Chapter 15

Question 1

accounting changes

Answer 1

Changes from one acceptable method of accounting to another acceptable method; like straight-line depreciation to a declining balance approach.

Question 2

Accounting Principles Board

Answer 2

The private sector group charged with developing accounting standards from 1959 to 1973; primary authoritative pronoucements were known as “opinions”.

Question 3

AICPA

Answer 3

American Institute of CPAs; an organization whose members are CPAs interested in advancing the accounting profession.

Question 4

basic EPS

Answer 4

The simplest earnings per share number; earnings available to common shares divided by weighted average shares, without factoring in potential dilution.

Question 5

book value per share

Answer 5

Common stockholders’ equity divided by common shares outstanding, to indicate stockholders’ equity per share.

Question 6

business component

Answer 6

Part of a business with clearly distinguishable operations; a business segment, unit, subsidiary, or group of assets.

Question 7

comparability

Answer 7

An enhancing quality of accounting such that even though different companies may use different accounting methods, there is still sufficient basis for valid comparison

Question 8

complex capital structure

Answer 8

Companies with options, warrants, or convertible bonds and stocks that may result in the issuance of additional shares.

Question 9

comprehensive income

Answer 9

Net income plus items of other comprehensive income (e.g., market value adjustments of available for sale securities)

Question 10

consistency

Answer 10

An enhancing quality of accounting such that deviations in outcomes from period to period should be the result of deviations in underlying performance (not accounting quirks).

Question 11

diluted EPS

Answer 11

An earnings per share number; adjusted to reflect the potential effect of dilutive securities.

Question 12

dilutive securities

Answer 12

Options, warrants, convertible bonds, convertible stocks, and other items that have the potential to increase the number of shares outstanding.

Question 13

discontinued operations

Answer 13

The special income statement reporting of the impact of disposing or abandoning of a component of a business.

Question 14

dividend payout ratio

Answer 14

Dividend per share divided by stock price; also called dividend yield.

Question 15

earnings

Answer 15

A concept that relates to income from continuing operations plus/minus discontinued operations and extraordinary items.

Question 16

Earnings per share

Answer 16

EPS; generally understood as the amount of income for each share of stock, but is actually better refined as basic and diluted EPS (see those definitions).

Question 17

EBIT

Answer 17

An analysts calculation to reflect “earnings before interest and taxes”.

Question 18

EBITDA

Answer 18

An analysts calculation to reflect “earnings before interest, taxes, depreciation, and amortization”.

Question 19

entity assumption

Answer 19

Accounting information should be presented for circumscribed distinct economic units.

Question 20

extraordinary item

Answer 20

The gain or loss resulting from a transactions or event that is both unusual in nature and infrequent in occurrence; reported below income from continuing operations.

Question 21

faithful representation

Answer 21

A fundamental quality of accounting such that information must be truthful; complete, neutral, and free from error.

Question 22

GAAP

Answer 22

Generally accepted accounting principles – encompass the rules, practices, and procedures that define the proper execution of accounting.

Question 23

going concern assumption

Answer 23

In the absence of evidence to the contrary, accountants assume that a business will continue to operate well into the future.

Question 24

International Financial Reporting Standards (IFRS)

Answer 24

The specific accounting rules developed by the International Accounting Standards Board.

Question 25

intraperiod tax allocation

Answer 25

Separately reported item like discontinued operations, extraordinary items, etc. are to be reported net of their specifically related tax effects.

Question 26

net income

Answer 26

Income from continuing operations plus/minus other special items like discontinued operations, etc., but before items of “other comprehensive income”

Question 27

PCAOB

Answer 27

Public Accounting Oversight Board – a private-sector, non-profit corporation, charged with overseeing the auditors of public companies.

Question 28

price earnings ratio

Answer 28

The per share market value of a stock divided by its earning per share.

Question 29

principles-based

Answer 29

The idea that accounting standards should articulate broad-based principles rather than specific and detailed rules.

Question 30

prior period adjustment

Answer 30

To correct errors from prior years; prior financial statements are retroactively changed to make them correct.

Question 31

relevancy

Answer 31

A fundamental quality of accounting such that information should be timely and bear on the decision-making process by possessing predictive or confirmatory (feedback) value.

Question 32

remeasurement

Answer 32

One of two approaches for converting the financial statements of a foreign affiliate to the reporting currency.

Question 33

restatement

Answer 33

The financial statements of prior periods are redone to reflect the correct amounts.

Question 34

return on assets ratio

Answer 34

A ratio comparing income (net income plus interest) to the average total assets.

Question 35

return on equity ratio

Answer 35

A ratio comparing income (net income minus preferred dividends) to the average total equity.

Question 36

rules-based

Answer 36

The idea that accounting standards must be very specific to provide adequate guidance and drive consistency in reporting.

Question 37

Sarbanes-Oxley

Answer 37

“SOX” – Legislation that imposes stringent controls over reporting and auditing; created the Public Accounting Oversight Board

Question 38

Securities and Exchange Commission

Answer 38

“SEC” –regulatory body with which public companies must file and report.

Question 39

stable currency assumption

Answer 39

An accounting assumption that presumes the currency is ont impacted over time by inflation.

Question 40

timeliness

Answer 40

An enhancing quality of accounting such that information is available in sufficient time to be capable of influence.

Question 41

translation

Answer 41

One of two approaches for converting the financial statements of a foreign affiliate to the reporting currency.

Question 42

understandability

Answer 42

An enhancing quality of accounting such that information is clear and concise to those with reasonable business knowledge.

Question 43

verifiability

Answer 43

An enhancing quality of accounting such that different knowledgeable and independent observers reach similar conclusions.