60 VOCABULARY Flashcards
Acquisition
An acquisition is a business combination in which one entity achieves control over another, thus requiring combined financial statement presentation using “consolidated financial statements.” Control is direct or indirect power over the management of another entity. An acquisition can occur when one company acquires a majority share in the voting stock of another enterprise but both entities continue their legal existence. Each company retains its legal existence in a parent-subsidiary relationship.
Acquisition Method
To apply the acquisition method, one must:
- identify the acquirer,
- determine the acquisition date,
- recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquire, and
- recognize and measure goodwill or a gain from a bargain purchase.
The acquirer is an entity that receives control of another entity by giving up consideration.
The acquisition date is the date on which the acquirer obtains control of the entity.
FASB ASC 805-10-05-2 requires that as of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement (SFAC) 6, Elements of Financial Statements, at the acquisition date.
- In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions.
Amortization
Amortization is an accounting process for reducing an asset or liability by periodic payments or writedowns that are distributed across the time the organization gains a value from or has obligation for the item. Specifically, it is the process of reducing a liability recorded as a result of a cash receipt (e.g., unearned revenue) by recognizing revenues or reducing an asset recorded as a result of a cash payment (e.g., prepaid expenses) by recognizing expenses or costs of production.
SFAC 6.142
Amortization is an allocation process to orderly reduce bond premium, bond discount, and bond issue costs by allocating the cost of an intangible asset to expense over time.
Carrying Amount (Book Value)
The carrying amount or book value is the net amount at which an item is reported in the financial statements of the enterprise. For a receivable, the FASB ASC Glossary indicates the carrying amount is the “face amount increased or decreased by applicable accrued interest and applicable unamortized premium, discount, finance charges, or issues costs and also an allowance for uncollectible amounts and other valuation accounts.”
For a payable, the FASB ASC Glossary indicates the carrying amount is the “face amount increased or decreased by applicable accrued interest and applicable unamortized premium, discount, finance charges, or issue costs.”
Cash Dividend
Combined Financial Statements
Combined financial statements are the financial statements of a combined group of commonly controlled entities or commonly managed entities presented as those of a single economic entity. The combined group does not include the parent.
Common Stock
Common stock is ownership interest that is subordinate to all other classes of stock (and to all creditors) of the issuing corporation in participation rights and in dividend and liquidation preferences (i.e., holders of common stock are paid after debt and preferred stock obligations have been met). Common stock is also known as residual ownership interest and usually carries voting rights (at stockholders’ meetings), although some classes of common stock may be nonvoting. Common stock is often called common shares.
Consolidation
Consolidation is a reporting procedure in which the financial statements of the parent and the subsidiary are combined. The financial statements are prepared by the parent, not by the subsidiary. Consolidation is a reporting procedure only. It does not affect the accounting records of either the parent or the subsidiary.
All majority-owned subsidiaries must be consolidated with the parent unless control does not rest with the majority owner (e.g., if the subsidiary is in legal reorganization or bankruptcy).
Cost of Goods Sold
The cost of goods sold is all costs that were included in the value of the units of finished product sold during the period.
Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold
Customer
A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
FASB ASC Glossary
Depreciation
Dividends
Dividends are the distributions of cash, other corporate assets or property, or the corporation’s own stock to stockholders in proportion to the number of outstanding shares held. Accounting for dividends represents a debit to retained earnings and the establishment of a liability at the date of declaration. Dividends must meet the preferences of preferred stock first and then may be extended to common stock.
There are two types of dividends:
Common, such as cash, stock (treasury or newly issued shares), and property
Special, such as scrip and liquidating
Four dates are relevant to dividends: date of declaration, record, ex-dividend, and distribution (payment).
Date of declaration is the date whereby the dividend amount is decided by the board of directors for those shareholders owning stock on the date of record (usually 1 month later) and to be paid on the date of distribution. Ex-dividend date is a date prior to the date of record (see ex-dividend date).
