Key Accounting Principles and Concepts

Reg FD (Fair Disclosure)

Requires public companies to disclose material information to all investors at the same time.

Timely, Verifiable, Neutral

Qualities of financial information that enhance its reliability and usefulness.

Revenue Recognition (ASC 606)

A five-step model for recognizing revenue from contracts with customers.

Identify the contract

Determine if a legally enforceable agreement exists.

Identify performance obligations

Identify distinct goods or services in the contract.

Determine transaction price

Estimate the consideration the entity expects to receive.

Allocate the transaction price

Distribute price among performance obligations.

Recognize revenue

Recognize when (or as) the obligation is satisfied.

Bill-and-Hold

Revenue recognized before delivery if specific criteria are met.

Gift Cards

Deferred revenue until redemption or estimated breakage.

Operating Activities

Cash flows related to day-to-day business operations.

Investing Activities

Cash flows from buying/selling long-term assets or securities.

Financing Activities

Cash flows from debt, equity, or dividend transactions.

Balance Sheet Linkage

Changes in balance sheet accounts affect the cash flow statement.

Retained Earnings

Accumulated net income minus dividends paid.

Accounts Receivable (A/R)

Money owed by customers, shown at net realizable value.

Allowance for Doubtful Accounts

Estimate of uncollectible receivables.

Factoring

Selling A/R to a third party to receive cash immediately.

Securitization

Pooling and selling receivables to investors.

Collateralized Loan

Loan backed by A/R as collateral.

FIFO

First-in, first-out inventory method; newer costs remain in inventory.

LIFO

Last-in, first-out inventory method; older costs remain in inventory.

Weighted Average

Inventory method using average cost of items.

LIFO Reserve

Difference between FIFO and LIFO inventory valuations.

LIFO Liquidation

Selling older inventory layers, potentially boosting profits.

Perpetual Inventory

Continuous update of inventory records.

Periodic Inventory

Inventory records updated at period-end via physical count.

Capitalized Cost

Expenditures included in the asset's book value.

Expensed Cost

Costs recorded as expense when incurred.

Depreciation

Allocation of tangible asset cost over its useful life.

Amortization

Depreciation for intangible assets.

Depletion

Expense recognition for natural resource extraction.

Impairment

Write-down when asset's carrying amount exceeds recoverable value.

R&D Costs

Generally expensed due to uncertainty of future benefit.

Short-Term Lease

Lease ≤12 months, no asset or liability recorded.

Operating Lease

Right-of-use asset and liability recorded, straight-line expense.

Finance Lease

Lease that meets certain criteria; amortization and interest recorded.

Executory Costs

Maintenance, taxes, and insurance costs expensed separately.

Bond at Par

Coupon rate equals market rate; sold at face value.

Bond at Discount

Coupon rate less than market; sold below face value.

Bond at Premium

Coupon rate more than market; sold above face value.

Extinguishment of Debt

Paying off debt before maturity; gain or loss may arise.

Floating Rate Debt

Debt with interest rate tied to benchmark (e.g., SOFR).

Imputed Interest

Estimated interest on non-interest-bearing obligations.

Book vs Tax Income

Difference arises from GAAP vs IRS rules.

Deferred Tax Asset (DTA)

Tax benefit from future deductible amounts.

Deferred Tax Liability (DTL)

Future taxes owed from current temporary differences.

Valuation Allowance

Reduces DTA if it's not likely to be realized.

Permanent Difference

Item affects only book or tax income, not both.

Temporary Difference

Item affects book and tax income in different periods.

NOL Carryforward

Net Operating Loss applied to future taxable income (up to 80%).

Uncertain Tax Position

Tax benefit recognized only if more likely than not to be upheld.

Change in Accounting Principle

Retrospective adjustment of prior years.

Change in Accounting Estimate

Prospective adjustment in current and future years.

Correction of Error

Prior period adjustment through retained earnings.

Prior Period Adjustment

Restates prior financial statements for material errors.

Non-GAAP Measure

Performance metric not compliant with GAAP; must reconcile to GAAP.