Definitions Flashcards
Account
An individual accounting record of increases and decreases in a specific asset, liability, and/or shareholder’s equity (common shares, retained earnings, revenue, expense, and dividends declared) item.
Accounting
The information system that identifies, records, and communicates the economic events of an organization to users interested in that information.
Accounting cycle
A series of nine steps used to account for, and report, transactions: analyze transactions (step 1), journalize transactions (step 2), post transactions (step 3), prepare a trial balance (step 4), journalize and post adjusting entries (step 5), prepare an adjusted trial balance (step 6), prepare financial statements (step 7), journalize and post closing entries (step 8), and prepare a post-closing trial balance.
Accounting equation
The equation that states that Assets = Liabilities + Shareholders’ Equity.
Accounting information system
The system of collecting and processing transaction data and communicating financial information to decision makers.
Accounting transaction
An economic event that is recorded in the financial statements because it involves an exchange that affects assets, liabilities, and/or shareholders’ equity.
Accounts payable
Amounts owed to suppliers for purchases made on credit (on account).
Accounts receivable
Amounts owed by customers who purchased products or services on credit (on account).
Accrual basis of accounting
An accounting basis in which transactions that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash
Accrued expenses
Expenses incurred but not yet paid in cash that are recorded at the end of the period by an adjusting entry
Accrued revenues
Revenues earned but not yet received in cash that are recorded at the end of an accounting period by an adjusting entry.
Accumulated other comprehensive income (AOCI)
The cumulative change in shareholders’ equity that results from the gains and losses that bypass net income (recorded in other comprehensive income) but affect shareholders’ equity.
Adjusted trial balance
A list of accounts and their balances after all adjusting journal entries have been recorded and posted.
Adjusting entries
Journal entries made at the end of an accounting period to update the accounts to ensure the proper recognition of revenues and expenses.
Aging of accounts receivable
A method of determining bad debts expense and allowance for doubtful accounts based on an analysis of customer balances by the length of time they have been outstanding.
Allowance method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Amortizable amount
The cost of a finite-life intangible asset (for example, patent, copyright) less its residual value, if any.
Amortization
The systematic allocation of the amortizable cost of a finite-life intangible asset over the shorter of the asset’s legal or useful life.
Amortized cost model
A method of valuing debt investments that are held to earn cash flows with specified payment dates in a contract in which the carrying value is adjusted only to the extent that discounts and premiums are amortized and not for the effect of changes in fair value.
Annuity
A series of equal payments received over time.
Asset retirement costs
The amount added to the cost of a long-lived asset that relates to obligations to dismantle, remove, or restore an asset when it is retired.
Asset turnover
A measure of how efficiently a company uses its total assets to generate sales. It is calculated by dividing sales by average total assets [(beginning + ending total assets) ÷ 2]
Assets
The resources owned or controlled by a business that are expected to provide future economic benefits
Associate
An investee that is significantly influenced by an investor
Authorized shares
The amount of share capital that a corporation is authorized to sell. The amount may be unlimited or specified.
Average collection period
The average amount of time that a receivable is outstanding. It is calculated by dividing 365 days by the receivables turnover.
Average cost formula
An inventory cost formula that assumes that the goods available for sale are homogeneous or non-distinguishable. The cost of goods sold and ending inventory are determined using a weighted average unit cost, calculated by dividing the cost of the goods available for sale by the units available for sale.
Bank indebtedness
A short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls
Basic earnings per share (EPS)
A measure of profitability showing the income earned by each common share. It is calculated by dividing income available to common shareholders by the weighted average number of common shares.
Bond
A type of long-term debt issued by large corporations, universities, and governments that involves a promise to repay a large amount of money at a fixed future date.
Capital expenditures
Expenditures that benefit future periods. They are recorded (capitalized) as long-lived assets.
Capital lease
A long-term agreement allowing one party (the lessee) to use the asset of another party (the lessor). The arrangement is accounted for as a purchase because the risks and rewards of owning the asset have been transferred to the lessee.
