Survey of Accounting: Fraud, Internal Control, Long-Lived Assets, Liabilities, and Stockholders' Equity

Comprehensive practice flashcards defining foundational accounting concepts across liabilities, bonds, stockholders' equity, long-lived plant and intangible assets, internal control, fraud, and cash management.

Current Liability

A debt that a company reasonably expects to pay from existing current assets or through the creation of other current liabilities within $1$ year or the operating cycle, whichever is longer.

Notes Payable

A written promissory note that provides formal documentation of an obligation, usually requiring the borrower to pay interest and frequently issued for short-term financing needs.

Sales Taxes Payable

A current liability representing the tax collected from customers as a stated percentage of the sales price, which the selling business must periodically remit to the state's department of revenue.

Unearned Revenues

Revenues received in cash before goods are delivered or services are performed, initially recorded by increasing Cash and a current liability account.

Current Maturities of Long-Term Debt

The portion of a long-term debt that is scheduled to come due within the current operating year, requiring reclassification from long-term to current liabilities without an adjusting entry.

Employer Payroll Taxes

Taxes levied directly upon the employer as operating liabilities, including the employer's matching share of FICA taxes along with federal and state unemployment taxes.

Bond

A form of interest-bearing note payable issued by corporations, universities, and government agencies, typically sold in denominations of $\$1,000$ or multiples thereof to borrow capital from the public.

Bond Certificate

A legal document issued to an investor that provides the name of the issuing company, the face value, the maturity date, and the contractual interest rate of the bond.

Contractual Interest Rate

The stated annual rate on a bond certificate used to determine the actual amount of cash interest the issuer pays to bondholders.

Bond Discount

The difference between the face value of a bond and its lower selling price, which occurs when the market interest rate is higher than the bond's contractual interest rate.

Bond Premium

The difference between the selling price of a bond and its lower face value, which occurs when the contractual interest rate is higher than the market interest rate.

Common Stockholders' Rights

The bundle of ownership privileges granted to common stockholders, including voting rights, dividend sharing, the preemptive right to maintain ownership percentage, and a residual claim upon liquidation.

Preemptive Right

The legal right of common stockholders to purchase proportionate shares of any new stock issuance to maintain their existing ownership percentage in the corporation.

Residual Claim

The right of common stockholders to share in corporate assets upon liquidation in proportion to their holdings after all creditor and lender claims have been fully settled.

Par Value Stock

Capital stock that has been assigned a specific nominal dollar value per share in the corporate charter, historically establishing the legal capital per share required to protect creditors.

Paid-in Capital

The total amount of cash and other assets paid in to a corporation by stockholders in exchange for shares of capital stock.

Retained Earnings

Cumulative net income that a corporation retains for reinvestment in the business rather than distributing to shareholders as dividends.

Preferred Stock

A class of capital stock that grants contractual priorities over common stock regarding dividend payments and the distribution of assets upon corporate liquidation, typically lacking voting rights.

Cumulative Dividend

A feature of preferred stock stipulating that preferred stockholders must receive both current-year dividends and any unpaid prior-year dividends (dividends in arrears) before common stockholders receive any dividend distribution.

Treasury Stock

A corporation's own capital stock that has been issued, fully paid for, and subsequently reacquired by the corporation to be held for future use, accounted for as a contra stockholders' equity account.

Payout Ratio

A financial metric that measures the percentage of earnings distributed to common stockholders in cash, calculated as $\text{Payout Ratio} = \frac{\text{Cash Dividends}}{\text{Net Income}}$.

Return on Common Stockholders' Equity

A profitability ratio measuring how much net income was earned for each dollar of common stockholders' investment, calculated as $\frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average Common Stockholders' Equity}}$.

Plant Assets

Tangible resources that possess physical substance, are utilized in normal business operations, are not intended for sale to customers, and provide service to the business over multiple operating years.

Historical Cost Principle

An accounting principle requiring plant assets to be recorded at cash or cash equivalent cost, which consists of all expenditures necessary to acquire the asset and prepare it for its intended use.

Revenue Expenditures

Costs incurred on plant assets that immediately benefit the current period and are expensed directly against revenues rather than included in an asset account.

Capital Expenditures

Costs incurred on plant assets that improve efficiency, increase productive capacity, or extend the useful life of the asset, recorded as additions to a balance sheet asset account.

Land Improvements

Structural enhancements made to land that have limited useful lives (such as driveways, parking lots, fences, and underground sprinklers) and are depreciated over time.

Ordinary Repairs

Routine expenditures incurred to maintain the operating efficiency and expected productive life of a plant asset unit, recognized as maintenance and repairs expense as incurred.

Depreciation

The rational and systematic process of allocating the historical cost of a plant asset to expense over its estimated useful life, representing cost allocation rather than asset valuation.

