigning  using receivables as collateral for loans; nonpayment of a debt will require the proceeds from collecting the assigned receivables to go directly toward repayment of the debt.
Attribution  process of assigning the cost of benefits to the years during which those benefits are assumed to be earned by employees.
Auditor's report  report issued by CPAs who audit the financial statements that informs users of the audit findings.
Auditors  independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company's financial statements.
Average collection period  indication of the average age of accounts receivable.
Average cost method  assumes cost of goods sold and ending inventory consist of a mixture of all the goods available for sale.
Average days in inventory  indicates the average number of days it normally takes to sell inventory.
Bad debt expense  an operating expense incurred to boost sales; inherent cost of granting credit.
Balance sheet  a position statement that presents an organized list of assets, liabilities, and equity at a particular point in time.
Balance sheet approach  determination of bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet.
Book value  assets minus liabilities as shown in the balance sheet.
Bank reconciliation  comparison of the bank balance with the balance in the company's own records.
Bargain purchase option (BPO)  provision in the lease contract that gives the lessee the option of purchasing the leased property at a bargain price.
Bargain renewal option  gives the lessee the option to renew the lease at a bargain rate.
Basic EPS  computed by dividing income available to common stockholders (net income less any preferred stock dividends) by the weighted-average number of common shares outstanding for the period.
Billings of construction contract  contra account to the asset construction in progress; subtracted from construction in progress to determine balance sheet presentation.
Board of directors  establishes corporate policies and appoints officers who manage the corporation.
Bond indenture  document that describes specific promises made to bondholders.
Bonds  Aform of debt consisting of separable units (bonds) that obligates the issuing corporation to repay a stated amount at a specified maturity date and to pay interest to bondholders between the issue date and maturity.
Callable  allows the issuing company to buy back, or call, outstanding bonds from the bondholders before their scheduled maturity date.
Capital budgeting  The process of evaluating the purchase of operational assets.
Capital leases  installment purchases/sales that are formulated outwardly as leases.
Capital markets  mechanisms that foster the allocation of resources efficiently.
Cash  currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers.
Cash basis accounting/net operating cash flow  difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers.
Cash disbursements journal  record of cash disbursements.
Cash discounts  sales discounts; represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specific period of time.
Cash equivalents  certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills that are highly liquid investments quickly convertible to cash.
Cash equivalents  short-term, highly liquid investments that can be readily converted to cash with little risk of loss.
Cash flow hedge  a derivative used to hedge against the exposure to changes in cash inflows or cash outflows of an asset or liability or a forecasted transaction ( like a future purchase or sale.
Cash flows from financing activities  both inflows and outflows of cash resulting from the external financing of a business.
Cash flows from investing activities  both outflows and inflows of cash caused by the acquisition and disposition of assets.
Cash flows from operating activities  both inflows and outflows of cash that result from activities reported on the income statement.
Cash receipts journal  record of cash receipts.
Certified Public Accountants (CPAs)  licensed individuals who can represent that the financial statements have been audited in accordance with generally accepted auditing standards.
Change in accounting estimate  a change in an estimate when new information comes to light.
Change in accounting principle  switch by a company from one accounting method to another.
Change in reporting entity  presentation of consolidated financial statements in place of statements of individual companies, or a change in the specific companies that constitute the group for which consolidated or combined statements are prepared.
Closing process  the temporary accounts are reduced to zero balances, and these temporary account balances are closed (transferred) to retained earnings to reflect the changes that have occurred in that account during the period.
Commercial paper  unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 30 to 270 days.
Committee on Accounting Procedure (CAP)  the first private sector body that was delegated the task of setting accounting standards.
Comparability  the ability to help users see similarities and differences among events and conditions.
Comparative financial statements  corresponding financial statements from the previous years accompanying the issued financial statements.
Compensating balance  a specified balance (usually some percentage of the committee amount) a borrower of a loan is asked to maintain in a low-interest or noninterest-bearing account at the bank.
Completed contract method  recognition of revenue for a long-term contract when the project is complete.
Complex capital structure  potential common shares are outstanding.
Composite depreciation method  physically dissimilar assets are aggregated to gain the convenience of group depreciation.
Compound interest  interest computed not only on the initial investment but also on the accumulated interest in previous periods.
Comprehensive income  traditional net income plus other nonowner changes in equity.
Conceptual framework  deals with theoretical and conceptual issues and provides and underlying structure for current and future accounting and reporting standards.
Conservatism  practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.
Consignment  the consignor physically transfers the goods to the other company (the consignee), but the consignor retains legal title.
Consistency  permits valid comparisons between different periods.
Consolidated financial statements  combination of the separate financial statements of the parent and subsidiary each period into a single aggregate set of financial statements as if there were only one company.
