Accounting Terminology Flashcards
Accounting
A system of providing “quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”
American Institute of Certified Public Accountants (AICPA)
The professional organization of certified public accountants in the United States.
Balance Sheet
Document which reports the resources of a company (the assets), the company’s obligations (the liabilities), and the owners’ equity, which represents how much money has been invested in the company by its owners.
Bookkeeping
The preservation of a systematic, quantitative record of an activity.
Certified Public Accountant
A person who has taken a minimum number of college-level accounting classes, has passed the dreaded CPA exam, and has met other requirements set by his or her state.
Financial Accounting
The name given to accounting information provided for and used by external users.
Financial Accounting Standards Board (FASB)
Private, non-profit body that sets accounting standards in the United States.
Financial Statements
The three primary financial information documents: the balance sheet, income statement, and statement of cash flows.
Income Statement
This document reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common.
Internal Revenue Service (IRS)
The government agency responsible for tax collection and tax law enforcement.
International Accounting Standards Board (IASB)
An independent, international body formed to develop worldwide accounting standards.
International Financial Reporting Standards (IFRS)
The accounting standards produced by the IASB.
Managerial Accounting
The name given to accounting systems designed for internal users.
Public Company Accounting Oversight Board (PCAOB)
A private, non-profit organization that effectively serves as an arm of the SEC in registering, inspecting, and disciplining the auditors of all publicly traded companies.
Statement of Cash Flows
This document reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing.
Accounting Equation
Assets = Liabilities + Owners’ Equity
Accumulated Other Comprehensive Income
The source of these increased assets
Assets
Assets are the firm’s economic resources, formally defined as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Balance Sheet
A statement of financial position shows the financial resources the company owns or controls and the claims on those resources
Comparability
Tnformation that becomes much more useful when it can be related to a benchmark or standard
Conservatism
a pervasive factor in accounting, can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains.
Consistency
The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods.
Book Value
The book value of an asset is the asset’s cost minus the asset’s accumulated depreciation.
Disclosure
Earnings Per Share (EPS)
EPS tells the owner of one share of stock what he or she really wants to know
Entity Concept
The idea that personal financial activity is kept separate from business financial activity
Expenses
The amount of assets consumed from the performance of business operations and thus are the opposite of revenues
External Audit
audit conducted by external (independent) qualified accountant(s)
Financing Activities
Those activities whereby cash is obtained from, or repaid to, owners and creditors
Gains
Refers to money made on activities outside the normal business of a company
Going Concern Assumption
allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments.
Historical Cost Convention
An accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition
Income Statement
A company’s financial performance for a specified period of time.
Investing Activities
The purchase and sale of land, buildings, and equipment. Investing activities also include buying and selling stocks of other companies
Liabilities
the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events
Liquidity,
the ease with which the item can be turned into cash
Losses
Refers to money lost on activities outside the normal business of a company
Materiality
the question of whether an item is large enough to make any difference to anyone
Net Assets
total assets minus total liabilities. In a sole proprietorship the amount of net assets is reported as owner’s equity. In a corporation the amount of net assets is reported as stockholders’ equity.
Net Income
the difference between revenues and expenses. If revenues exceed expenses, net income results. If, on the other hand, expenses exceed revenues, there will be a net loss
Notes to Financial Statements
These provide additional information pertaining to a company’s operations and financial position and are considered to be an integral part of the financial statements.
Operating Activities
Those activities involved in producing and selling goods and services and thus comprise the day-to-day business of a company
Owners’ Equity
portion of the assets that the owners of the organization can really call their own
Paid-in Capital
The value of the assets given in exchange for shares of stock.
Recognition
Relevance
A qualitative characteristic in accounting. Relevance is associated with information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.
Retained Earnings
Represent the portion of stockholders’ equity (resulting from cumulative profitable operations) that has not been paid to the owners as dividends
Revenue
The amount of assets created through the performance of business operations
Revenue Recognition
Statement of Cash Flows
Individual cash flow items that are classified according to three main activities: operating, investing, and financing.
