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Financial Accounting Glossary

Financial Accounting Glossary

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Published by Nadiya Khattak

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Published by: Nadiya Khattak on Sep 12, 2012
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10/31/2013

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Glossary
A
Accelerateddepreciationis a depreciationmethodn whichmore depreciationxpensestaken nthe earlyyearsoftheasset'sife andess nthe ateryears.Accountspayableare amountshat a companyowests ven-dors.They areiabilitiesandareshownon hebalanceheet.Accountsreceivableis a currentassethatarisesrom salesoncredi| it is alsohe totalamountcustomerswehe irm.The accountsreceivable(AR)turnoverratiois aratiothatmeasuresowquickly a firmcollectstsaccountseceiv-able. t isdefinedascredit salesividedbyaverageccountsreceivable.An accrual isa transactionn whichthe revenuehas beenearnedorthe expenseasbeen ncurredbut nocashhasbeenexchanged.Accrualaccountingreferso thewaywe recognizeevenuesand expenses.ccountantsdo notrely onthe exchangefcashodeterminehe timingof revenueecognition.Firmsrecognizeevenuewhentis earnedndexpenseshenheyare incurredno matterwhenthecashs receivedordis-bursed.Accrual accountingollowsthe matchingprinciple.Accumulateddepreciationis thereductiono thecostof theasset.Accumulateddepreciations a contra-asset,eductedfrom the costof the assetorthe balanceheet.Activitymethod depreciationis themethodofdepreciationin which usefulife is expressedn termsof theotalunits ofactivity orproductionexpectedrom theasset,ndhe assetis written offinproportion oits activityduringheaccount-ingperiod.Adjusting the booksmeanso makechangesnthe account-ing records,t the endoftheperiod,ustbeforeheinancialstatementsreprepared, o make sureheamountseflectthe financial conditionof the companyat thatdate'An aging scheduleis an analysisofthe amountsowedtoafirm bythe engthof timethey havebeenoutstanding'Allowancefor uncollectibleaccountsis acontra-assetc-count,he balanceof whichrepresentshetotalamounthefirm believest willnot collectfromits totalaccountse-ceivable.Allowance methodis amethodofaccountingorbaddebtsnwhichthe amountofthe uncollectibleaccountssestimatedatthe end of eachaccountingeriod.Amortizationmeans o writeoffthe costof a ong-termassetover more hanone accountingeriod.Annuity A seriesf equalcash eceiptsncashpayments venequallyspacentervalsof time.Assets are the economicesourceswnedor controlledbyacompany,esultingrompastransactions.Authorizedsharesare sharesf stockhatare availableor afirm to issueperts corporateharter.Available-for-salesecuritiesInvestmentshecompanymayholdor sell; the company'sntentions notclearenoughouseone ofthe othercategorieseld tomaturityottrading.
B
Baddebtsexpenses theexpenseo recorduncollectibleac-countseceivable.Thebalancesheetis oneof thefourmajor financialstate-ments.t showshe amountsofa firm'sassets,iabilities,and owners'equityat aspecificpoint in time.A bankreconciliationis a comparisonetweenhe cashbal-ancen the irm'saccountingecordsnd hecashbalancenthebankstatemento dentifyheeasonsor anydifferences.A bankstatementis a summaryof theactivityn a bankac-countsenteachmontho theaccountholder'Thebookvalueof an assetsthe cost minusheaccumulateddepreciationelatedothe asset.Thebooksare acompany'saccountingecords.A bondis aninterest-bearing,ong-termnotepayable ssuedbycorporations,niversities,ndgovernmental gencies.Bondsissued at a discountarebonds ssuedoran amountIesshan hefacevalue ofthebond.This happenswhenhemarketate ofinterestsgreaterhanhe bond'sstatedateofinterest.Bondsissued atpararebondsssuedor the acevalueofthebond.Thishappenswhenhemarketateofinterest sequaltothe bond'sstatedate ofinterest.Bondsissued at apremium arebonds ssuedoran amountmorehan heacevalueofthebond.This happenswhenhemarketate of interestsless hanhe bond'sstatedate ofinterest.
c
Capital,as shownona balancesheet,s thecombinedcon-tributedcapitalandearnedapitaletainedarningsf a soleproprietorship rpartnershiP.Capitalis a term oftenusedo describeheresourcessed ostartand un a business.A capitalexpenditureis a costhat isrecordedas anasset,notan expense,t thetime itis incurred.Thisis alsocalledcapitalizingacost.Capitalstructureis thecombinationof debtandequityhatafirmuses ofrnancets business.To capitalizeis to recorda costasan assetatherhan orecordit asan expense.Carryingvalue is anotherexpressionor bookvalue.Cashbasis accountingis asystembasedonthe exchangefcash.n thissystem,evenues recognizednlywhencashis collected,andanexpenses recognizednlywhencashsdisbursed.his isnot an acceptablemethodof accountingunderGAAP.Cashequivalentsare highlyliquidinvestmentswitha matu-rityof 3monthsorless hata flrm caneasilyconvertnto aknown amountof cash.A certifiedpublicaccountant(CPA)is someonewhohasmet specifrceducationnd examequirementsetup byin-dividualstateso makesurehat onlyindividualswiththe621
 
