Accounting. It is a system that collects, processes, analyzes, measures, and records financial information of a firm and reports that information to decision makers

Accounting equation. The process used to capture the effect of economic events; Assets = Liabilities + Owner’s Equity

Accounting fraud. It is the intentional misrepresentation and abuse of accounting information including sales, revenues, expenses, assets, or liabilities to inflate earnings, stock values, obtain more loans, or avoid debt commitments

Accounts payable. Accounts that are owed to suppliers (trade creditors). Accounts payable are shown under current (short-term) liabilities in the balance sheet

Accounts receivables. They are promises to receive money from customers and are generally classified as current assets

Accrual accounting / Accruals. It is the accounting principle that recognizes revenue when earned and associated expenses when incurred, not when money is received / paid

Accrued liability. Expense already incurred but not yet paid (accrued expense)

Accrued receivable. The recognition of revenue earned before cash is received

Accumulated depreciation. It is the amount of depreciation accumulated to date for fixed assets. It is a contra account to fixed assets

Activity ratios. Measures a company’s efficiency in managing its assets

Additional paid in capital. It is contributed capital by shareholders in excess of par or stated value. It is calculated as total contributed capital less total par value of the stock

Amortization. The allocation of the cost of an intangible asset (such as a patent or trademark) over its useful life

Annual report. It is a document used by most companies to disclose corporate information to their shareholders. It includes an opening letter from the CEO, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs

Assets. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Asset disposal. A corporation may decide not to hold a long-lived asset for its entire life. The cost of the asset and any accumulated depreciation associated with the asset at the date of disposal must be removed from the books. The difference between any proceeds received on disposal of an asset and its net book value at the date of disposal is recognized as a gain or loss on the disposal of the asset

Asset impairment. It occurs when an asset’s fair value is less than its net book value (i.e., total cost of the asset – its accumulated depreciation). Impairment results in an impairment loss calculated as Net Book Value − Fair Value

Asset recognition. An asset is created (or recognized) on the balance sheet if the expenditure satisfies the asset recognition criteria: The benefit is quantifiable and rights to use are obtained due to past transactions

Asset Retirement Obligation (ARO). Obligation associated with the disposition of an operational asset

Auditors. Independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company’s financial statements

Auditor’s report. Report issued by CPAs who audit the financial statements that informs users of the audit findings

Authorized shares. The maximum number of shares that the firm can issue according to firm’s article of incorporation

Available-For-Sale (AFS). Used for a debt or equity security that does not qualify as Trading or Held-To-Maturity

Bad debt. Bad debts, which occur when debtors do not pay, reduce the amount of accounts receivable on the balance sheet and creates a loss in the income statement

Balance Sheet. It reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time

Bank loan. It is borrowing from a bank. It is a liability account on the balance sheet

Bond. A type of loan where the borrower pays to the lender fixed periodic amounts (i.e., coupon payments) and the original amount of borrowed money (i.e., the principal) at the bond maturity date

Bond certificate. Firms issue bond certificates to lenders in return of the amount borrowed. Bond certificates include the following information: maturity date (principal repayment date), Face value (the amount to repay at maturity), and coupon rate (annual interest rate)

Building financial statements. It is the process of recording transactions and sorting them to form balance sheet, income statement, and cash flow statement

Capital markets. Mechanisms that foster the allocation of resources efficiently

Capitalization. Creating an asset on the balance sheet

Cash accounting. It is the accounting principle that recognizes revenue when cash is received and recognizes expense when cash is paid

Cash discounts. They are discounts given on the sale price if the customer pays in a certain time period to encourage early payment

Cash equivalents. Short-term, highly liquid investments that can be readily converted to cash with little risk of loss

Cash flows. Cash spending or cash generation

Cash flows from financing activities. Cash generated / spent through a firm’s financing activities (e.g., equity issuance, debt, dividends)

Cash flows from investing activities. Cash generated / spent through a firm’s investment activities (e.g., purchasing fixed assets)

Cash flows from operations. Cash generated / spent through a firm’s main operations

Cash Flows Statement. It is the financial statement showing how cash of a firm changes in a certain period

Common share. It is the ownership interest in a corporation. Common shareholders bear the ultimate risk of loss and receive the ultimate benefits of success, but they are not guaranteed dividends. They have the right to vote and the right to share in earnings of the corporation

Compound interest. Includes interest not only on the initial investment but also on the accumulated interest in prior periods

Comprehensive income. The total change in equity for a reporting period other than from transactions with owners

Conservatism. Revenues / profits are recorded only when earned, but provision is made for all known losses, even when the amount is only a best estimate on the basis of available information

Consignment. An arrangement where the “consignor” physically transfers the goods to the other company (“consignee”) to sell its product but the consignor retains legal title

Consistency. Consistency of accounting treatment of like items within each accounting period and from one period to the next

Consolidated financial statement. Financial information presentation in which the assets, equity, liabilities, and operating accounts of a firm and its subsidiaries are combined (after eliminating all inter-firm transactions) and shown as belonging to a single reporting entity. Also called combined financial statement or consolidated accounts