Stockholders’ Equity
The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings
Time Period Concept
The time period principle is the concept that a business should report the financial results of its activities over a standard time period, which is usually monthly, quarterly, or annually.
Treasury Stock
Shown as a subtraction in the stockholders’ equity section of the balance sheet
“Other Assets”
Long-term assets that are not suitable for reporting under any of the previous classifications
Accounts Payable
The flip side of accounts receivable—when one company sells on credit, creating for itself an account receivable, the company on the other side of the transaction is buying on credit, creating an account payable.
Accounts Receivable
Amounts owed to a business by its credit customers and are usually collected in cash within 10 to 60 days.
Accumulated Depreciation
Reflects the wear and tear, or depreciation, of these items since they were originally purchased.
Accumulated Other Comprehensive Income
The grouped together and reported changes which companies experience increases and decreases in equity each year because of the movement of market prices or exchange rates
Additional Paid-in Capital
Invested by stockholders that exceeds the par value of the issued shares.
Asset
Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events.
Asset Mix,
The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates.
Balance Sheet
A listing of an organization’s assets and of its liabilities at a certain time.
Capital Lease Obligations
A long-term liability in the balance sheet.
Cash
Coins and currency as well as the balances in company checking and savings accounts.
Common Stock
Stockholders’ equity investment
Current Assets
Cash, accounts receivable, and inventory
Current Liabilities
Those obligations expected to be paid within one year, the most common being accounts payable.
Current Portion of Long-term Debt
Some liabilities, such as mortgages, are payable in equal monthly installments over a specified number of years. The portion of these liabilities that is payable within 12 months from the balance sheet date.
Deferred Income Tax Liability
The income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.
Derivative
A financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated with some other item.
Disclosure
Convey the details in a narrative note without ever including anything in the financial statements themselves.
Equity
Residual interest in the assets of an entity that remains after deducting its liabilities.
Executory Contract,
It is an exchange of promises about the future.
Financing Mix
The percentage of total financing (liabilities plus equity) in each individual category.
Intangible Assets
Assets that have no physical or tangible characteristics
Inventory
The name given to goods held for sale in the normal course of business.
Investment Securities
Composed of publicly traded stocks and bonds.
Liability
Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Long-term Debt
Long-term notes, bonds, mortgages, and similar obligations on the balance sheet
Long-term Investments
Those assets that you expect to still be around next year when you prepare the balance sheet again.
Noncontrolling Interest,
Arises when a corporation has subsidiaries that are not 100 percent owned by the corporation.
Par Value
The market value of the shares at issuance.
Preferred Stock
Stockholders’ equity investment
Prepaid Expenses
Payments in advance for business expenses.
Property, Plant, and Equipment
Exactly what the label implies: land, buildings, machinery, tools, furniture, fixtures, and vehicles used by a company in conducting its business activities.
Recognition
Boil down all the estimates and judgments into one number and report that one number in formal financial statements.
Retained Earnings
The cumulative amount of a corporation’s profits that have been reinvested on behalf of the stockholders
Retained Earnings
The cumulative amount of a corporation’s profits that have been reinvested on behalf of the stockholders
Short-term Loans Payable
Formal, interest-bearing loans that are expected to be paid back within one year.
Stockholders’ Equity
The difference between assets and liabilities in a corporation
Transaction Analysis
The process of determining how an economic event impacts the financial statements
Treasury Stock
The repurchased shares when a company buys back its own shares
Unearned Revenue,
Represents Sears’s obligation to provide service to customers who have paid Sears for a service they have not yet received.
Valuation
Once it has been determined that an item should be recognized in financial statements, the question then arises about what dollar amount to assign to the item.
Accrual Accounting
The process that accountants use in adjusting raw transaction data into refined measures of a firm’s economic performance.
