ACFM Exam 1

Sole Proprietorship

A type of firm that is not a separate legal entity, typically private, with a single owner, where legal obligations and liabilities cannot be separated from the owner, and uses pass-through taxation.

Partnership

A type of firm that is not a separate legal entity, typically private, with more than one owner, dissolved and reformed if ownership changes, where legal obligations and liabilities cannot be separated from the owners, and uses pass-through taxation.

Limited Liability Company (LLC or LLP)

A popular type of private firm governed by state law, easy to create, which should create a separate entity (though still being tested in common law), and uses pass-through taxation (treated like a partnership or sole proprietorship).

Corporation (S or C)

A type of firm that is a separate legal entity, where ownership is evidenced by stock certificates, granting rights to vote and share in corporate distributions, and has a corporate governance structure.

C Corporation

A separate legal entity where ownership is evidenced by stock certificates, granting rights to vote and share in corporate distributions, and possesses a corporate governance structure.

Public Corporation

A corporation whose shares are offered to the public and are generally actively traded, with the company receiving proceeds only when the shares are initially offered to the public, adhering to the entity concept.

Private Corporation

A corporation where it is illegal to offer shares to the public without first registering with the SEC and state agencies, typically having very little regulation and usually only a few shareholders, sometimes referred to as 'closely held'.

Financial Accounting

Enables analysis, supports the capital market decision process, and requires the development and adherence to financial reporting standards.

Earnings/Profits/Income/Net Income

Synonymous terms referring to the financial gain or revenue of a business after all expenses have been deducted.

Liabilities/Debts/Obligations

Synonymous terms referring to financial obligations that must be paid or satisfied at some point in the future.

Equity/Owner’s Equity/Shareholder’s Equity/Stockholder’s Equity

Synonymous terms representing the residual interest in the assets of an entity after deducting liabilities, with the specific term used depending on the organizational structure.

Assets

Represent purchased resources that provide future benefit to the business.

Liabilities

Financial obligations that must be paid (satisfied) at some point in the future.

Matching Expenses to Period

The accounting principle that expenses should be recognized in the same period as the revenues they helped generate, or when they are incurred/consumed/expended.

Capitalization

The process of creating an asset from purchases that are expected to provide future economic benefits and will result in future expenses (e.g., depreciation).

Accrual

An accounting event where the transaction has transpired but cash has not yet been exchanged.

Deferral

An accounting event where cash has been exchanged but the transaction or event has not yet transpired.

General Purpose Financial Statements

Financial reports prepared in accordance with GAAP to provide information to a wide range of users.

GAAP (Generally Accepted Accounting Principles)

A common set of accounting principles, standards, and procedures that companies must follow to compile their financial statements.

FASB (Financial Accounting Standards Board)

The private sector organization in the United States responsible for establishing and improving GAAP.

SEC (Securities and Exchange Commission)

A U.S. government agency that oversees securities markets and is responsible for protecting investors, maintaining fair and orderly functioning of securities markets, and facilitating capital formation.

PCAOB (Public Company Accounting Oversight Board)

A private, non-profit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies in order to protect investors.

IFRS (International Financial Reporting Standards)

A set of global accounting standards developed by the International Accounting Standards Board (IASB) that aim to make financial statements comparable across different countries.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and owner's equity at a specific point in time, following the equation: Assets = Liabilities + Owner's Equity.

Assets

Measurable resources that provide future economic benefit to a business.

Current Assets

Assets that are liquid (easily converted to cash) or will be used or converted to cash within the next year, such as Cash, Accounts Receivable, Inventory, Prepaid Expenses, and Marketable Securities.

Non-current Assets

Assets that will be used in the business for longer than one year and are usually not liquid.

Property, Plant & Equipment (PP&E)

A category of non-current assets including tangible items like Buildings, Land, Machinery, Vehicles, and Furniture & Fixtures.

Intangibles

Non-current assets that lack physical substance, such as Patents, Copyrights, and Goodwill.