Carrying amount
Amount at which an asset is recognized in the statement of financial position. Can be used to describe the assets of a company as a whole or individual assets such as accounts receivable (cost less allowance for doubtful accounts), depreciable assets (cost less accumulated depreciation), amortizable assets (cost less accumulated amortization), investments, and bonds.
Cash
Resources that consist of coins, currency, cheques, and money orders that are acceptable at face value on deposit in a bank or similar institution.
Cash basis accounting
An accounting basis in which revenue is recorded only when cash is received, and an expense is recorded only when cash is paid.
Cash dividends
A pro rata (proportional) distribution of cash to shareholders.
Cash equivalents
Short-term, highly liquid (easily sold) investments that have insignificant risk, are held to meet short-term cash needs rather than for investment purposes and are readily converted into cash, usually within less than 90 days.
Chart of account
A list of a company’s accounts and account numbers that identify where the accounts are in the general ledger.
Closing entries
Journal entries at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, and dividends declared) to the permanent shareholders’ equity account Retained Earnings.
Collateral
Assets pledged as security for the payment of a debt.
Collusion
Two or more individuals working together to get around prescribed control activities
Comparability
An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and differences among, items.
Compound interest
Interest that is earned on interest earned in prior periods.
Comprehensive income
The total change in the shareholders’ equity of the entity from non-owner sources. Includes net income as well as other comprehensive income.
Conceptual framework
A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting statements
Consigned goods
Goods shipped by a consignor, who retains ownership, to a party called the consignee, who holds the goods for sale.
Consignee
The party that holds the consigned goods and is responsible for selling them, but does not own the goods.
Consignor
The party that owns the consigned goods, but has transferred them to a consignee who is responsible for selling them.
Consolidated financial statements
Financial statements that present the accounts of both the parent company and its subsidiaries on a combined basis.
Contingent liabilities
Existing or possible obligations arising from past events. The liability is contingent (dependent) on whether some uncertain future event occurs that will confirm either its existence or the amount payable, or both.
Contra expense account
An account that is offset against (reduces) an expense account on the statement of income. Examples include purchase returns and allowances and purchase discounts.
Contra asset account
An account that is offset against (reduces) another related asset account on the statement of financial position. Examples include allowance for doubtful accounts and accumulated depreciation.
Contra revenue account
An account that is offset against (reduces) a revenue account on the statement of income. Examples include sales returns and allowances and sales discounts.
Contracted-based approach
An approach to revenue recognition that recognizes revenue when an entity satisfies a performance obligation in a contract by transferring a promised good or service to a customer.
Contributed surplus
A source of contributed capital that can result from certain types of equity transactions, including the reacquisition of shares.
Control account
An account in the general ledger that summarizes the details for a subsidiary ledger and controls it.
Copyright
An exclusive right granted by the federal government allowing the owner to reproduce and sell an artistic or published work for a period extending over the life of the creator plus 50 years.
Corporate life cycle
The four phases in the life of a business: introductory, growth, maturity, and decline. In each phase, the nature of the company’s cash flows changes.
Corporation
A company organized as a separate legal entity, with most of the rights and privileges of a person. Shares are evidence of ownership.
Cost constraint
The pervasive constraint that ensures that the value of the information provided in financial reporting is greater than the cost of providing it.
Cost model (for investments)
An accounting model in which an equity investment is recorded at cost because a fair value for the investment cannot be readily determined. This model is also a choice allowed under ASPE for investments in associates. Investment income is recognized only when cash dividends are earned.
Cost model (for long-lived assets)
A model for accounting for an asset that carries the asset at its cost less any accumulated depreciation or amortization.
Cost of goods available for sale
The sum of beginning inventory and the cost of goods purchased.
Cost of goods purchased
The sum of net purchases and freight in.
Cost of goods sold
The total cost of inventory sold during the period. In a perpetual inventory system, it is calculated and recorded for each sale. In a periodic inventory system, it is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale.
Coupon interest rate
The rate stated in a bond certificate used to determine the amount of interest the borrower pays and the investor receives.
Credit
The right side of an account.
Creditors
Users of accounting information, including suppliers, that grant credit (sell on account) to a customer.
Cummulative
A feature of preferred shares that entitles the shareholder to receive current-year and unpaid prior-year dividends before common shareholders receive any dividends.