Construction In Progress (CIP). The contractor’s work-in-process inventory

Contingent liability. A potential liability that has arisen as the result of a past event; it is not a liability until some future event occurs

Contract. An agreement that creates legally enforceable rights & obligations

Copyright. An exclusive right of protection given to a creator of a published work

Cost of goods sold. Direct costs attributable to the goods sold by a company. In the income statement, cost of goods sold is subtracted from revenues to arrive at the gross profit of a business

Creditors. Creditors lend money to a company for a specific length of time

Coupon payment. This payment, which represents an annuity, is computed by multiplying the principal amount times the interest rate stated in the bond contract. The bond contract specifies whether the coupon payments are made quarterly, semiannually, or annually

Coupon rate. It is the interest to be paid to the bond investors

Deferrals. Receipts of assets/cash in advance before goods or services are delivered

Deferred income. Advance payments for products or services that are to be delivered in the future. It is recorded as a liability until delivery is made, at which time it is converted into revenue

Deferred revenues (unearned revenues). Represent liabilities recorded when cash is received from customers in advance of providing a good or service

Depletion. Allocation of the cost of natural resources

Depreciation. It is the gradual reduction of the value of the tangible asset over the life of the asset

Disclosure notes. Additional insights about company operations, accounting principles, contractual agreements, and pending litigation

Dividends. A dividend is a pro-rata distribution by a corporation based on the shares of a particular class of stock and usually represents a distribution of cash. Dividends are paid only on authorized, issued, and outstanding shares; they are not paid on treasury stock. Each common share is entitled to the same amount of cash

Dollar-Value LIFO Retail Method. LIFO retail method combined with dollar-value LIFO

Du Pont Framework. Depict return on equity as determined by profit margin (representing profitability), asset turnover (representing efficiency), and the equity multiplier (representing leverage)

Earnings management. It is a strategy used by the management of a company to deliberately manipulate the company’s earnings so that the figures match a predetermined target

Earnings Per Share (EPS). The amount of income earned by a company expressed on a per share basis

Earnings quality. The earnings quality is the quality of financial information provided by the company. High quality information is accurate, relevant, comparable, unbiased, and timely. High quality information is important to investors in making good investment decisions

Effective Interest Method. Calculates interest revenue as the market rate of interest multiplied by the outstanding balance of the investment

Equity. It is the amount of total assets financed by a firms’ owners (i.e., shareholders)

Equity Method. Used when an investor can’t control, but can significantly influence, the investee

Ethics. A code or moral system that provides criteria for evaluating right and wrong

Extended warranty. An additional, extended service that covers new issues arising after the buyer takes control of the product

Face value. It is the amount to repay at maturity of a bond

Factoring. An arrangement where the company sells its accounts receivable to a financial institution, which charges a fee for this service

Fair value. Bases measurement on the price that would be received in an orderly market transaction

Fair value option. Allows companies to report their financial assets and liabilities at fair value

Financial Accounting Standards Board (FASB).The current private sector body that has been delegated the task of setting accounting standards

FIFO. It assumes that the first units purchased or manufactured are the first units sold. This means that early purchases are expensed against revenues and recent costs are included in inventory

Fixed assets. Long-term tangible assets such as buildings and equipment.
Financial statements. Balance Sheet, Income Statement, Cash Flow Statement, and Statements of Shareholders’ Equity

Financial transaction. An exchange between a business and one or more external parties to a business. It has a monetary impact on the financial statements of a business

F.O.B. destination. The seller is responsible for shipping and the legal title does not pass until the goods arrive at their destination

F.O.B. 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

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

Fundamental accounting concepts. They are concepts governing the accounting system and include going concern, consistency, accruals, matching principle, and conservatism

Fundamental accounting equation. Assets = Liabilities + Stockholders’ Equity

Future value. Amount of money that a dollar will grow to at some point in the future

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

General ledger. Collection of accounts

Going concern. The assumption that the business will continue to operate for the foreseeable future

Goodwill. Goodwill is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition

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 or revenue

Gross Profit Method. Estimates cost of goods sold which is then subtracted from cost of goods available for sale to estimate ending inventory

Gross PPE. Undepreciated amount of plant, property, and equipment. It just includes original cost of PPE

Held-To-Maturity (HTM). Securities for which an investor has the positive intent and ability to hold the debt securities to maturity

Historical cost. Original transaction value

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

Impairment of goodwill. A charge that companies record when goodwill’s carrying value on financial statements exceeds its fair value. Goodwill impairment arises when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of goodwill dips below its book value

Income Statement. It is a financial statement that reports revenues, expenses, gains, and losses during a period

Intangible assets. Intangible assets are the long-term resources of an entity but have no physical existence. They derive their value from intellectual or legal rights, and from the value they add to the other assets. Intangible assets are generally classified into two broad categories: (1) Limited-life intangible assets, such as patents, copyrights, and trademarks; (2) Unlimited-life intangible assets, such as goodwill