622GLOSSARY
appropriate ualificationsanperformaudits.Tosignan au-dit report,an accountantmust be a CPA.Aclassifiedbalance sheet showsa subtotalor many tems,includingcurrentassets nd current iabilities.Commonstock is the mostwidespreadorm of ownership na corporation;ornmonshareholdersavea vote n the elec-tionof the firm'sboardof directors.Comparativebalance sheets are the balance sheets romconsecutiveiscalyearsora singlecompany.Comprehensiveincome Thetotal of all items that affectshareholders'quityexcept ransactionswiththe owners;comprehensivencomehas woparts:net ncomeand othercomprehensivencome.Contingentliabilities arepotentialiabilities that dependona futureevent elated osomepastaction.Acontra-assetis an amounthat s deducted rom an asset.Acontra-revenueis an accounthat s an offset o a revenueaccountandhereforededucted rom therevenue or the fi-nancialstatements.Contributedcapital, sometimesalledpaid-incapital, s theamounthe ownershaveputinto the business.Cooking thebooks A slang xpressionhat means o manipulateor falsifythe irm's accountingecords o make he irm's finan-cialperformancerpositionookbetter han t actually s.Acopyright isa form oflegalprotectionor authorsof"orig-inalworks of authorship,"rovidedby U.S.awA corporationis a specialegal orm for a businessn which hebusinesssalegalentity separateromthe owners.A corpo-rationmay havea singleowneror a largenumberof owners.CorporategovernanceThe way a firmgovernstself,as ex-ecutedby theboard of directors.Corporategovernancesalsodescribeds he setofrelationshiosbetween he boardofdirectors,management, hareholders,uditors,and anyotherswith a stake n thecompany.Cost ofgoodsavailable forsalesthe total of beginning n-ventoryplushe netpurchasesmadeduring heperiod(plusany reight-incosts).Currentassetsare he assetshe companyplanso tum intocashoruse ogenerateevenuen the next iscalyear.Current liabilitiesare iabilitiesthe companywillpayoff inthenext fiscalyear.Currentratio isa iquidity ratio thatmeasures hrm's abilityto meetts short-termoblieations.
D
Decliningbalance depreciationis an accelerated eprecia-tionmethodn which depreciationxpenses basedon thedecliningbookvalueof theasset.Adeferral isa transactionnwhich the cash s exchanged e-forethe revenues earned rthe expenses incurred.Definitelydeterminableliabilities areobligations hat canbemeasuredxactly.Depletionis theamortizationof a naturalesource.A depositin transit isa bank depositherrmhasmadebut snot ncludedon themonth'sbank statementecausehe de-positdid not reachhe bank's ecord-keepingepartmentntimeto be ncludedon the currentbank statement.Depreciatinganasset means o recognize hecost of the as-setasan