Construction in progress  asset account equivalent to the asset work-in-progress inventory in a manufacturing company.
Contingently issuable shares  additional shares of common stock to be issued, contingent on the occurrence of some future circumstance.
Conventional retail method  applying the retail inventory method in such a way that LCM is approximated.
Convertible bonds  bonds for which bondholders have the option to convert the bonds into shares of stock.
Copyright  exclusive right of protection given to a creator of a published work, such as a song, painting, photograph, or book.
Corporation  the dominant form of business organization that acquires capital from investors in exchange for ownership interest and from creditors by borrowing.
Correction of an error  an adjustment a company makes due to an error made.
Cost effectiveness  the perceived benefit of increased decision usefulness exceeds the anticipated cost of providing that information.
Cost of goods sold  cost of the inventory sold during the period.
Cost recovery method  deferral of all gross profit recognition until the cost of the item sold has been recovered.
Cost-to-retail percentage  ratio found by dividing goods available for sale at cost by goods available for sale at retail.
Coupons bonds  name of the owner was not registered; the holder actually clipped an attached coupon and redeemed it in accordance with instructions on the indenture.
Credits  represent the right side of the account.
Cumulative  if the specified dividends is not paid in a given year, the unpaid dividends accumulate and must be made up in a later dividend year before any dividends are paid on common shares.
Current assets  includes assets that are cash, will be converted into cash, or will be used up within one year or the operating cycle, whichever is longer.
Current liabilities  expected to require current assets and usually are payable within one year.
Current maturities of long-term debt  the current installment due on long-term debt, reported as a current liability.
Current ratio  current assets divided by current liabilities.
Date of record  specific date stated as to when the determination will be made of the recipient of the dividend.
Debenture bond  secured only by the "full faith and credit" of the issuing corporation.
Debits  represent the left side of the account.
Debt issue cost  with either publicly or privately sold debt, the issuing company will incur costs in connection with issuing bonds or notes, such as legal and accounting fees and printing costs, in addition to registration and underwriting fees.
Debt to equity ratio  compares resources provided by creditors with resources provided by owners.
Decision usefulness  the quality of being useful to decision making.
Default risk  a company's ability to pay its obligations when they come due.
Deferred annuity  the first cash flow occurs more than the one period after the date the agreement begins.
Deferred tax asset  taxes to be saved in the future when future deductible amounts reduce taxable income (when the temporary differences reverse).
Deferred tax liability  taxes to be paid in the future when future taxable amounts become taxable (when the temporary differences reverse).
Deficit  debit balance in retained earnings.
Defined benefit pension plans  fixed retirement benefits defined by a designated formula, based on employee' years of service and annual compensation.
Defined contribution pension plans  fixed annual contributions to a pension fund; employees choose where funds are invested—usually stocks or fixed-income securities.
Depletion  allocation of the cost of natural resources.
Depreciation  cost allocation for plant and equipment.
Derivatives  financial instruments usually created to hedge against risks created by other financial instruments or by transactions that have yet to occur but are anticipated and that "derive" their values or contractually required cash flows from some other security or index.
Detachable stock purchase warrants  the investor has the option to purchase a stated number of shares of common stock at a specified option price, within a given period of time.
Development costs  for natural resources, costs incurred after the resource has been discovered but before production begins.
Diluted EPS  incorporates the dilutive effect of all potential common shares.
Direct financing lease  lease in which the lessor finances the asset for the lessee and earns interest revenue over the lease term.
Direct method  the cash effect of each operating activity (i.e., income statement item) is reported directly on the statement of cash flows.
Direct write-off method  an allowance for uncollectible accounts is not used; instead bad debts that do arise are written off as bad debt expense.
Disclosure notes  additional insights about company operations, accounting principles, contractual agreements, and pending litigation.
Discontinued operations  The discontinuance of a component of an entity whose operations and cash flows can be clearly distinguished from the rest of the entity.
Discount  Arises when bonds are sold for less than face amount.
Discounting  the transfer of a note receivable to a financial institution.
Distributions to owners  decreases in equity resulting from transfers to owners.
Dividend  distribution to shareholders of a portion of assets earned.
Dollar-value LIFO (DVL)  Inventory is viewed as a quantity of value instead of a physical quantity of goods. Instead of layers of units from different purchases, the DVL inventory pool is viewed as comprising layers of dollar value from different years.
Dollar-value LIFO retail method  LIFO retail method combined with dollar-value LIFO.
Double-declining-balance (DDB) method  200% of the straight-line rate is multiplied by book value.
Double-entry system  dual effect that each transaction has on the accounting equation when recorded.
Early extinguishment of debt  debt is retired prior to its scheduled maturity date.
Earnings per share (EPS)  the amount of income earned by a company expressed on a per share basis.
Earnings quality  refers to the ability of reported earnings (income) to predict a company's future earnings.
