Updated PIM 811 Final

Operating Cycle

The repetitive cycle of business activities that converts cash into inventory, sales, and back into cash.

Short Operating Cycle

Indicates inventory and receivables are converted to cash quickly.

Revenue

Inflow of assets from selling goods or performing services.

ASC 606

The accounting standard governing revenue recognition.

ASC 606 Step 1

Identify the contract with the customer.

ASC 606 Step 2

Identify performance obligations.

ASC 606 Step 3

Determine the transaction price.

ASC 606 Step 4

Allocate the transaction price to performance obligations.

ASC 606 Step 5

Recognize revenue when obligations are satisfied.

Performance Obligation

A promise to transfer a good or service to a customer.

Point-in-Time Revenue Recognition

Revenue recognized when control transfers to the customer.

Installment Method

Revenue recognized as cash is collected when collectability is uncertain.

Input Method

Revenue recognized based on efforts or costs incurred toward completion.

Output Method

Revenue recognized based on milestones or value transferred.

Accounts Receivable

Amounts owed by customers from credit sales.

Allowance for Uncollectible Accounts

Estimated amount of receivables expected to be uncollectible.

Contra Asset Account

Account that reduces the balance of a related asset account.

Net Realizable Value

Accounts Receivable minus Allowance for Uncollectible Accounts.

Bad Debt Expense

Estimated cost of uncollectible accounts.

Percentage-of-Credit-Sales Method

Estimates bad debt expense directly.

Aging Method

Estimates the ending allowance account balance directly.

Write-Off of Receivables

Removal of an uncollectible account from the books.

Receivable Collection Period

365 ÷ Accounts Receivable Turnover.

Accounts Receivable Turnover

Net Credit Sales ÷ Average Accounts Receivable.

Capitalized Cost

Cost recorded as an asset rather than an expense.

Historical Cost

The acquisition cost of an asset.

Betterment Expenditure

Cost that improves an asset or extends its useful life.

Revenue Expenditure

Routine maintenance cost expensed immediately.

Long-Lived Asset

Asset providing benefits for more than one year.

Depreciation

Systematic allocation of a tangible asset's cost over its useful life.

Straight-Line Depreciation

(Cost − Residual Value) ÷ Useful Life.

Residual Value

Estimated value of an asset at the end of its useful life.

Double-Declining Balance

Accelerated depreciation method with higher early-year expenses.

Units-of-Production Depreciation

Method based on asset usage or output.

Accumulated Depreciation

Total depreciation recorded since acquisition.

Book Value

Cost minus accumulated depreciation.

Asset Impairment

Reduction in an asset's carrying amount when not recoverable.

Recoverability Test

Compares expected future cash flows to carrying value.

Intangible Asset

Nonphysical asset with future economic benefits.

Patent

Exclusive legal right to manufacture or sell an invention.

Copyright

Exclusive legal protection for creative works.

Trademark

Protected name, logo, or symbol.

Franchise

Contractual right to conduct business under another company's brand.

Goodwill

Excess of purchase price over fair value of net identifiable assets acquired.

Amortization

Systematic allocation of intangible asset cost.

Indefinite-Life Intangible

Intangible asset not amortized because it has no determinable life.

Natural Resource

Wasting asset such as oil, gas, timber, or minerals.

Depletion

Allocation of a natural resource's cost over production.

Full Cost Method

Capitalizes successful and unsuccessful exploration costs.

Successful Efforts Method

Capitalizes only successful exploration costs.

Debt Financing

Raising capital through borrowing.

Bond

Long-term debt security that pays interest and principal.

Note Payable

Written promise to repay borrowed funds.

Indenture Agreement

Legal contract between bond issuer and bondholders.

Debt Covenant

Restriction placed on borrowers by lenders.

Secured Bond

Bond backed by collateral.

Debenture

Unsecured bond not backed by collateral.

Callable Bond

Bond that may be redeemed early by the issuer.

Convertible Bond

Bond that can be exchanged for common stock.

Credit Risk

Risk that a borrower will fail to make required payments.

Junk Bond

High-risk, non-investment-grade bond.

Face Value

Amount repaid at bond maturity.

Coupon Rate

Stated interest rate on a bond.

Market Rate

Current interest rate demanded by investors.

Effective Interest Rate

Market rate used for bond valuation.

Present Value

Current value of future cash flows discounted at a market rate.

Bond Discount

Occurs when coupon rate is less than market rate.

Bond Premium

Occurs when coupon rate is greater than market rate.

Bond Amortization

Allocation of a bond premium or discount over time.

Effective Interest Method

GAAP-preferred method for bond amortization.

Interest Expense Formula

Beginning Book Value × Effective Interest Rate.

Debt Retirement

Early repayment of debt before maturity.

Gain on Debt Retirement

Occurs when debt is retired for less than book value.

Loss on Debt Retirement

Occurs when debt is retired for more than book value.

Lease

Contract granting the right to use an asset.

Right-of-Use Asset

Asset recognized by a lessee for leased property.

Lease Liability

Present value of future lease payments.

Finance Lease

Lease treated similarly to purchasing an asset with debt.

Operating Lease

Lease with a single lease expense recognized over time.

Lease Classification Criteria

Ownership transfer, purchase option, major life usage, substantial PV, or no alternative use.

Leverage

Use of debt financing to increase returns.

Interest Coverage Ratio

(Net Income + Interest Expense) ÷ Interest Expense.

Stockholders' Equity

Owners' residual claim on company assets.

Contributed Capital

Amount invested by stockholders.

Retained Earnings

Cumulative earnings not distributed as dividends.

Accumulated Other Comprehensive Income (AOCI)

Cumulative OCI items reported in equity.

Common Stock

Basic ownership shares with voting rights.

Preferred Stock

Shares with dividend and liquidation preferences.

Par Value

Nominal value assigned to stock.

Additional Paid-In Capital (APIC)

Amount received above par value.

Authorized Shares

Maximum shares a corporation may issue.

Issued Shares

Shares sold to investors.

Treasury Stock

Shares repurchased by the issuing company.

Outstanding Shares

Issued Shares minus Treasury Shares.

Cash Dividend

Distribution of cash to shareholders.

Declaration Date

Date the board declares a dividend.

Record Date

Date shareholders must be on record to receive dividends.

Distribution Date

Date dividends are paid.

Dividend Yield

Dividend per Share ÷ Market Price per Share.

Dividend Payout Ratio

Dividend per Share ÷ Earnings per Share.