Current assets
Assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date.
Current liabilities
Obligations that will be paid or settled within one year of the company’s financial statement date.
Current portion of long-term debt`
(also known as current maturities of long-term debt) The portion of a non-current or long-term loan that is repayable within the current year.
Current ratio
A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by dividing current assets by current liabilities.
Data analytics
The process of analyzing data to find patterns and correlations, trends, and other valuable insights to enhance decision-making.
Days in inventory
A liquidity measure of the average number of days that inventory is held. It is calculated as 365 days divided by the inventory turnover ratio.
Debit
The left side of an account.
Debt investment
An investment in money-market instruments, bonds, commercial paper, or similar items.
Debt to total assets
A measure of solvency showing the percentage of total financing that is provided by lenders and other creditors. It is calculated by dividing total liabilities by total assets.
Declaration date
The date the board of directors formally declares (approves) a dividend and announces it to shareholders.
Deferred revenue
A liability representing cash receipts from customers that have not yet met the criteria for revenue recognition.
Deficit
A negative balance in retained earnings resulting from cumulative net losses exceeding cumulative net income.
Depletion
The depreciation of natural resources.
Deposits in transit
Amounts deposited at a bank and recorded by the depositor that have not yet been recorded by the bank.
Depreciable amount
The cost of a depreciable asset (for example, property, plant, and equipment) less its residual value.
Depreciation
The process of allocating the cost of a depreciable asset (for example, buildings and equipment) over its useful life.
Derecognized
The term used when an asset (such as a note receivable; property, plant, and equipment; or an intangible asset) no longer provides any future benefits and is removed from the accounts.
Development costs
Expenditures related to the application of research to a plan or design for a new or improved product or process for commercial use. These costs are recorded (capitalized) as long-lived assets.
Diminished-balance method
A depreciation method in which depreciation expense is calculated by multiplying the carrying amount of an asset by a depreciation rate (the straight-line rate, which is 100% divided by the useful life, adjusted for any multiplier effect). This method produces a decreasing periodic depreciation expense over the asset’s useful life.
Direct method
A method of determining net cash provided (used) by operating activities on the statement of cash flows by adjusting each item in the statement of income from the accrual basis to the cash basis.
Discontinued operations
The disposal, or availability for sale, of a separate component of an entity. A component is a major line of business or major geographic area of operations.
Discount
The difference between a bond’s face value and its issue price when it is sold for less than its face value. This occurs when the market interest rate is higher than the coupon interest rate.
Dishonoured note
A note that is not paid in full at maturity.
Dividend yield
A measure of the percentage of the share price that is paid in dividends. It is calculated by dividing dividends per share by the share price.
Dividends
The distribution of retained earnings from a corporation to its shareholders, normally in the form of cash.
Dividends in arrears
Dividends that were not declared on cumulative preferred shares during a period
Double-entry accounting system
A system that records the dual effect of each transaction in appropriate accounts.
Earnings-based approach
An approach to revenue recognition that recognizes revenue when performance is substantially complete and collection is reasonably assured.
EBIT
Earnings (net income) before interest expense and income tax expense.
Effective-interest methods
A method of amortizing a bond discount or premium that results in a periodic interest expense that equals a constant percentage (the market or effective interest rate) of the bond’s carrying amount. Amortization is calculated as the difference between the interest expense and the interest paid.
Elements of financial statements
A set of broad categories or classes used to group financial information for presentation in the financial statements, such as assets, liabilities, equity, income, and expenses.
Employee benefits
Payments made by an employer for its share of Canada Pension Plan, Employment Insurance, pension, insurance, health, and/or other benefits paid on behalf of its employees.
Equity investment
An investment in the share capital (common and/or preferred shares) of other corporations.
Equity method
An accounting method in which the investment in common shares is initially recorded at cost. The investment account is then adjusted (increased for the investor’s share of the investee’s net income and decreased for dividends received) to show the investor’s equity in the investee.
Estimated inventory returns
The estimated cost of inventory that is expected to be returned by customers.
Expected credit losses
Losses that are expected to result from customers defaulting on accounts receivable.