Economic events  any event that directly affects the financial position of the company.
Effective interest method  recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt.
Effective rate  the actual rate at which money grows per year.
Emerging Issues Task Force (EITF)  responsible for providing more timely responses to emerging financial reporting issues.
Employee share purchase plans  permit all employees to buy shares directly from their company, often at favorable terms.
Equity method  used when an investor can't control, but can significantly influence, the investee.
Equity/net assets  called shareholders' equity or stockholders' equity for a corporation; the residual interest in the assets of an entity that remains after deducting liabilities.
Estimates  prediction of future events.
Ethics  a code or moral system that provides criteria for evaluating right and wrong.
Ex-dividend date  date usually two business days before the date of the record and is the first day the stock trades without the right to receive the declared dividend.
Executory costs  maintenance, insurance, taxes, and any other costs usually associated with ownership.
Expected cash flow approach  adjusts the cash flows, not the discount rate, for the uncertainty or risk of those cash flows.
Expected economic life  useful life of an asset.
Expected postretirement benefit obligation (EPBO)  discounted present value of the total net cost to the employer of postretirement benefits.
Expected return on plan assets  estimated long-term return on invested assets.
Expenses  outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing good, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.
Exploration costs  for natural resources, expenditures such as drilling a well, or excavating a mine, or any other costs of searching for natural resources.
External events  exchange between the company and a separate economic entity.
Extraordinary items  material events and transactions that are both unusual in nature and infrequent in occurrence.
F.O.B. (free on board) shipping point  legal title to the goods changes hands at the point of shipment when the seller delivers the goods to the common carrier, and the purchaser is responsible for shipping costs and transit insurance.
F.O.B. destination  the seller is responsible for shipping and the legal title does not pass until the goods arrive at their destination.
Factor  financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service.
Fair value hedge  a derivative is used to hedge against the exposure to changes in the fair value of an asset or liability or a firm commitment.
Financial accounting  provides relevant financial information to various external users.
Financial Accounting Foundation (FAF)  responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB's activities.
Financial Accounting Standards Board (FASB)  the current private sector body that has been delegated the task of setting accounting standards.
Financial instrument  cash; evidence of an ownership interest in an entity; a contract that imposes on one entity an obligation to deliver cash or another financial instrument, and conveys to the second entity a right to receive cash or another financial instrument; and a contract that imposes on one entity an obligation to exchange financial instruments on potentially unfavorable terms and conveys to a second entity a right to exchange other financial instruments on potentially favorable terms.
Financial leverage  by earning a return on borrowed funds that exceeds the cost of borrowing the funds, a company can provide its shareholders with a total return higher than it could achieve by employing equity funds alone.
Financial reporting  process of providing financial statement information to external users.
Financial statements  primary means of communicating financial information to external parties.
Financial activities  cash inflows and outflows from transactions with creditors and owners.
Finished goods  costs that have accumulated in work in process are transferred to finished goods once the manufacturing process is completed.
Fiscal year  the annual time period used to report to external users.
Fixed-asset turnover ratio  used to measure how effectively managers used PP&E;
Fixed-Asset Turnover Ratio = net sales/average fixed assets
Foreign currency futures contract  agreement that requires the seller to deliver a specific foreign currency at a designated future date at a specific price.
Foreign currency hedge  if a derivative is used to hedge the risk that some transactions require settlement in a currency other than the entities' functional currency or that foreign Net sales Average fixed assets Fixed-asset turnover ratio operations will require translation adjustments to reported amounts.
Forward contract  calls for delivery on a specific date; is not traded on a market exchanged; does not call for a daily cash settlement for price changes in the underlying contract.
Fractional shares  a stock dividend or stock split results in some shareholders being entitled to fractions of whole shares.
Franchise  contractual arrangement under which the franchisor grants the franchisee the exclusive right to use the franchisor's trademark or tradename within a geographical area, usually for specified period of time.
Franchisee  individual or corporation given the right to sell the franchisor's products and use its name for a specified period of time.
Franchisor  grants to the franchisee the right to sell the franchisor's products and use its name for a specific period of time.
Freight-in  transportation-in; in a periodic systems, freight costs generally are added to this temporary account, which is added to purchases in determining net purchases.
Full-cost method  allows costs incurred in searching for oil and gas within a large geographical area to be capitalized as assets and expensed in the future as oil and gas from the successful wells are removed from that area.
Full-disclosure principle  the financial reports should include any information that could affect the decisions made by external users.
Funded status  difference between the employer's obligation (PBO) and the resources available to satisfy that obligation (plan assets).
Future deductible amounts  the future tax consequence of a temporary difference will be to decrease taxable income relative to accounting income.
Future taxable amounts  the future tax consequence of temporary difference will be to increase taxable income relative to accounting income.