Interest revenue. The earnings that an entity receives from the debt it lends

Inventory. They are goods of a firm to be sold to customers to generate revenues

Inventory impairment. It occurs when net realizable value of an inventory is less than the cost. Inventory impairment requires a decrease in value of inventory account on the balance sheet

Issued shares. Number of shares printed by the firm

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

Leverage ratios. AKA debt to equity ratio which equals total liabilities/shareholder’s equity

Liabilities. They are debts or obligations of the entity that result from past transactions, which will be paid with assets or services. They are sacrifices to transfer economic values and due to past transactions

Licenses. Allow the customer to use seller’s intellectual property

LIFO. It assumes that the last units purchased or manufactured are the first units sold. This method matches recent costs with revenues while earlier purchases remain in inventory

Liquidity. The ability to pay current obligations

Lower of the cost or the market. Valuation method used to value inventory on the balance sheet. It departs from the cost principle; it serves to recognize a loss when replacement cost or net realizable value of an inventory drops below cost

MACRS. The federal income tax code allows taxpayers to compute depreciation for their tax returns using this method

Matching. Revenues earned by a business are matched with the expenses incurred in earning those revenues

Maturity date. It is the bond principal repayment date

Net income. This measure is the difference between revenues and expenses

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 cash flow. This measure is the difference between cash receipts and cash payments

Net PPE. It is gross plant, property, and equipment net of accumulated depreciation

Net realizable value (fixed assets, inventory). It is the expected selling price of an asset less the expenses incurred in the sales transaction, and in bringing the asset to the saleable state (i.e. selling costs)

Net realizable value of receivables. Face value of receivables less cash discounts, sales returns, and bad debts

Non-operating income. Income received by a business that is not derived from its core operations. Non-operating income usually does not occur on an ongoing basis, and is examined separately from operating income. An example of non-operating income is income generated through the sale of a subsidiary or division

Notes payable. Written promises to pay stated sums of money at future dates, classified as current (if due within 12 months) or non-current (if due after 12 months) of the balance sheet date

Operating income. Includes revenues and expenses directly related to the principal revenue-generating activities of the company

Outstanding shares. Number of shares actively traded in the stock market (i.e., issued shares – treasury stock)

Par value. Value written on a share certificate (generally a very small number such as 1 cent)

Patent. Exclusive right to manufacture a product or to use a process

Percentage of Sales Method. Provision for bad debts is equal to a certain percentage of the credit sales. The percentage comes from either past experience or the bad debt rate of other firms in the same industry

Performance obligations. Promises to transfer goods and services to a customer. They are satisfied when the seller transfers control of goods or services to the customer

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

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

Prepaid expenses. It is an asset account that records the prepayment of future expenses

Principal. The amount payable at the maturity of a bond

Profitability ratios. Measures a company’s ability to earn an adequate return relative to sales or resources

Provision for credit losses. An allowance set aside that is judged adequate to cover anticipated credit losses

Provision for doubtful accounts. It is the amount of estimated accounts receivables that firms do not expect to collect from customers

Purchase discounts. Reductions in the amount to be paid if remittance is made within a designated period of time

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

Recording financial transactions. It involves the following steps: (1) Identify the accounts affected (at least two); (2) Classify each account as an asset, liability, or shareholders’ equity; (3) Determine the direction of the effect on each account; (4) Make sure that the fundamental accounting equation remains in balance

Repairs & Maintenance (R&M). Expenditures made to maintain a given level of benefits provided by the asset and do not increase future benefits

Residual approach. Used to estimate a stand-alone selling price that is very uncertain

Restructuring costs. Include costs associated with shutdown or relocation of facilities or downsizing of operations

Retained earnings. Cumulative earnings of a company that are not distributed to the owners and are reinvested in the business

Revenue recognition. The accounting principle governing when revenues need to be recognized in financial statements

Sales returns. It is a provision account to record the estimated amount sales returns by customers

Salvage value. The amount the company expects to receive for the asset at the end of its service life

Securities and Exchange Commission (SEC). Responsible for setting accounting and reporting standards for companies whose securities are publicly traded

Shareholders. Ultimate owners of firms

Shareholders’ equity (SE). Comprised of paid-in capital and retained earnings. Assets – Liabilities = SE

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

Straight-line Method. It is the most common depreciation method among companies. It is a method of depreciation where depreciation is recognized evenly over the life of the asset. Residual value is included in the calculation

Statement of Cash Flows. Change statement summarizing the transactions that caused cash to change during the period

Temporary accounts. Represent changes in the retained earnings component of shareholders’ equity for a corporation caused by revenue, expense, gain, and loss transactions

Trade discounts. Percentage reduction from the list price

Trademark. 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 (TS). Equity or debt securities the investor (usually a financial institution) acquires principally for the purpose of selling in the near term

Treasury stock. Number of issued shares repurchased by the firm

Unearned revenue. It is a liability account recording the firm’s promise to perform services or deliver goods in the future and is generated when customers pay in advance

Useful life. The amount of use that the company expects to obtain from the asset before disposing of it

Voting right. It is the right given to holders of common stock to vote

Work-in-process. Products that are not yet complete