Expense recognition
The process of recording an expense when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities. Expense recognition is linked to revenue recognition in that expenses are recognized in the period in which a company makes efforts to generate revenues.
Expenses
The decreases in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue.
External users
Users of accounting information that are not involved in managing the organization and do not have access to accounting information other than that which is publicly available, including investors, lenders, and other creditors.
Fair value
(also known as current value or current cost) An estimate of the price a company would pay to purchase an asset or settle a liability today with arms’-length parties under normal business conditions.
Fair value basis of accounting
A method of accounting under which assets are recognized on the statement of financial position at their fair values.
Fair value through other comprehensive income (OCI) model
A fair value model for non-strategic investments that can be used only with an election under IFRS (not used under ASPE). It allows investors to record realized and unrealized gains and losses in other comprehensive income rather than in net income.
Fair value through profit or loss model
A valuation method that reports non-strategic debt or equity investments that are held for trading at their fair values, resulting in the recording of unrealized gains and losses in the statement of income.
Faithful representation
A fundamental qualitative characteristic describing information that represents economic reality. It must be complete, neutral, and free from material error.
Financial assets
Receivables and investments that have a contractual right to receive cash or another financial asset.
Financial liability
A form of financial instrument, represented by a contractual obligation to pay cash in the future.
Financing activities
Activities that report the cash effects of debt or equity financing. These include (1) borrowing or repaying cash from (to) lenders, and (2) issuing or reacquiring shares or paying dividends to investors.
First-in, first-out (FIFO) cost formula
An inventory cost formula that assumes that the costs of the earliest (oldest) goods acquired are the first to be recognized as the cost of goods sold. The costs of the latest goods acquired are assumed to remain in ending inventory.
Fiscal year
An accounting period that is one year long.
FOB (free on board) destination
Freight terms indicating that the seller will pay for the shipping costs of the goods and is responsible for the goods until they arrive at their destination (normally the buyer’s place of business).
FOB (free on board) shipping point
Freight terms indicating that the seller is responsible for the goods only until they reach their shipping point (normally the seller’s place of business). The buyer will pay for the shipping costs of the goods from the shipping point until they arrive at their destination and is responsible for them once they have left the shipping point.
Franchise
A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names, usually within a designated geographic area.
Fraud
Intentional misappropriation of assets or misstatement of financial information.
Free cash flow
A cash-based measure used to evaluate solvency. It is calculated by deducting net capital expenditures and cash dividends from net cash provided (used) by operating activities.
Function
A method of organizing expenses on the statement of income by way of the activity (business function) for which they were incurred (such as cost of goods sold, administrative, and selling).
Future value
The value of a cash flow at the time it will be received or paid in the future.
General journal
The book of original entry in which transactions are recorded in chronological (date) order.
General ledger
The book of accounts that contains a company’s asset, liability, and shareholders’ equity (common shares, retained earnings, revenue, expense, and dividends declared) accounts.
Generally accepted accounting principles (GAAP)
A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes.
Going concern assumption
The assumption that the business will remain in operation for the foreseeable future.
Goodwill
The value of favourable, unidentifiable attributes related to a company as a whole. It is calculated when one business acquires another and pays more than the fair value of the company’s net identifiable assets.
Gross pay
The total compensation (such as salaries or wages) earned by an employee.
Gross profit
Sales revenue less cost of goods sold.
Gross profit margin
Gross profit expressed as a percentage of sales. It is calculated by dividing gross profit by sales.
Historical cost basis of accounting
Measurement basis that states that assets and liabilities should be recorded at their cost at the time of acquisition.
Honoured note
A note that is paid in full at maturity.
Horizontal analysis
A technique for evaluating a series of financial statement data over time to determine the increase (decrease) that has taken place. This increase (decrease) is expressed as either an amount or a percentage.
Horizontal percentage change for the period
A percentage measuring the change from one year (or period) to the next year (or period). It is calculated by dividing the dollar amount of the change between the specific year (or period) under analysis and the prior year (or period) by the prior-year amount.