Future value  amount of money that a dollar will grow to at some point in the future.
Futures contract  agreement that requires the seller to deliver a particular commodity at a designated future date at a specified price.
Gain or loss on the PBO  the decrease or increase in the PBO when one or more estimates used in determining the PBO requires revision.
Gains  increases in equity from peripheral, or incidental, transactions of an entity.
General journal  used to record of any type of transaction.
General ledger  collection of accounts.
Generally Accepted Accounting Principles (GAAP)  set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
Going concern assumption  in the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.
Goodwill  unique intangible asset in that its cost can't be directly associated with any specifically identifiable right and it is not separable from the company itself.
Government Accounting Standards Board (GASB)  responsible for developing accounting standards for governmental units such as states and cities.
Gross investment in the lease  total of periodic rental payments and residual value.
Gross method  For the buyer, views a discount not taken as part of the cost of inventory. For the seller, views a discount not taken by the customer as part of sales of revenue.
Gross profit method (gross margin method)  estimates cost of goods sold which is then subtracted from cost of goods available for sale to estimate ending inventory.
Gross profit/ratio  highlights the important relationship between net sales revenue and cost of goods sold.
Gross profit ratio = Gross Profit/net sales
Group depreciation method  collection of assets defined as depreciable assets that share similar service lives and other attributes.
Half-year convention  record one-half of a full year's depreciation in the year of acquisition and another half year in the year of disposal.
Hedging  taking an action that is expected to produce exposure to a particular type of risk that is precisely the opposite of an actual risk to which the company already is exposed.
Historical costs  original transaction value.
Horizontal analysis  comparison by expressing each item as a percentage of that same item in the financial statements of another year (base amount) in order to more easily see year-to-year changes.
Illegal acts  violations of the law, such as bribes, kickbacks, and illegal contributions to political candidates.
Impairment of value  operational assets should be written down if there has been a significant impairment (fair value less than book value) of value.
Implicit rate of interest  rate implicit in the agreement.
Improvements  replacement of a major component of an operational asset.
Income from continuing operations  revenues, expenses (including income taxes), gain, and losses, excluding those related to discontinued operations and extraordinary items.
Income statement  statement of operations or statement of earnings is used to summarized the profit-generating activities that occurred during a particular reporting period.
Income statement approach  estimating bad debt expense as a percentage of each period's net credit sales; usually determined by reviewing the company's recent history of the relationship between credit sales and actual bad debts.
Income summary  account that is a bookkeeping convenience used in the closing process that provides a check that all temporary accounts have been properly closed.
Income tax expense  provision for income taxes; reported as a separate expense in corporate income statements.
Indirect method  the net cash increase or decrease from operating activities is derived indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.
Initial direct costs  costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire the lease.
In-process research and development  the amount of the purchase price in a business acquisition that is allocated to projects that have not yet reached technological feasibility.
Installment notes  Notes payable for which equal installment payments include both an amount that represents interest and an amount that represents a reduction of the outstanding balance so that at maturity the note is completely paid.
Installment sales method  recognizes revenue and costs only when cash payments are received.
Institute of Internal Auditors  national organization of accountants providing internal auditing services for their own organizations.
Institute of Management Accountants (IMA)  primary national organization of accountants working in industry and government.
Intangible assets  operational assets that lack physical substance; examples include patents, copyrights, franchises, and goodwill.
Interest  "rent" paid for the use of money for some period of time.
Interest cost  interest accrued on the projected benefit obligation calculated as the discount rate multiplied by the projected benefit obligation at the beginning of the year.
Interest rate swap  agreement to exchange fixed interest payments for floating rate payments, or vice versa, without exchanging the underlying principal amounts.
Internal control  a company's plan to encourage adherence to company policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data.
Internal events  events that directly affect the financial position of the company but don't involve an exchange transaction with another entity.
International Accounting Standards Board (IASB)  objectives are to develop a single set of high-quality, understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and International Accounting Standards.
International Accounting Standards Committee (IASC)  umbrella organization formed to develop global accounting standards.
International Financial Reporting Standards  voluntary IASB standards.
Intraperiod tax allocation  associates (allocates) income tax expense (or income tax Gross profit Net sales Gross profit ratio benefit if there is a loss) with each major component of income that causes it.
Intrinsic value  the difference between the market price of the shares and the option price at which they can be acquired.
Inventories  goods awaiting sale (finished goods), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials).
Inventory  goods acquired, manufactured, or in the process of being manufactured for sale.
Inventory turnover ratio  measures a company's efficiency in managing its investment in inventory.
Investing activities  involve the acquisition and sale of long-term assets used in the business and non-operating investment assets.
Investments by owners  increases in equity resulting from transfers of resources (usually cash) to a company in exchange for ownership interest.
Irregularities  intentional distortions of financial statements.