Equity
Equity is ownership interest. It is the residual interest in the business entity that remains after deducting its liabilities. Equity is affected by all events that increase or decrease total assets by a different amount than they increase or decrease total liabilities.
SFAC 6.49–.65 and 6.212–.214
Distinctions within equity (common, preferred, etc.) are matters of presentation and display, not of definition.
Equity stems from ownership rights and involves a relation between the enterprise and its owners as owners rather than as employees, lenders, suppliers, customers, or other nonowner roles. Stockholders, partners, proprietors, investors, and participants are also terms used in defining owners.
The distinction between liability and equity depends on the nature of the claim, not the identity of the claimant—equity ranks after liabilities as a claim to or interest in the assets of the enterprise (the residual interest). Generally, the enterprise is not obligated to transfer interest to owners except under liquidation. Distributions to owners are at the discretion of the owners or their representatives.
The distinguishing characteristic of the equity of a business (compared to the equity of not-for-profit entities, termed “net assets”) is that it may be increased through investments by owners and decreased by distributions to owners.
See SFAC 6.64–.65 for details regarding changes in equity.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date.
Goodwill
Goodwill is an asset that represents a future economic benefit arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. Goodwill is generally calculated as the difference between the amount paid for a business minus the fair market value (FMV) of the net assets acquired.
Gross Margin
Gross margin is the sales minus cost of goods sold, the “first stage” profit from the manufacture of goods for sale, and profit before selling and administrative expenses. Gross margin results from using absorption costing. It is also known as gross profit.
Gross margin analysis involves the evaluation of the gross margin variance (the difference between actual and budgeted gross margin). Gross margin variance can be caused by the following:
Sales price variance: The difference between planned sales price and the actual sales price
Sales mix variance: The difference between the planned sales mix and the mix actually achieved
Sales volume variance: The difference between the planned volume of sales and the actual volume achieved
Cost price variance: Differences between planned and actual manufacturing costs
Impairment
Impairment is the condition that exists when the amount of a long-lived asset (asset group) carried on an organization’s books exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment is based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.
FASB ASC 360-10-35-15; GASB 1100.107
Income Statement
The income statement is a financial statement that shows an organization’s revenues and expenses for a defined period of time. The income statement is the financial statement used most often by investors as it provides information concerning the firm’s ability to sustain ongoing operations profitably. The income statement is also the statement that is most readily understood.
The single-step income statement displays the net income from ordinary operations without intermediate calculations. The multi-step income statement uses intermediate steps such as gross profit in displaying the net income from ordinary operations.
Intercompany
An intercompany transaction occurs between members of the same commonly controlled group of entities (e.g., sales or loans made between parent and subsidiary or between two subsidiaries of the same parent). Intercompany transactions and profits must be eliminated from consolidated financial statements.
Intercompany
An intercompany transaction occurs between members of the same commonly controlled group of entities (e.g., sales or loans made between parent and subsidiary or between two subsidiaries of the same parent). Intercompany transactions and profits must be eliminated from consolidated financial statements.
Intercompany
An intercompany transaction occurs between members of the same commonly controlled group of entities (e.g., sales or loans made between parent and subsidiary or between two subsidiaries of the same parent). Intercompany transactions and profits must be eliminated from consolidated financial statements.
Intercompany Profit
Intercompany profits are financial statement amounts that arise from transactions between members of the same commonly controlled group of entities (parent-subsidiary, subsidiary-subsidiary), i.e., transactions between two entities that are related parties. They may be receivables/payables or profit/expense from the sale of merchandise, or loan receivable/payable. Intercompany profits must be eliminated from consolidated financial statements.
Intracompany
An intracompany transaction or event occurs between components (segments, divisions, locations, departments) of a single entity and does not involve another entity. For example, a transfer of merchandise between two store locations owned by the same entity is an intracompany transfer.