Horizontal percentage of a base-period amount
A percentage measuring the change since a base year (or period), normally involving more than one year (or period). It is calculated by dividing the amount for the specific year (or period) under analysis by the base-year (period) amount.
Impairment loss
The amount by which the carrying amount of an asset exceeds its fair value (assumed to be its recoverable amount).
Income
(also known as revenue) The increase in economic benefits that result from the normal operating activities of a business, such as the sale of a product or provision of a service.
Income available to common shareholders
Net income less the annual preferred dividend for cumulative preferred shares. The dividend is deducted for noncumulative preferred shares only if declared.
Income from operations
The results of a company’s normal operating activities. It is calculated as gross profit less operating expenses.
Income summary
A temporary account used in closing revenue, gain, loss, income, and expense accounts. The balance in each individual revenue and expense account is credited or debited and summarized in the Income Summary account before being closed to retained earnings (via the Income Summary account)
Indirect method
A method of determining net cash provided (used) by operating activities on the statement of cash flows in which net income is adjusted for items that do not affect cash.
Initial public offering (IPO)
The initial offering of a corporation’s shares to the public.
Intangible assets
Assets of a long-lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company.`
Internal controls
Systems designed to help an organization achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations.
Internal users
Users of accounting information, including company officers, managers, and directors, who have access to an organization’s internal accounting information.
Inventory
Goods held for sale to customers.
Inventory turnover
A liquidity measure of the number of times, on average, that inventory is sold (“turned over”) during the period. It is calculated by dividing the cost of goods sold by the average inventory. Average inventory is calculated by adding the beginning and ending inventory balances and dividing the result by 2.
Investee
The corporation that issues (sells) the debt or equity securities.
Investing activites
Activities that report the cash effects of purchasing and disposing of long-lived assets such as property, plant, and equipment and investments not held for trading.
Investors
Users of accounting information that have an ownership interest (own debt or equity securities) in the organization.
Issued shares
The portion of authorized shares that has been sold.
Legal capital
The amount per share that must be retained in the business for the protection of corporate creditors. Equal to the proceeds received from the issue of most shares.
Lenders
Users of accounting information, including bankers, that extend credit to borrowers
Liabilities
The debts and obligations of a business. Liabilities are claims of lenders and other creditors on the assets of a business.
License
Operating right to use an asset that is granted by a government agency or other organization.
Liquidity ratios
Measures of a company’s short-term ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash. These include working capital and the current, receivables turnover, average collection period, inventory turnover, and days in inventory ratios.
Long-term investments
(also known as investments) Investments in debt securities intended to be held for many years to earn interest, and equity securities of other companies held to generate investment income or held for strategic reasons.
Lower of cost and net realizable value (LANRV)
A basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period
Market capitalization
A measure of the fair value of a company’s equity. It is calculated by multiplying the number of shares by the share price at any given date.
Market interest rate
The rate that investors demand for lending funds to a corporation.
Multiple-step statement of income
A statement of income that shows several steps to determine net income or loss by separately reporting sales, gross profit, income from operations, income before income tax, and net income.
Nature
A method of organizing expenses on the statement of income by way of their natural classification (such as salaries, transportation, depreciation, and advertising).
Net income
(also known as profit or net earnings) The amount by which revenues exceed expenses.
Net loss
The amount by which expenses exceed revenues.
Net pay
Gross pay less payroll deductions.
Net purachses
Purchases less purchase returns and allowances and purchase discounts.
Net realizable value (NRV)
The selling price of an inventory item, less any costs required to make the item saleable.
Noncumulative
Preferred shares that are entitled to the current dividend, if declared, but not to any undeclared and unpaid amounts from prior years.
Non-current assets
(also known as long-term assets) Assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date.
Non-current liabilites
(also known as long-term liabilities) Obligations that are not expected to be paid or settled within one year of the financial statement date.
Non-GAAP measures
Management-defined measures of financial performance.
non-strategic investment
A debt or equity investment that is purchased mainly to generate investment income.
Nontrade receivables
Receivables (such as interest receivable, loans to company officers, and income tax receivable) that do not result from the operations of the business.