Comprehensive Income
The number used to reflect an overall measure of the change in a company’s wealth during the period
Cost of Goods Sold,
When a business sells goods to customers, the cost of the goods sold is recorded as an expense
Discontinued Operations
Report the Hughes results in a separate category called income from discontinued operations
Earnings Per Share (EPS),
The amount of net income associated with each share of stock.
Economic Value Added,
A system of earnings-based compensation
Expanded Accounting Equation
Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends)
Expenses
The value of resources used in generating the reported revenue.
Extraordinary Items
Gains and losses that result from transactions that are both unusual in nature and infrequent in occurrence
Financial Capital Maintenance
The approach that accountants typically use in computing a company’s income is the first option described above in which inflation is ignored and a company is said to have income when its financial resources increase
Gain
The amount of a company makes money on activities that are peripheral to its primary operations
Gross Profit
The difference between the selling price of the product and the cost of the product
Income From Continuing Operations
the segments of a company’s business that it considers to be normal, and expects to operate in for the foreseeable future
Loss
The amount of a company loses money on activities that are peripheral to its primary operations
Matching
The concept typically used in practice to determine when an expense should be recognized
Multiple-step Income Statement
The multi-step income statement includes multiple sub-totals within the income statement.
Net Income
The accountant’s attempt to summarize in one number the overall economic performance of a company for a given period.
Operating Income
The performance of the fundamental business operations conducted by a company
Physical Capital Maintenance
income is earned only when one experiences an increase in actual physical resources.
Restructuring Charges
The fact that companies have exercised considerable discretion in determining the amount and timing of a restructuring charge.
Revenue
The value of the goods and services provided by a company in its business operations.
Revenue Recognition
a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized.
Single-step Income Statement
With this format, all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between total revenues and total expenses.
Cash Equivalents
Short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds.
Direct Method
reporting the information contained in the last column of the adjustment worksheet
Financing Activities
Obtaining resources from owners and providing them a return on their investment, and obtaining resources from creditors and repaying those borrowings
Indirect Method
A method for creating a statement of cash flows a company may use during any given reporting period. The indirect method uses accrual accounting information to present the cash flows from the operations section of the cash flow statement.
Investing Activities
Cash inflows and outflows from (1) acquiring and selling productive assets such as property, plant, and equipment, (2) acquiring and selling investment securities, and (3) lending money and collecting on those loans
Non-cash Investing and Financing Activities
Some investing and financing activities affect a company’s financial position but not the company’s cash flows during the period.
Operating Activities
All transactions relating to a company’s delivering or producing its goods for sale and providing its services
Pro Forma,
A prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented.
Statement of Cash Flows,
Summarize a company’s cash flows for a period of time.
Asset Turnover
Sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets.
Assets-to-equity Ratio
Assets divided by equity and is interpreted as the number of dollars of assets acquired for each dollar invested by stockholders.
Average Collection Period
Shows the average number of days that elapse between sale and cash collection.
Cash Flow Adequacy Ratio
Cash from operations divided by expenditures for fixed asset additions and acquisitions of new businesses
Common-size Financial Statements
All amounts for a given year being shown as a percentage of that denominator for the year.
Current Ratio
A comparison of current assets (cash, receivables, and inventory) with current liabilities. It is computed by dividing total current assets by total current liabilities.
Debt Ratio
A frequently used measure of leverage, computed as total liabilities divided by total assets.
Debt-to-equity Ratio
Total liabilities divided by total equity and is interpreted as the number of dollars of borrowing for each dollar of equity investment
DuPont Framework
A systematic approach to identifying general factors causing ROE to deviate from normal.
Financial Ratios
Relationships between financial statement amounts
Financial Statement Analysis
Areas in which additional data must be gathered, including details of significant transactions, market share information, competitors’ plans, and customer demand forecasts.
Fixed Asset Turnover
Sales divided by average fixed assets and is interpreted as the number of dollars in sales generated by each dollar of fixed assets.
Leverage
Borrowing that allows a company to purchase more assets than its stockholders are able to pay for through their own investment.
