CTP Chapter 8

Question 1

The accounting approach under which expenses must be reported when the revenues with which they are associated are recognized. Long-lived or fixed assets are capitalized (i.e., recorded as assets on the balance sheet) and depreciated over time because they produce revenues over many accounting periods. This practice matches an asset’s cost to the revenues it produces. Under the revenue recognition and matching principles, sales are reported even though cash has not been received. Similarly, expenses are reported even though cash has not been paid out.

Answer 1

accrual accounting

Question 2

An asset account (more specifically, a contra asset account) that records the amount of depreciation previously expensed on a company’s assets. It appears on the asset side of the balance sheet, but it is a source of funds when it increases. While it is technically a noncash expense (i.e., there is no actual payment for depreciation), it does have a cash flow impact because it reduces the company’s income taxes by lowering pretax income.

Answer 2

accumulated depreciation

Question 3

A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or disbursed.

Answer 3

cash basis accounting

Question 4

The expense associated with providing the goods or services whose sale is recognized as revenues. This includes labor and material directly used in manufacturing the product sold, as well as any indirect or allocated manufacturing expenses.

Answer 4

cost of goods sold (COGS)

Question 5

A term that generally refers to assets that are expected to be converted into cash within one year

Answer 5

current assets

Question 6

A term that generally refers to liabilities that are required to be paid for within one year.

Answer 6

current liabilities

Question 7

A financial product that acquires its value by inference through a formulaic connection to another asset. The other asset is termed the underlying asset, and can be a financial instrument (e.g., a stock or bond), currency, or commodity.

Answer 7

derivative

Question 8

A measure of operating income or profit that is calculated as gross profit less operating expenses, depreciation, and amortization. This has traditionally been the measure used to evaluate a firm’s ability to generate operating profits and to meet its financial and tax obligations.

Answer 8

earnings before interest and taxes (EBIT)

Question 9

A measure of operating profitability that is calculated as gross profit less operating expenses (but not subtracting depreciation and amortization). This first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods.

Answer 9

earnings before interest, taxes, depreciation, and amortization (EBITDA)

Question 10

A database that contains a searchable listing of US Securities and Exchange Commission (SEC) filings for public companies.

Answer 10

Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database

Question 11

Defined by determining the price that would be received in an asset sale or the price paid to transfer a liability. The valuation price must be market-based and take into consideration all observable valuation inputs, such as competition and risk. ASC Topic 825 expands this application by stating that this should be applied to all financial assets and liabilities except for certain specified types of assets.

Answer 11

fair value

Question 12

A type of hedge in which the risk being hedged is a change in the fair value of an asset or a liability. Changes in fair value may arise through changes in interest rates (for fixed-rate loans), foreign exchange rates, equity prices, or commodity prices.

Answer 12

fair value hedge

Question 13

An independent, self-regulating US organization, formed in 1973 and made up of accounting professionals, that establishes financial accounting and reporting standards in the United States, collectively referred to as Generally Accepted Accounting Principles (US GAAP).

Answer 13

Financial Accounting Standards Board (FASB)

Question 14

Accounting reports that summarize a company’s operating results and its financial position at a point in time. Analyzing these statements provides insights into (1) how well the company has managed its liquidity position, (2) how effectively it used and financed its assets, (3) whether it had a proper balance between debt and equity financing compared to peers, (4) how well it controlled operating and financing costs, and (5) whether the profit it earned was satisfactory in relation to the levels of revenue it experienced and the investment in assets that support its operations.

Answer 14

financial statements

Question 15

A process used to convert the financial results of a parent company’s foreign subsidiaries to its reporting currency.

Answer 15

foreign currency translation

Question 16

For determining foreign exchange translation exposure, this is the currency of the primary economic environment in which the entity operates. Normally, the majority of the entity’s business activities are transacted in that currency.

Answer 16

functional currency

Question 17

An account that can be found in the assets portion of a company’s balance sheet. This can often arise when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm’s intangible assets.

Answer 17

goodwill

Question 18

The currency of the country in which an entity’s headquarters are located.

Answer 18

home currency

Question 19

A financial statement that summarizes revenues earned, expenses incurred, and other income and expenses, including foreign exchange gains and losses, interest income and expenses, and other nonoperating income and expenses over an accounting period. Also called a statement of earnings, a statement of operations, or a profit and loss (P&L) statement.

Answer 19

income statement

Question 20

Assets that lack physical substance and for which there is often a high degree of uncertainty concerning their future value. Examples are goodwill, trademarks, and patents. This with a finite and useful life is amortized over its legal or useful life, but if the intangible asset has an indefinite useful life, it is not amortized. However, it must be evaluated annually for any decline in value, which must be charged against income when identified.

Answer 20

intangible assets

Question 21

A type of hedge designed to hedge currency risk associated with a company’s net investment in a foreign operation.

Answer 21

net investment hedge

Question 22

Gains or losses that are realized when a transaction that was previously recorded in the financial statements is completed.

Answer 22

realized gains/losses

Question 23

A balance sheet account that represents the accumulated net earnings of a corporation since its inception, less dividends paid to shareholders. It also represents the changes in shareholders’ equity arising from the retention of profits and losses of the company, less any dividends paid out to shareholders.

Answer 23

retained earnings

Question 24

A financial statement that provides a detailed picture of the sources of a company’s cash flows and how these sources are used. Also known as a cash flow statement

Answer 24

statement of cash flows

Question 25

Gains or losses that are recorded in the financial statements without an associated cash flow.

Answer 25

unrealized gains/losses