Normal balance
The side of an account used to increase the account. Asset accounts have a normal debit balance. Liabilities and shareholders’ equity accounts have a normal credit balance. Individual components that make up shareholders’ equity have normal balances as follows: common shares, retained earnings, and revenue accounts have normal credit balances. Expense and dividends declared accounts have normal debit balances, as they reduce retained earnings.
Normal course issuer bid
The reacquisition of a specified percentage of a company’s own shares from the general public for a predetermined price and period, subject to regulatory approval.
Notes payable
(also known as loans payable) Amounts owed to suppliers, banks, or others that are normally interest-bearing and supported by a written promise to repay.
Notes receivable
Amounts owed by customers or others that are normally interest-bearing and supported by a written promise to repay.
NSF (non-sufficent funds) cheque
A cheque that has been deposited but is returned by a bank because there are insufficient funds in the bank account of the customer who wrote the cheque.
Objective of financial reporting
The provision of financial information about a company that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.
Operating activities
Activities that result from day-to-day operations. They report the cash effects of transactions that create revenues and expenses.
Operating cycle
Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services.
Operating expenditures
Expenditures that benefit only the current period. They are immediately charged against revenues as an expense.
Operating expenses
Expenses incurred in the process of earning sales revenue. They are deducted from gross profit to arrive at income from operations.
Operating lease
An arrangement allowing one party (the lessee) to use the asset of another party (the lessor). The arrangement is accounted for as a rental because the risks and rewards of owning the asset have been retained by the lessor.
Operating line of credit
A pre-arranged agreement to borrow money at a bank, up to an agreed-upon amount.
Other comprehensive income (OCI)
Gains and losses that affect shareholders’ equity but are not shown in net income or loss. They relate to complex transactions such as certain types of gains and losses on investments
Outstanding cheques
Cheques issued (written and distributed) and recorded by a company that have not yet been paid (cleared) by the bank.
Parent company
A company that controls (usually owns more than 50% of) the common shares of another company.
Partnership
A business owned by more than one person.
Patent
An exclusive right issued by the federal government that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the application.
Paymeny date
The date dividends are paid or distributed to shareholders.
Payout ratio
A measure of the percentage of the net income distributed in the form of cash dividends to common shareholders. It is calculated by dividing cash dividends by net income.
Payroll deductions
Deductions from gross pay to determine the amount of a paycheque.
Periodic inventory system
An inventory system in which detailed records are not maintained and the ending inventory and cost of goods sold are determined only at the end of the accounting period after a physical inventory count has been completed.
Performance obligation
A company’s requirement to provide goods or services to a customer, as outlined under a contract.
Permanent accounts
Statement of financial position accounts whose balances are carried forward to the next accounting period.
Perpetual inventory system,
An inventory system in which the quantity and cost of each inventory item is maintained. The records continuously show the inventory that should be on hand and the cost of the items sold.
Post-closing trial balance
A list of permanent accounts and their balances after closing entries have been journalized and posted.
Posting
The procedure of transferring journal entries to the general ledger accounts.
Preferred shares
Share capital that has contractual preferences over common shares in certain areas.
Premium
The difference between the issue price and the face value of a bond when a bond is sold for more than its face value. This occurs when the market interest rate is lower than the coupon interest rate.
Prepaid expense
Costs paid in advance of use that benefit more than one accounting period. They are initially recorded as assets and become expenses only when they are used or consumed and no longer have future benefit.
Present value
The value today of an amount or series of amounts to be received or paid in the future.
Price-earnings (P-E) ratio
A profitability measure of the ratio of the market price of each common share to the earnings per share. It reflects investors’ beliefs about a company’s future income potential.
Principal
The original amount of a loan.
Private corporation
A corporation whose shares are not traded on a public stock exchange.
Profit margin
Net income expressed as a percentage of sales. It is calculated by dividing net income by sales.
Profitability ratio
Measures of a company’s operating success for a specific period of time. These include the gross profit margin, profit margin, return on assets, return on common shareholders’ equity, earnings per share, price-earnings, payout, and dividend yield ratios.
Promissory note
A written promise to pay a specified amount of money on demand or at a fixed date in the future.
Property, plant, and equipment
Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business.
