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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.
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.
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.
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.
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 schedule  
schedule that reflects the changes in the debt over its term to maturity.
cost allocation for intangibles.
Annuity due  
cash flows occurring at the beginning of each period.
cash flows received or paid in the same amount 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.
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
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.
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.
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 approach  
determination of bad debt expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet.
Balance sheet  
a position statement that presents an organized list of assets, liabilities, and equity at a particular point in time.
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.
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.
Book value  
assets minus liabilities as shown in the balance sheet.
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 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  
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.
currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers.
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.
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.
practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.
the consignor physically transfers the goods to the other company (the consignee), but the consignor retains legal title.
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.
exclusive right of protection given to a creator of a published work, such as a song, painting, photograph, or book.
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.
represent the right side of the account.
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.
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).
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.
allocation of the cost of natural resources.
cost allocation for plant and equipment.
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.
Arises when bonds are sold for less than face amount.
the transfer of a note receivable to a financial institution.
Distributions to owners  
decreases in equity resulting from transfers to owners.
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.
prediction of future events.
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.
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.
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 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 accounting  
provides relevant financial information to various external users.
Financial activities  
cash inflows and outflows from transactions with creditors and owners.
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.
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;
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.
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.
individual or corporation given the right to sell the franchisor's products and use its name for a specified period of time.
grants to the franchisee the right to sell the franchisor's products and use its name for a specific period of time.
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.
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.
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.
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.
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.
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 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 statement  
statement of operations or statement of earnings is used to summarized the profit-generating activities that occurred during a particular reporting period.
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 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.
"rent" paid for the use of money for some period of time.
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.
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 turnover ratio  
measures a company's efficiency in managing its investment in inventory.
goods acquired, manufactured, or in the process of being manufactured for sale.
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.
intentional distortions of financial statements.
Journal entry  
captures the effect of a transaction on financial position in debit/credit form.
a chronological record of all economic events affecting financial position.
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.
user of a leased asset.
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.
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.

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