Journal  a chronological record of all economic events affecting financial position.
Journal entry  captures the effect of a transaction on financial position in debit/credit form.
Just-in-time (JIT) system  a system used by a manufacturer to coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.
Land improvements  the cost of parking lots, driveways, and private roads and the costs of fences and lawn and garden sprinkler systems.
Last-in, first-out (LIFO) method  assumes units sold are the most recent units purchased.
Leasehold improvements  account title when a lessee makes improvements to leased property that reverts back to the lessor at the end of the lease.
Lessee  user of a leased asset.
Lessor  owner of a leased asset.
Leveraged lease  a third-party, long-term creditor provides nonrecourse financing for a lease agreement between a lessor and a lessee.
Liabilities  probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
LIFO conformity rule  if a company uses LIFO to measure taxable income, the company also must use LIFO for external financial reporting.
LIFO inventory pools  simplifies recordkeeping and reduces the risk of LIFO liquidation by grouping inventory units into pools based on physical similarities of the individual units.
LIFO liquidation  the decline in inventory quantity during the period.
Limited liability company  owners are not liable for the debts of the business, except to the extent of their investment; all members can be involved with managing the business without losing liability protection; no limitations on the number of owners.
Limited liability partnership  similar to a limited liability company, except it doesn't offer all the liability protection available in the limited liability company structure.
Line of credit  allows a company to borrow cash without having to follow formal loan procedures and paperwork.
Liquidating dividend  when a dividend exceeds the balance in retained earnings.
Liquidity  period of time before an asset is converted to cash or until a liability is paid.
Long-term solvency  the riskiness of a company with regard to the amount of liabilities in its capital structure.
Loss contingency  existing, uncertain situation involving potential loss depending on whether some future event occurs.
Losses  decreases in equity arising from peripheral, or incidental, transactions of the entity.
Lower-of -cost-or-market (LCM)  recognizes losses in the period that the value of inventory declines below its cost.
Management discussion and analysis (MDA)  provides a biased but informed perspective of a company's operations, liquidity, and capital resources.
Managerial accounting  deals with the concepts and methods used to provide information to an organization's internal users (i.e., its managers).
Matching principle  expenses are recognized in the same period as the related revenues.
Materiality  if a more costly way of providing information is not expected to have a material effect on decisions made by those using the information, the less costly method may be acceptable.
Measurement  process of associating numerical amounts to the elements.
Minimum lease payments  payments the lessee is required to make in connection with the lease.
Model Business Corporation Act  designed to serve as a guide to states in the development of their corporation statutes.
Modified accelerated cost recovery system (MACRS)  The federal income tax code allows taxpayers to compute depreciation for their tax returns using this method.
Monetary assets  money and claims to receive money, the amount of which is fixed or determinable.
Monetary liabilities  obligations to pay amounts of cash, the amount of which is fixed or determinable.
Mortgage bond  backed by a lien on specified real estate owned by the issuer.
Multiple-step  income statement format that includes a number of intermediate subtotals before arriving at income from continuing operations.
Natural resources  oil and gas deposits, timber tracts, and mineral deposits.
Net income/net loss  revenue + gains – (expenses and losses for a period) income statement bottom line.
Net markdown  net effect of the change in selling price (increase, decrease, increase).
Net markup  net effect of the change in selling price (increase, increase, decrease).
Net method  For the buyer, considers the cost of inventory to include the net, after-discount amount, and any discounts not taken are reported as interest expense. For the seller, considers sales revenue to be the net amount, after discount, and any discounts not taken by the customer as interest revenue.
Net operating loss  negative taxable income because tax-deductible expenses exceed taxable revenues.
Net realizable value less a normal profit margin (NRV – NP)  lower limit of market.
Net realizable value (NRV)  upper limit of market.
Neutrality  neutral with respect to parties potentially affected.
Noncash investing and financing activities  transactions that do not increase or decrease cash but that result in significant investing and financing activities.
Noninterest-bearing note  notes that bear interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset.
Nonoperating income  includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company.
Nontemporary difference  difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis that will not "reverse" resulting from transactions and events that under existing tax law will never affect taxable income or taxes payable.
Note payable  A promissory note (essentially an IOU) that obligates the issuing corporation to repay a stated amount at or by a specified maturity date and to pay interest to the lender between the issue date and maturity.
Notes receivable  receivables supported by a formal agreement or note that specifies payment terms.
Objectives-oriented/principles-based accounting standards  approach to standard setting stresses professional judgment, as opposed to following a list of rules.
Operating activities  inflows and outflows of cash related to transactions entering into the determination of net income.
Operating cycle  period of time necessary to convert cash to raw materials, raw materials to finished product, the finished product to receivables, and then finally receivables back to cash.
Operating income  includes revenues and expenses directly related to the principal revenue-generating activities of the company.