Proprietorship
A business owned by one person.
Provisions
Liabilities of uncertain timing or amount. They are recorded in the accounts based on reasonable and probable estimates.
Public corporations
A corporation whose shares are publicly traded on a stock exchange.
Purchase discount
A price reduction, based on the invoice price less any returns and allowances, to encourage customers to make an early payment of a credit purchase.
Purchase returns and allowances
A return of goods for cash or credit, or a deduction granted by the seller on the selling price of unsatisfactory merchandise.
Quantity discount
A price reduction that reduces the invoice price and is given to the buyer for volume purchases. Quantity discounts are not separately recorded.
Realized gain or loss
The difference between fair value and cost (carrying amount) when an investment is actually sold.
Receivables turnover
A measure of the liquidity of receivables. It is calculated by dividing net credit sales by the average gross accounts receivable and is expressed as the number of times per year that the accounts receivable are collected.
Record date
The date when ownership of shares is determined for dividend purposes.
Relevance
A fundamental qualitative characteristic describing information that makes a difference in a user’s decision. It should have predictive value, confirmatory value, or both, and be material.
Reporting entity concept
The concept that economic activity that can be identified with a particular company must be kept separate and distinct from the activities of the owner(s) and of all other economic entities.
Research expenses
Expenditures on an original planned investigation that is done to gain new knowledge and understanding. These costs are expensed because criteria for recording them as assets have not been met.
Residual value
An estimate of the amount that a company would obtain from the disposal of an asset at the end of its useful life.
Retained earnings
The amount of accumulated net income (less net losses, if any) from the prior and current periods that has been retained and reinvested in the corporation for future use and not distributed to shareholders as dividends.
Retained earnings restrictions
Circumstances that make a portion of retained earnings currently unavailable for dividends.
Return on assets
A profitability measure that indicates the amount of net income generated by each dollar invested in assets. It is calculated as net income divided by average total assets [(beginning + ending total assets) ÷ 2]. It can also be calculated by multiplying profit margin by asset turnover.
Return on common shareholders’ equity
A measure of profitability from the shareholders’ point of view. It is calculated by dividing net income minus preferred dividends by average common shareholders’ equity (total shareholders’ equity minus preferred shares).
Revaluation model
A model of accounting for a long-lived asset that carries the asset at its fair value less accumulated depreciation or amortization.
Revenue
(also known as income) The increase in economic benefits that result from the operating activities of a business, such as the sale of a product or provision of a service.
Revenue recognition
The process of recording revenue when there is an inflow of future economic benefits that results from an increase in an asset or a decrease in a liability in the course of ordinary activities. In addition, five conditions must be met: a contract must exist, performance obligations identified, the transaction price determined, the transaction price allocated to the performance obligations, and revenue recognized when the performance obligation is satisfied.
Right-of-use asset
A leased asset recorded as property, plant, and equipment because the right to use the asset has been obtained by the lessee, usually because the lease extends beyond one year.
Sales
Revenue from the sale of inventory.
Sales discount
A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale.
Share capital
Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares.
Shareholders’ equity
The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.
Significant influence
An investor’s ability to influence decisions made by an investee, which is determined by reviewing criteria regarding board representation and transactions and exchanges with the investee. Significant influence is often assumed to exist when more than 20% but less than 50% of an investee’s shares are owned.
SIngle-step statement of income
A statement of income that shows only one step (revenues less expenses) in determining income before income tax, after which income tax expense is deducted to determine net income (loss).
Solvency ratios
Measures of a company’s ability to survive over a long period of time by having enough assets to settle its liabilities as they fall due. These include the debt to total assets and times interest earned ratios and free cash flow.
Specific identification
An inventory cost formula used when goods are unique, identifiable items and not ordinarily interchangeable. It follows the actual physical flow of goods, and individual items are specifically costed to arrive at the cost of goods sold and cost of the ending inventory.
Statement of cash flow
A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.
Statement of changes in equity
A financial statement that summarizes the changes in total shareholders’ equity, as well as each component of shareholders’ equity, for a specific period of time.