expensever more hanoneperiod.Depreciationisa systematic nd ationalallocationprocessorecognizehe expenseflong-termassets ver theperiodsinwhichthe assets reused.Thedirect methodshowseverycash nflow and outflow topreparehestatement fcash lows.The directwrite-off method is a methodof accounting orbaddebts n which theyareecordedsanexpensen thepe-riod in whichthey are dentifredas uncollectible.Discount onbondspayableis a contra-liabilityhat sde-ductedrom bondspayableon the balanceheet; t is thedifferencebetweenhe face valueof the bond and itssellingprice,when he sellingpricesless han he face(par)value.Discontinuedoperations Thosepartsof the irmthat a com-panyhaseliminatedby sellinga division.The discount rateis the nterest ate usedo comDutehe ore-sentvalue of futurecash lows.Discountingmeans o computehepresentvalue of futurecash lows.Dividendyieldratio Dividend persharedivided by the cur-rentmarketprice pershare.Dividendsare the distributionof a corporation'searnings oshareholders.
E
Earningspershare(EPS)Net incomedivided by theweightedaveragenumberof outstandingsharesof(com-mon)stock.Estimatedliabilitiesare obligations hathave some uncer-taintyn the amount,suchas he cost o honora warranty.EXpenSeS rehe costs ncurred ogenerateevenue.Extraordinary itemsEvents hatare unusual n nature andinfrequentn occurrence.
FTheFinancialccountingtandards oardFASB)s he
groupthat sets accountingstandards.tgetsts authorityfrom theSEC.Financial leverageis the use of bonowedfunds to increaseeamlngs.Financialservices companiesdealin services relatedtomoney.First-in, first-out(FIFO)is theinventory cost flowmethod hatassumeshe irst temspurchasedre he irstitemssold.Afiscalyearisayearn the ife ofa business.t mayormaynotcoincidewiththe calendarear.FOB(freeon board) destinationmeans hatthe vendor(sellingfirm)paysthe shipping costs,so the buyer has nofreight-incost.FOB(freeonboard) shippingpointmeanshe buying irmpayshe shippingcosts.The amount scalled reighrin andis includedn thecostof the nventory.A for-profitfirm hashegoalof makingaprofitfor its owners.A franchiseis an agreementhat authorizessomeone o sellor distributea company'sgoodsor services n acertainarea.Free cashflow is equal o cashrom operatingactivitiesmi-nus dividendsand minus capitalexpenditures.The full-disclosure principlemeanshat the firmmust dis-close anycircumstances ndevents hat wouldmake a dif-ferenceo the usersofthe financialstatements.
G
Generally acceptedaccountingprinciples (GAAP)aretheguidelinesor financial eporting.Thegoing-concernassumptionmeans hat, unlesshere sobviousevidenceo the contrarya firm is expectedo con-tinue operatingn the foreseeableuture.
 