Historical Cost (Acquisition Cost)

An asset valuation method primarily used for Property, Plant & Equipment (PP&E) and Intangibles, recording them at their original purchase price.

Net Realizable Value

An asset valuation method used for Accounts Receivable, representing the amount expected to be collected.

Mark to Market

An asset valuation method used for Marketable Securities and Investments, adjusting their value to current market prices.

Lower-of-cost-or-market

An asset valuation method used for Inventory, valuing it at the lower of its historical cost or its current market value.

Depreciation

The systematic and rational allocation of the cost of property and equipment to the periods in which it is used to generate revenue.

Straight-line Depreciation

A depreciation method calculated as (Acquisition Price - Salvage/Residual Value) / Useful Life.

Liabilities

Obligations that require a future sacrifice, usually in the form of a cash payment.

Accounts Payable

A liability resulting from the credit purchase of merchandise (retailer) or raw materials (manufacturer).

Notes Payable

A liability representing borrowed funds, such as bank borrowings.

Accrued Amounts

Liabilities that result from a timing difference between when an unpaid expense is reported on the income statement and when it is ultimately paid (e.g., accrued wages, income taxes).

Unearned Revenue

A liability representing advanced payments received from customers for goods or services to be delivered in the future.

Contingent Liabilities

Liabilities recorded when it is more likely than not that a future occurrence will result in a material adverse financial impact and the amount can be reasonably estimated.

Current Liabilities

Liabilities that are scheduled to be paid within one year.

Long-Term Debt

Liabilities that are not scheduled to be paid within one year (e.g., mortgages, bonds).

Stockholders' Equity

The residual amount of assets remaining after subtracting liabilities, representing the owners' claim to the assets.

Contributed/Invested Capital

The portion of stockholders' equity primarily represented by Common Stock, reflecting owner investments.

Retained Earnings

The accumulated net income of a corporation that has not been distributed to stockholders as dividends.

Treasury Stock

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

Cash Basis

An accounting method in which revenues are recognized when cash is received and expenses are recognized when cash is paid.

Accrual Basis

An accounting method in which revenues are recognized when earned and expenses are recognized when incurred, regardless of cash movements.

On Credit (On Account)

Purchasing or selling with payment to be made later; creates accounts receivable or accounts payable.

Revenue

Income earned from delivering goods or services, recognized in the period it is earned (under accrual).

Expenses

Costs incurred in earning revenue, recognized in the period incurred (under accrual).

Profit / Net Income

The excess of revenues over expenses for a period; shown on the income statement.

P&L Statement (Income Statement)

Financial statement that shows revenues, expenses, and profit or loss for a period.

Asset

Economic resource providing future benefits; examples include cash, inventory, land, buildings.

Liability

Obligation requiring future sacrifice; examples include loans and debt.

Equity

Investor's money placed in the business; residual interest after liabilities.

Balance Sheet

Financial statement showing assets, liabilities, and equity at a point in time.

Income Statement

Another term for P&L; reports revenues minus expenses over a period.

Statement of Cash Flows

Financial statement detailing cash inflows and outflows categorized into operating, investing, and financing activities.

Operating Activities

Cash flows from the core daily business operations.

Investing Activities

Cash flows from the purchase and sale of long-term assets and investments.

Financing Activities

Cash flows from debt, equity transactions, and dividends.

10-K

Annual report filed with regulators containing comprehensive financial information.

10-Q

Quarterly report filed with regulators.

Accounts Receivable

Amounts owed to the company by customers who bought on credit.

Accounts Payable

Amounts the company owes to suppliers for purchases made on credit.

Inventory

Goods held for sale; in the lawn mower example, stock of mowers.

GAAP

Generally Accepted Accounting Principles

FASB

Financial Accounting Standards Board

IFRS

International Financial Reporting Standards

PCAOB

Public Company Accounting Oversight Board

SEC 

Securities and Exchange Commission