CLEP FINANCIAL ACCOUNTING VOCAB

made using notebook lm

Accounting Equation

Assets = Liabilities + Equity

Assets

Resources owned by a company expected to provide future benefit

Liabilities

Debts or obligations owed by a company to external parties

Equity

The residual interest in the assets of an entity that remains after deducting its liabilities

Current Asset

An asset expected to be converted to cash, sold, or consumed within one year or the operating cycle

Current Liability

An obligation due to be paid within one year or the operating cycle

Intangible Asset

An asset that holds real value but lacks physical substance, such as patents or goodwill

Book Value

The original cost of an asset minus its accumulated depreciation

Gross Profit

The amount of revenue remaining after subtracting the cost of goods sold

FIFO (First-In, First-Out)

An inventory valuation method that assumes the first items purchased are the first ones sold

LIFO (Last-In, First-Out)

An inventory valuation method that assumes the most recently purchased items are sold first

Weighted Average Cost

An inventory method that averages the cost of all items available for sale during a period

Lower of Cost or Market (LCM)

A rule requiring inventory to be written down to market value if it falls below the original cost

Allowance for Doubtful Accounts

A contra asset account that reduces accounts receivable to its net realizable value

Net Realizable Value

The amount of cash a company actually expects to collect from its accounts receivable

Accrual Basis Accounting

A system that records revenues when earned and expenses when incurred, regardless of when cash is exchanged

Direct Write-Off Method

A method that recognizes bad debt expense only when a specific account is deemed uncollectible

Allowance Method

A GAAP-compliant method that estimates uncollectible accounts at the end of each period

Bond Discount

The amount by which the market price of a bond is lower than its face value

Bond Premium

The amount by which the market price of a bond is higher than its face value

Face Value

The amount a bondholder will receive at the bond's maturity date; also called par value

Multi-Step Income Statement

A format that presents subtotals for gross profit and operating income before reaching net income

EBITDA

Earnings before interest, taxes, depreciation, and amortization

Statement of Cash Flows

A financial report that classifies cash transactions into operating, investing, and financing activities

Current Ratio

A liquidity metric calculated as current assets divided by current liabilities

Quick Ratio

A more stringent liquidity test that excludes inventory and prepaid expenses from current assets

Matching Principle

The accounting rule that requires expenses to be reported in the same period as the revenues they helped generate

Conservatism

A principle that guides accountants to choose the alternative that is least likely to overstate assets or income

Materiality

The threshold used to determine if an item is significant enough to influence the decisions of a user of financial statements

Treasury Stock

Shares of a company's own stock that it has reacquired from the open market