Liquidity
A company’s ability to pay its debts in the short run
Margin
The profitability of each dollar in sales
Number of Days’ Sales in Inventories
Calculated by dividing average inventory by average daily cost of goods sold and is interpreted as the average number of days of sales that can be made using only the supply of inventory on hand.
Price-earnings Ratio
an equity valuation multiple. It is defined as market price per share divided by annual earnings per share.
Return On Assets
Net income divided by total assets and is the number of pennies of net income generated by each dollar of assets.
Return On Equity
The overall measure of the performance of a company.
Return On Sales
Net income divided by sales and is interpreted as the number of pennies in profit generated from each dollar of sales.
Turnover
The degree to which assets are used to generate sales
Cash Budget
An important tool in helping management plan its cash needs. This discussion briefly introduces you to budgeting cash receipts.
Audit Committee
Members of a company’s board of directors who are responsible for dealing with the external and internal auditors.
Control Activities
Policies and procedures used by management to meet their objectives.
Control Environment
The actions, policies, and procedures that reflect the overall attitudes of top management about control and its importance to the entity.
Control Procedures
Policies and procedures used by management to meet their objectives.
Detective Controls
Internal control activities that are designed to detect the occurrence of errors and fraud.
External Auditors
Independent CPAs who are retained by organizations to perform audits of financial statements.
GAAP Oval
A diagram that represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions.
Generally Accepted Auditing Standards (GAAS)
Auditing standards developed by the PCAOB for public companies and AICPA for private companies.
Income Smoothing
The practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next.
Independent Checks
Procedures for continual internal verification of other controls.
Internal Auditors
An independent group of experts (in controls, accounting, and operations) who monitor operating results and financial records, evaluate internal controls, assist with increasing the efficiency and effectiveness of operations, and detect fraud.
Internal Control Structure
Policies and procedures established to provide management with reasonable assurance that the objectives of an entity will be achieved.
Internal Earnings Targets
Financial goals established within a company.
Organizational Structure
Lines of authority and responsibility.
Physical Safeguards
Physical precautions used to protect assets and records.
Preventative Controls
Internal control activities that are designed to prevent the occurrence of errors and fraud.
Public Company Accounting Oversight Board (PCAOB)
Board of five full-time members established by the Sarbanes-Oxley Act to oversee the accounting and auditing profession.
Sarbanes-Oxley Act
A law passed by Congress in 2002 that gives the SEC significant oversight responsibility and control over companies issuing financial statements and their external auditors.
Securities and Exchange Commission (SEC)
The government body responsible for regulating the financial reporting practices of most publicly owned corporations in connection with the buying and selling of stocks and bonds.
Segregation of Duties
A strategy to provide an internal check on performance through separation of authorization of transactions from custody of related assets, operational responsibilities from record-keeping responsibilities, and custody of assets from accounting personnel.
Capital Budgeting
Systematic planning for long-term investments in operating assets.
Controlling
Implementing management plans and identifying how plans compare with actual performance.
Cost-volume-profit (C-V-P) Analysis
Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.
Differential Costs
Future costs that change as a result of a decision; also called incremental or relevant costs.
Direct Costs
Costs that are specifically traceable to a unit of business or segment being analyzed.
Direct Labor
Wages paid to those who physically work on direct materials to transform them into a finished product and are traceable to specific products.
Direct Materials
Materials that become part of the product and are traceable to it.
Evaluating
Analyzing results, rewarding performance, and identifying problems.
Fixed Costs
Costs that remain constant in total, regardless of activity level, over a certain range of activity.
Indirect Costs
Costs normally incurred for the benefit of several segments within the organization; sometimes called common costs or joint costs.
Indirect Labor
Labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product.
Indirect Materials
Materials that are necessary to a manufacturing or service business but are not directly included in or are not a significant part of the actual product.
Manufacturing Overhead
All costs incurred in the manufacturing process other than direct materials and direct labor.