Operating leases  fundamental rights and responsibilities of ownership are retained by the lessor and that the lessee merely is using the asset temporarily.
Operating loss carryback  reduction of prior (up to two) years' taxable income by a current net operating loss.
Operating loss forward  reduction of future (up to 20) years' taxable income by a current net operating loss.
Operating segment  a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other companies of the same enterprise); whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; for which discrete financial information is available.
Operational assets  property, plant, and equipment, along with intangible assets.
Operational risk  how adept a company is at withstanding various events and circumstances that might impair its ability to earn profits.
Option  gives the holder the right either to buy or sell a financial instrument at a specified price.
Option pricing models  statistical models that incorporate information about a company's stock and the terms of the stock option to estimate the option's fair value.
Ordinary annuity  cash flows occur at the end of each period.
Other comprehensive income  certain gains and losses that are excluded from the calculation of net income, but included in the calculation of comprehensive income.
Paid-in capital  invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation.
Parenthetical comments/modifying comments  supplemental information disclosed on the face of financial statements.
Participating  preferred shareholders are allowed to receive additional dividends beyond the stated amount.
Patent  exclusive right to manufacture a product or to use a process.
Pension plan assets  employer contributions and accumulated earnings on the investment of those contributions to be used to pay retirement benefits to retired employee.
Percentage-of-completion method  allocation of a share of a project's revenues and expenses to each reporting period during the contract period.
Periodic inventory system  the merchandise inventory account balance is not adjusted as purchases and sales are made but only periodically at the end of a reporting period when a physical count of the period's ending inventory is made and costs are assigned to the quantities determined.
Periodicity assumption  allows the life of a company to be divided into artificial time periods to provide timely information.
Permanent accounts  represent assets, liabilities, and shareholders' equity at a point in time.
Perpetual inventory system  account inventory is continually adjusted for each change in inventory, whether it's caused by a purchase, a sale, or a return of merchandise by the company to its supplier.
Pledging  trade receivables in general rather than specific receivables are pledged as collateral; the responsibility for collection of the receivables remains solely with the company.
Point-of-sale  the goods or services sold to the buyer are delivered (the title is transferred).
Post-closing trial balance  verifies that the closing entries were prepared and posted correctly and that the accounts are now ready for next year's transactions.
Posting  transferring debits and credits recorded in individual journal entries to the specific accounts affected.
Postretirement benefits  all types of retiree benefits; may include medical coverage, dental coverage, life insurance, group legal services, and other benefits.
Potential common shares  Securities that, while not being common stock may become common stock through their exercise, conversion, or issuance and therefore dilute (reduce) earnings per share.
Predictive value/feedback value  confirmation of investor expectations about future cash-generating ability.
Preferred stock  typically has a preference (a) to specified amount of dividends (stated dollar amount per share or percentage of par value per share) and (b) to distribution of assets in the event the corporation is dissolved.
Premium  arises when bonds are sold for more than face amount.
Prepaid expense  represents an asset recorded when an expense is paid in advance, creating benefits beyond the current period.
Prepayments/deferrals  the cash flow precedes either expense or revenue recognition.
Present value  today's equivalent to a particular amount in the future.
Prior period adjustment  addition to or reduction in the beginning retained earnings balance in a statement of shareholders' equity due to a correction of an error.
Prior service cost  the cost of credit given for an amendment to a pension plan to employee service rendered in prior years.
Pro forma earnings  actual (GAAP) earnings reduced by any expenses the reporting company feels are unusual and should be excluded.
Product costs  costs associated with products and expensed as cost of goods sold only when the related products are sold.
Profit margin on sales  net income divided by net sales; measures the amount of net income achieved per sales dollar.
Projected benefit obligation (PBO)  the discounted present value of estimated retirement benefits earned so far by employees, applying the plan's pension formula using projected future compensation levels.
Property dividend  when a noncash asset is distributed.
Property, plant, and equipment  land, buildings, equipment, machinery, autos, and trucks.
Prospective approach  the accounting change is implemented in the present, and its effects are reflected in the financial statements of the current and future years only.
Proxy statement  contains disclosures on compensation to directors and executives; sent to all shareholders each year.
Purchase commitments  contracts that obligate a company to purchase a specified amount of merchandise or raw materials at specified prices on or before specified dates.
Purchase discounts  reductions in the amount to be paid if remittance is made within a designated period of time.
Purchase return  a reduction in both inventory and accounts payable (if the account has not yet been paid) at the time of the return.
Purchases journal  records the purchase of merchandise on account.
Quasi reorganization  a firm undergoing financial difficulties, but with favorable future prospects, may use a quasi reorganization to write down inflated asset values and eliminate an accumulated deficit.
Ratio analysis  comparison of accounting numbers to evaluate the performance and risk of a firm.