Depreciable Cost

The total portion of an asset's original acquisition cost that is subject to depreciation over its service life, computed as $\text{Cost} - \text{Salvage Value}$.

Straight-Line Method

A depreciation method that allocates an identical periodic expense amount to each full operating year of an asset's useful life.

Declining-Balance Method

An accelerated depreciation method that applies a constant percentage rate to an asset's decreasing book value each year, producing higher depreciation expense in the early years of service.

Units-of-Activity Method

A depreciation method in which the useful life of an asset is expressed in total anticipated units of production or activity rather than time, making depreciation expense vary with usage.

Modified Accelerated Cost Recovery System (MACRS)

A mandatory, accelerated statutory depreciation system established by the Internal Revenue Service (IRS) for calculating depreciation deductions on corporate tax returns.

Asset Impairment

A permanent drop in the fair value of a long-lived asset below its recorded book value, requiring the asset to be written down to fair value in the period of impairment.

Intangible Assets

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

Amortization

The rational and systematic allocation of the acquisition cost of a limited-life intangible asset to expense over its estimated useful life, typically using the straight-line method.

Patent

An exclusive legal right granted by the federal government allowing the holder to manufacture, sell, or otherwise control an invention for a statutory duration of $20$ years from the date of grant.

Copyright

An exclusive legal right granted by the federal government allowing the creator to reproduce and sell an artistic, musical, or published literary work for the creator's lifetime plus $70$ years.

Trademark

A word, phrase, jingle, or symbol that uniquely identifies and distinguishes a commercial enterprise or product, legally protected for $20$ years and renewable indefinitely.

Goodwill

An unidentifiable intangible asset recognized exclusively when an entire operating business is acquired, measured as the excess of the purchase price over the fair market value of the net assets acquired.

Research and Development (R&D) Costs

Expenditures directed toward discovering new scientific knowledge, designs, or products, all of which must be charged to expense when incurred regardless of future commercial success.

Return on Assets (ROA)

An overall profitability measure indicating the net income generated by each dollar invested in assets, defined as $\text{Return on Assets} = \frac{\text{Net Income}}{\text{Average Total Assets}}$.

Asset Turnover

An asset efficiency ratio that measures how effectively a company uses its asset base to generate revenue, calculated as $\text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}}$.

Fraud

A dishonest act intentionally committed by an employee that produces a personal benefit to the individual at an economic cost to the employing enterprise.

Fraud Triangle

The three critical factors that facilitate and encourage fraudulent business behavior: opportunity, financial pressure, and rationalization.

Sarbanes-Oxley Act (SOX)

A federal law applying to publicly traded U.S. corporations that mandates reliable internal controls, requires executive certification, necessitates external auditor attestation, and established the PCAOB.

Internal Control

A comprehensive organizational process designed to provide reasonable assurance regarding the achievement of company objectives concerning operational efficiency, reliable reporting, and legal compliance.

Control Environment

The overarching component and foundation of internal control, commonly called the 'tone at the top,' reflecting executive philosophy, integrity, and ethical conduct throughout the enterprise.

Segregation of Duties

An internal control principle mandating that distinct employees be assigned responsibility for related transactional steps and that physical custody of an asset be separated from its accounting records.

Independent Internal Verification

An internal control procedure wherein accounting records and asset balances are periodically examined and reconciled by an employee who is independent of the personnel handling the records.

Bonding

A human resource internal control practice involving insurance coverage obtained against financial losses resulting from employee theft or dishonesty.

Cash Over and Short

An income statement account utilized to record the discrepancy between actual physical cash counted and the expected cash recorded on register tapes or POS receipts.

Voucher System

A formal network of independent written authorizations designed to ensure that all disbursements made by check are legitimate, verified, and properly documented.

Petty Cash Fund

A localized reserve of currency used to pay relatively small, incidental expenses (such as delivery fees, taxi fares, or postage due) where check issuance is impractical.

Bank Reconciliation

The comparative procedure of aligning the cash balance per the bank statement with the cash balance per company books, adjusting for timing lags and errors to establish the correct cash balance.

Deposit in Transit

A cash receipt that has been recorded in the company's ledger accounts in one accounting period but has not yet been processed or credited by the bank on the monthly statement.

Outstanding Check

A check written, signed, and recorded by the issuing company that has not yet been presented to or cleared by the bank for payment.

NSF Check

A check deposited by a payee that is subsequently returned unpaid by the issuer's bank due to insufficient funds, requiring a deduction from book cash balances.

Cash Equivalents

Short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that their market value is insensitive to interest rate fluctuations.

Restricted Cash

Cash assets that are legally or contractually segregated for a designated specific purpose and are unavailable to fund general current business operations.

Cash Budget

A detailed financial schedule projecting anticipated future cash receipts, cash disbursements, and financing requirements over a one- to two-year period.