Operational Budgeting
Managerial planning decisions regarding current and immediate future (a year or less) operations that are characterized by regularity and frequency.
Opportunity Costs
The benefits lost or forfeited as a result of selecting one alternative course of action over another.
Out-of-pocket Costs
Costs that require an outlay of cash or other resources.
Period Costs
Costs not directly related to a product, service, or asset. They are charged as expenses to the income statement in the period in which they are incurred.
Planning
Outlining the activities that need to be performed for an organization to achieve its objectives.
Product Costs
Costs associated with products or services offered.
Production Prioritizing
Management’s continual evaluation of various product lines and divisions’ profitability in order to analyze and identify opportunities to improve profits.
Return On Investment
A measure of operating performance and efficiency in utilizing assets; computed in its simplest form by dividing net income by average total assets (also known as return on assets or ROA).
Strategic Planning
Broad, long-range planning usually conducted by top management.
Sunk Costs
Costs that are past costs and do not change as a result of a future decision.
Variable Costs
Costs that change in total in direct proportion to changes in activity level.
Activity-based Costing (ABC)
A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs.
Batch-level Activities
Activities that take place in order to support a batch or production run, regardless of the size of the batch.
Cost Drivers
Numerical measure used to reflect the amount of a specific cost that is associated with a particular activity.
Cost Pool
Total cost being generated by a specific overhead cost activity.
Facility Support Activities
Activities necessary to have a facility in order to participate in the development and production of products or services; activities are not related to any particular line of products or services.
Product-line Activities
Activities that take place in order to support a product line, regardless of the number of batches or individual units produced.
Unit-level Activities
Activities that take place each time a unit of product is produced.
Break-even Point
The amount of sales at which total costs of the number of units sold equal total revenues; the point at which there is no profit or loss.
Contribution Margin
The difference between total sales and variable costs; the portion of sales revenue available to cover fixed costs and provide a profit.
Contribution Margin Ratio
The percentage of net sales revenue left after variable costs are deducted; the contribution margin divided by net sales revenue.
Cost Behavior
The way a cost is affected by changes in activity levels.
Cost-volume-profit (C-V-P) Analysis
Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.
Fixed Costs
Costs that remain constant in total, regardless of activity level, at least over a certain range of activity.
High-low Method
A method of segregating the fixed and variable components of a mixed cost by analyzing the costs at the highest and the lowest activity levels within a relevant range.
Method
A method of segregating the fixed and variable components of a mixed cost by plotting on total costs at several activity levels and drawing a regression line through the points.
Mixed Costs
Costs that contain both variable and fixed costs components.
Operating Leverage
The extent to which fixed costs replace variable costs as part of a company’s cost structure; the higher the proportion of fixed costs to variable costs, the faster income increases or decreases with changes in sales volume.
Per-unit Contribution Margin
The excess of the sales price of one unit over its variable costs.
Profit Graph
A graph that shows how profits vary with changes in volume.
Regression Line
On a scattergraph, the straight line that most closely expresses the relationship between the variables.
Relevant Range
The range of operating level, or volume of activity, over which the relationship between total costs (variable plus fixed) and activity level is approximately linear.
Return On Sales Revenue
A measure of operating performance; computed by dividing net income by total sales revenue. Similar to profit margin.
Sales Mix
The relative proportion of total sales dollars (or total units sold) that is represented by each of a company’s products.
Scattergraph
A method of segregating the fixed and variable components of a mixed cost by plotting on total costs at several activity levels and drawing a regression line through the points.
Stepped Costs
Costs that change in total in a stair-step fashion (in large amounts) with changes in volume of activity.
Target Income
A profit level desired by management.
Variable Cost Rate
The change in cost divided by the change in activity; the slope of the regression line.
Variable Costs
Costs that change in total in direct proportion to changes in activity level.
Visual-fit
A method of segregating the fixed and variable components of a mixed cost by plotting on total costs at several activity levels and drawing a regression line through the points.