Raw materials  cost of components purchased from other manufacturers that will become part of the finished product.
Real estate lease  involves land—exclusively or in part.
Realization principle  requires that the earnings process is judged to be complete or virtually complete, and there is reasonable certainty as to the collectibility of the asset to be received (usually cash) before revenue can be recognized.
Rearrangements  expenditures made to restructure an asset without addition, replacement, or improvement.
Receivables  a company's claims to the future collection of cash, other assets, or services.
Receivables turnover ratio  indicates how quickly a company is able to collect its accounts receivable.
Recognition  process of admitting information into the basic financial statements.
Redemption privilege  might allow preferred shareholders the option, under specified conditions, to return their shares for a predetermined redemption price.
Related-party transactions  transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company.
Relevance  one of the primary decisionspecific qualities that make accounting information useful; made up of predictive value and/or feedback value, and timeliness.
Reliability  the extent to which information is verifiable, representationally faithful, and neutral.
Rent abatement  lease agreements may call for uneven rent payments during the term of the lease, e.g., when the initial payment (or maybe several payments) is waived.
Replacement cost (RC)  the cost to replace the item by purchase or manufacture.
Replacement depreciation method  depreciation is recorded when assets are replaced.
Representational faithfulness  agreement between a measure or description and the phenomenon it purports to represent.
Residual value  or salvage value, the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.
Restoration costs  costs to restore land or other property to its original condition after extraction of the natural resource ends.
Restricted stock  shares subject to forfeiture by the employee if employment is terminated within some specified number of years from the date of grant.
Retail inventory method  relies on the relationship between cost and selling price to estimate ending inventory and cost of goods sold; provides a more accurate estimate than the gross profit method.
Retained earnings  amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends.
Retired stock  shares repurchased and not designated as treasury stock.
Retirement depreciation method  Records depreciation when assets are disposed of and measures depreciation as the difference between the proceeds received and cost.
Retrospective approach  financial statements issued in previous years are revised to reflect the impact of an accounting change whenever those statements are presented again for comparative purpose.
Return on assets (ROA)  indicates a company's overall profitability.
Return on shareholders' equity  measures the return to suppliers of equity capital.
Revenues  inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major, or central, operations.
Reverse stock split  when a company decreases, rather than increases, its outstanding shares.
Reversing entries  optional entries that remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period.
Right of conversion  shareholders' right to exchange shares of preferred stock for common stock at specified conversion ratio.
Right of return  customers' right to return merchandise to retailers if they are not satisfied.
Rules-based accounting standards  a list of rules for choosing the appropriate accounting treatment for a transaction.
S corporation  characteristics of both regular corporations and partnerships.
SAB No. 101  Staff Accounting Bulletin 101 summarizes the SEC's views on revenue recognition.
Sale-leaseback transaction  the owner of an asset sells it and immediately leases it back from the new owner.
Sales journal  records credit sales.
Sales return  the return of merchandise for a refund or for credit to be applied to other purchases.
Sales-type lease  in addition to interest revenue earned over the lease term, the lessor receives a manufacturer's or dealer's profit on the sale of the asset.
Sarbanes-Oxley Act  law provides for the regulation of the key players in the financial reporting process.
Secondary market transactions  provide for the transfer of stocks and bonds among individuals and institutions.
Securities and Exchange Commission (SEC)  responsible for setting accounting and reporting standards for companies whose securities are publicly traded.
Securities available-for-sale  equity or debt securities the investor acquires, not for an active trading account or to be held to maturity.
Securities to be held-to-maturity  debt securities for which the investor has the "positive intent and ability" to hold the securities to maturity.
Securitization  the company creates a special purpose entity (SPE), usually a trust or a subsidiary; the SPE buys a pool of trade receivables, credit card receivables, or loans from the company and then sells related securities.
Serial bonds  more structured (and less popular) way to retire bonds on a piecemeal basis.
Service cost  increase in the projected benefit obligation attributable to employee service performed during the period.
Service life (useful life)  the estimated use that the company expects to receive from the asset.
Service method  allocation approach that reflects the declining service pattern of the prior service cost.
Share purchase contract  shares ordinarily are sold in exchange for a promissory note from the subscriber—in essence, shares are sold on credit.
Short-term investments  investments not classified as cash equivalents that will be liquidated in the coming year or operating cycle, whichever is longer.
Significant influence  effective control is absent but the investor is able to exercise significant influence over the operating and financial policies of the investee (usually between 20% and 50% of the investee's voting shares are held).
Simple capital structure  a firm that has no potential common shares (outstanding securities that could potentially dilute earnings per share).
Simple interest  computed by multiplying an initial investment times both the applicable interest rate and the period of time for which the money is used.
Single-step  income statement format that groups all revenues and gains together and all expenses and losses together.