Goodwill is the excess f cost overmarketvalue ofthe net as-setswhenone companypurchasesnotherompany.Grossprofitratio is equal o thegrossprofit(salesminuscostofgoodssold) divided by sales. t is a ratiofor evaluatingfirmperformance.
H
Held-to-maturitysecuritiesInvestments n debt securitiesthat hecompanyplanso hold until theymature.The historical-costprinciplemeanshat transactionsarerecordedat actualcost.Horizontalanalysis A technique or evaluatinghnancialstatementmounts crossime.
I
Thencome statement showsall revenuesminusall expensesfor anaccountingerioda month, aquarter,orayear.Impairmentis apermanentdeclinen the fair market valueof an asset uch hat ts book value exceedstsfair mar-ketvalue.The ndirectmethod startswithnet ncomeandmakesadjust-ments oritems hat arenot cash opreparehe statement fcash lows.Intangibleassets are ights,privileges,or benefitshat resultfromowning ong-livedassetshat do not havephysicalsub-stance.The nterestis the cost of using someone lse'smoney.Interestpayableis a liability.Itisthe amount a companyowes orborrowing money(afterhetimeperiodto whichthe nterestapplieshaspassed).Internalcontrols are a company'spoliciesandproceduresoprotecthe assetsfthe firmando ensure he accuracy ndreliabilityoftheaccountingecords.The InternalRevenue Service(IRS)is thefederal agencyresponsibleor federal ncome ax collection.The nventoryturnover ratio is definedascostof goodssolddividedby averagenventory. t is a measure fhowquicklya firmsells ts inventory.Issuedshares are shares f stock hat havebeenofferedandsold o shareholders.
L
Last-in, first-out(LIFO)istheinventory cost low methodthatassumeshe ast temspurchasedre he irsttems sold.Liabilitiesare obligations he companyhas ncurredo obtainthe assetst has acquired.Liquidityis a measure fhow easilyan asset anbeconvertedtocash.The more iquid an assets, the moreeasily t canbeturnednto cash.Liquidity ratiosmeasurehe company'sabilitytopayts cur-rentbills and operating osts.The ower-of-cost-or-market(LCM)rule is therule that e-quiresirms touse heowerof either hecost or the marketvalue(replacementost) of its inventoryonthe date of thebalanceheet.
M
Themaker of a note s thepersonorfrrm making hepromisetopay.A manufacturingcompanymakes hegoodst sells.Marketindicators ratios elatehe currentmarketpriceof thecompany's tock oeamingsor dividends.Themarket rateofinterest is thenterestate hat an nvestorcould earn n anequallyiskyinvestment.
GLOSSARY 623
Thematchingprinciplesayshatexpenses houldberecog-nizedshownon thencome statementn the sameperiodasthe revenue hey helpedgenerate.Amerchandising companysellsaproducto itscustomers.The monetary-unit assumptionmeans hat the tems on thefinancial statements remeasuredn monetaryunits(dollarin theU.S.).A multistep income statement startswith salesand subtractscostofgoodssoldtogeta subtotalcalledgrossprofitonsales,lsoknown asgrossmargin.Then,otheroperating ev- enuesare addedand other operating xpenses re deducted.A subtotal or operatingncome sshownbefore deductionsrelatedo nonoperatingtems and axesare deducted. hen,incomeaxesare subtracted,eavingnet ncome.NNetincomeequalsallrevenuesminus all expensesor a spe-cificperiodoftime.Noncurrentassets, or long-term assets,areassetshatwillIast or more han ayear.Noncurrentliabilities,orlong-term liabilities, are iabil-itiesthatwill take ongerhan ayearo settle.Notesto the financial statementsare nformationprovidedwiththefour basic statementshat describeshe company'smajor accountingoliciesandprovideother disclosuresohelpexternal sers etterunderstandhe inancialstatements. Anot-for-profit firm has hegoalofprovidinggoodsor ser-viceso tsclients.
o
Onaccount means n credit.Theexpression pplies o eitherbuyingorselling oncredit.OrdinaryannuitiesAn annuitywhosepaymentsremadeatthe end of each nterval orperiod.An outstanding check is a checkhe firm haswrittenbut hasnotyetcleared he bank.That s, the checkhasnot been pre-sented o the bank orpayment.Outstandingshares are sharesof stock that are ownedbystockholders.
P
Paid-incapital is theamountof theowner's ontributions o thefrrm;alsoknown asshareholders'equity or stockholders'equity.Parvalueis the monetaryamountassignedo ashareofstockin the corporate harter. thas ittle meaning n today'sbusi-nessenvironment.Apartnershipis a company wnedby two or morendividuals.Apatentisapropertyight thatheU.S.government rantsoannventortoexcludeothersrom making,using,offeringfor sale, orsellingthe invention throughout the UnitedStatesor importing the invention nto the United Statesora specihederiodof time."Thepayeeof a note s thepersonor firm receiving he money.Theperiodicinventorysystemis a methodof recordkeep-ingthat nvolvesupdatinghe accounting ecordsonly at heendof theaccountingeriod.Theperpetualinventorysystems a methodofrecord keep-ing that nvolvesupdating he accountingecordsat he imeof everypurchase,ale,andeturn.Preferredstock are sharesof stock that representa specialkind of ownership n a corporation.Preferredshareholdersdonotgeta vote but they do receivedividendsbefore hecoffImon hareholders.

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