Statement of comprehensive income
A financial statement that presents net income (loss) and other comprehensive income (loss) for a specific period of time. Other comprehensive income items, such as realized and unrealized gains and losses from investments accounted for using the fair value through OCI model, are not reported on the statement of income because they are not considered critical to the evaluation of management’s performance, but are included in comprehensive income.
Statement of financial position
(also known as balance sheet) A financial statement that reports the assets, liabilities, and shareholders’ equity at a specific date.
Statement of income
The main financial statement that reports a company’s financial performance during the period.
Statement of retained earnings
A statement that summarizes the changes in the Retained Earnings account during the period. This statement is issued only by private companies reporting using ASPE.
Stock dividend
A pro rata (proportional) distribution of the corporation’s own shares to shareholders.
Stock split
The issue of additional shares to shareholders accompanied by a reduction in the legal capital per share.
Straight-line method
A depreciation method in which depreciation expense is calculated by dividing the depreciable amount of a long-lived asset, such as buildings or equipment, by its useful life.
Strategic investment
An equity investment that is purchased to influence or control another company.
Subsidiary company
A company whose common shares are controlled (usually more than 50% of the common shares are owned) by another company.
Subsidiary ledger
A ledger that is used to manage the detailed information that would be difficult to track in a general ledger account. A control account in the general ledger summarizes the information in the subsidiary ledger.
Supplies
Consumable items used in running a business, such as office and cleaning supplies.
T account
The basic form of an account, with a debit (left) side and a credit (right) side showing the effect of transactions on the account.
Temporary accounts
Revenue, gain, loss, income, expense, and dividends declared accounts whose balances are transferred to Retained Earnings at the end of an accounting period.
Time value of money
The fact that a specified sum of money is worth more in the future because earning interest on that sum allows it to grow over time.
Timeliness
An enhancing qualitative characteristic of useful information that means that information is available to decision makers in time to be capable of influencing their decisions.
Times interest earned
A measure of a company’s solvency, calculated by dividing net income (earnings) before interest expense and income tax expense (EBIT) by interest expense
Trade receivables
Accounts and notes receivable that result from sales transactions.
Trademark (trade name)
A word, phrase, jingle, or symbol that distinguishes or identifies a particular business or product.
Trading investments
Investments that are acquired principally for the purpose of selling in the near term.
Trial balance
A list of general ledger accounts and their balances at a specific time, usually at the end of the accounting period. There are three kinds of trial balances: unadjusted trial balances (before adjusting entries are made), adjusted trial balances (after adjusting entries are made), and post-closing trial balances (after closing entries are made).
Unadjusted trial balance
A list of accounts and their balances before adjusting journal entries have been made.
Units-of-production method
A depreciation method in which the useful life is expressed in terms of the total units of production or total use expected from the asset. Depreciation expense is calculated by multiplying the units produced by a depreciation rate per unit. This rate is determined by dividing the depreciable amount of the asset by the estimated total units of activity. The method will produce an expense that will vary each period depending on the amount of activity.
Unrealized gain or loss
The difference between the fair value and cost (carrying amount) of an investment still held (owned) by the investor.
Useful life
The length of service of a depreciable asset.
Variable consideration
The amount reflected in the transaction price of a contract resulting from discounts, refunds, rebates, price concessions, incentives, performance bonuses, penalties, or the like, which affect the consideration that a customer is expected to pay under the contract.
Verifiability
An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach a consensus that the information is faithfully represented.
Vertical analysis
A technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount. The base amount is usually sales in the statement of income and total assets in the statement of financial position.
Vertical percentage of a base amount
A percentage measuring the proportion of an amount in a financial statement within a year (or period). It is calculated by dividing the financial statement amount under analysis by the base amount for that particular financial statement (such as sales for the statement of income or total assets for the statement of financial position).
Weighted average number of common shares
A weighted average of the number of common shares issued during the year. Shares issued or repurchased during the year are weighted by the fraction of the year for which they have been outstanding.
Weighted average unit cost
The average cost of inventory weighted by the number of units purchased at each unit cost. It is calculated as the cost of goods available for sale divided by the number of units available for sale.
Working capital
A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by subtracting current liabilities from current assets.