Sinking fund debentures  bonds that must be redeemed on a prespecified year-by-year basis; administered by a trustee who repurchases bonds in the open market.
Source documents  relay essential information about each transaction to the accountant, e.g., sales invoices, bills from suppliers, cash register tapes.
Special journal  record of a repetitive type of transaction, e.g., a sales journal.
Specific identification method  each unit sold during the period or each unit on hand at the end of the period to be matched with its actual cost.
Specific interest method  for interest capitalization, rates from specific construction loans to the extent of specific borrowings are used before using the average rate of other debt.
Start-up costs  whenever a company introduces a new product or service, or commences business in a new territory or with a new customer, it incurs one-time costs that are expensed in the period incurred.
Statement of cash flows  change statement summarizing the transactions that caused cash to change during the period.
Statement of shareholders' equity  statement disclosing the source of changes in the shareholders' equity accounts.
Stock appreciation rights (SARs)  awards that enable an employee to benefit by the amount that the market price of the company's stock rises above a specified amount without having to buy shares.
Stock dividend  distribution of additional shares of stock to current shareholders of the corporation.
Stock options  employees aren't actually awarded shares, but rather are given the option to buy shares at a specified exercise price within some specified number of years from the date of grant.
Stock split  stock distribution of 25% or higher, sometimes call a large stock dividend.
Straight line  an equal amount of depreciable base is allocated to each year of the asset's service life.
Straight-line method  recording interest each period at the same dollar amount.
Subordinated debenture  the holder is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied.
Subsequent event  a significant development that takes place after the company's fiscal yearend but before the financial statement are issued.
Subsidiary ledger  record of a group of subsidiary accounts associated with a particular general ledger control account.
Successful efforts method  requires that exploration costs that are known not to have resulted in the discovery of oil or gas be included as expense in the period the expenditures are made.
Sum-of-the-years'-digits (SYD) method  systematic acceleration of depreciation by multiplying the depreciable base by a fraction that declines each year.
Supplemental financial statements  reports containing more detailed information than is shown in the primary financial statements.
T-account  account with space at the top for the account title and two sides for recording increases and decreases.
Taxable income  comprises revenues, expenses, gains, and losses as measured according to the regulations of the appropriate taxing authority.
Technological feasibility  established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.
Temporary accounts  represent changes in the retained earnings component of shareholders' equity for a corporation caused by revenue, expense, gain, and loss transactions.
Temporary difference  difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis which will "reverse" in later years.
Time-based methods  allocated the cost base according to the passage of time.
Time value of money  money can be invested today to earn interest and grow to a larger dollar amount in the future.
Timeliness  information that is available to users early enough to allow its use in the decision process.
Times interest earned ratio  a way to gauge the ability of a company to satisfy its fixed debt obligations by comparing interest charges with the income available to pay those charges.
Trade discounts  percentage reduction from the list price.
Trade notes payable  formally recognized by a written promissory note.
Trademark (tradename)  exclusive right to display a word, a slogan, a symbol, or an emblem that distinctively identifies a company, a product, or a service.
Trading securities  equity or debt securities the investor (usually a financial institution) acquires principally for the purpose of selling in the near term.
Transaction analysis  process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved.
Transactions  economic events.
Transaction obligation  the unfunded accumulated postretirement benefit obligation existing when SFAS 106 was adopted.
Treasury stock  shares repurchased and not retired.
Troubled debt restructuring  the original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor (borrower).
Trustee  person who accepts employer contributions, invests the contributions, accumulates the earnings on the investments, and pays benefits from the plan assets to retired employees or their beneficiaries.
Unadjusted trial balance  a list of the general ledger accounts and their balances at a particular date.
Understandability  users must understand the information withing the context of the decision being made.
Unearned revenues  cash received from a customer in one period for goods or services that are to be provided in a future period.
Units-of-production method  computes a depreciation rate per measure of activity and then multiplies this rate by actual activity to determine periodic depreciation.
Unqualified opinion  auditors are satisfied that the financial statements present fairly the company's financial position, results of operations, and cash flows and are in conformity with generally accepted accounting principles.
Valuation allowance  indirect reduction (contra account) in a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Verifiability  implies a consensus among different measurers.
Vertical analysis  expression of each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, but within the same year.
Vested benefits  benefits that employees have the right to receive even if their employment were to cease today.
Weighted-average interest method  for interest capitalization, weighted-average rate on all interest-bearing debt, including all construction loans, is used.
With recourse  the seller retains the risk of uncollectibility.
Without recourse  the buyer assumes the risk of uncollectibility.
Working capital  differences between current assets and current liabilities.
Work-in-process inventory  products that are not yet complete.
Worksheet  used to organized the accounting information needed to prepare adjusting and closing entries and the financial statements.





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