accelerated depreciation method - allocates a higher depreciation in the earlier years of the asset’s lift and lower depreciation in later years

account - a record of the business activities related to a particular item

accounting - a system of maintaining records of a company’s operations and communicating that information to decision-makers

accounting cycle - full set of procedures used to accomplish the measurement/communication process of financial accounting

accounting equation - an equation that shows a company’s resources (assets) equal creditors’ and owners’ claims to those resources (liabilities and stockholders’ equity)

accounts receivable - the amounts owed to the company by its customers from the sale of goods or services on account

accrual-basis accounting - recording revenues when goods and services are provided to customers, and record expenses for the costs used to provide those goods and services to customers

accrued expenses - occur when a company has used costs in the current period, but the company hasn’t yet paid cash for those costs

accrued revenues - occur when a company provides products or service's but hasn’t yet received cash

accumulated deficit - a negative balance in retained earnings

accumulated depreciation - a contra asset account representing the total depreciation taken to date

acid-test ratio - cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities

activity-based method - allocates an asset’s cost based on its use

addition - occurs when a new major component is added to an existing asset

additional paid-in capital - the portion of the cash proceeds from issuing stock above par value

adjusted trial balance - a list of all accounts and their balances after we have updated account balances for adjusting entries

adjusting entries - entries at the end of the period used to update balances of revenues and expenses (and changes in their related assets and liabilities) that have occurred during the period but that we have not yet recorded

aging method - basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for “old” accounts than for “new” accounts

aggressive accounting practices - practices that results in reporting higher income, higher assets, and lower liabilities

allowance for uncollectible accounts - contra asset account representing the amount of accounts receivable not expected to be collected

allowance method - method of reporting accounts receivable for the net amount expected to be collected

amortization - allocation of the cost of an intangible asset over its service life

amortization schedule - provides a table format detailing the cash payment each period, the portions of each cash payment that represents interest and the change in carrying value, and balance of the carrying value

angel investors - wealthy individuals in the business community willing to risk investment funds on a promising business venture

annuity - cash payments of equal amounts over equal time periods

articles of incorporation - describes the nature of the firm’s business activities, the shares to be issued, and the composition of the initial board of directors

assets - resources of a company

asset turnover - net sales divided by average total assets, which measures the sales per dollar of assets invested.

auditors - trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company’s financial statements

authorized stock - shares available to sell, as stated in the company’s articles of incorporation

average collection period - approximate number of days the average accounts recievable balance is outstanding. it equals 365 divided by the receivables turnover ratio

average days in inventory - approximate number of days the average inventory is held. it equals 365 days divided by the inventory turnover ratio

balance sheet - a financial statement that presents the financial position of the company on a particular date

bad debt expense - the cost of estimated future bad debts that is reported as an expense in the current year’s income statement

bank reconciliation - matching the balance of cash in the bank account with the balance of cash in the company’s own records

basket purchase - purchase of more than one asset at the same time for one purchase price

big bath - recording all losses in one year to make a bad year even worse

book value - an asset’s original cost less accumulated depreciation

bond - a formal debt instrument issued by a company to borrow money. the issuing company (borrower) is obligated to pay back to the investor (lender): (1) a stated amount, referred to as the principle or face amount, at a specified maturity fate and (2) periodic interest payments over the life of the bond.

callable - a bond feature that allows the borrower to repay the bonds before their specified maturity date at a specified call price

capitalize - record an expenditure as an asset

capital structure - the mixture of liabilities and stockholders’ equity in a business

carrying value - the amount for which a liability is reported in the balance sheet

cash - currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents

cash-basis accounting - record revenues at the time cash is received and expenses at the time cash is paid

cash equivalents - short-term investments that have a maturity date no longer than three months from the date of purchase

cash flow to sales - net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales

cash return on assets - net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets

chart of accounts - a list of all account names used to record transactions of a company

checks outstanding - checks the company has written that have not been subtracted from the bank’s record of the company’s balance

classified balance sheet - balance sheet that groups a company’s assets into current assets and long-term assets and that separates liabilities into current liabilities and long-term liabilities

closing entries - entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account)

collusion - two or more people acting in coordination to circumvent internal controls

commercial paper - borrowing from another company rather than from a bank

common stock - amounts invested by stockholders when they purchase shares of stock; external source of equity

comparability - the ability of users to see similarities and differences between two different business activities

conservative accounting practices - practices that results in reporting lower income, lower assets, and higher liabilities

contingencies - uncertain situations that can results in a gain or a loss for a company.

contingent gain - an existing uncertain situation that might result in a gain

contingent liability - an existing uncertain situation that might result in a loss

contra account - an account with a balance that is the opposite, or “contra.” to that of its related accounts

contra revenue account - can account with a balance that is opposite, or “contra,” to that of its related revenue account

consistency - the use of similar accounting procedures either over time for the same company or across companies at the same point in time.

convertible - a bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock

1. shares that can be exchanged for common stock

copyright - an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software

corporation - an entity that is legally separate from its owners and even pays its own income taxes

cost constraint - financial accounting information is provided only when the benefits of doing so exceed the costs

cost of goods sold (cogs) - cost of the inventory that was sold during the period

credit - right side of an account. indicates an increase to asset, expense, or dividend accounts, and a decrease to liability, stockholders’ equity, or revenue accounts

creditors - lend money to a company, expecting to be paid back the loan amount plus interest

credit sales - transfer of goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. also known as sales on account or services on account

cumulative - preferred stock shares receive priority for future dividends, if dividends are not declared in a given year

current liabilities - obligations that, in most cases, are due within one year from the balance sheet date. however, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year

current portion of long-term debt - debt that will be paid within one year from the balance sheet date

current ratio - current assets divided by current liabilities; measures the availability of current assets to pay current liabilities

debt covenant - an agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt

debt financing - borrowing money from creditors (liabilities)

debt to equity ratio - total liabilities divided by total stockholders’ equity; measures a company’s risk

decision usefulness - the ability of the information to be useful in decision-making

declaration date - the date the board of directors announces the next dividend to be paid

declining-balance method - an accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

default risk - the risk that a company will be unable to pay the bond’s face amount or interest payments as they become due

deferred revenues - arise when a company receives cash in advance from customers, but goods and services won’t be provided until a later period

• cash received in advance from a customer for products or services to be provided in the future

deposits outstanding - cash receipts of the company that have not been added to the bank’s record of the company’s balance

depreciation - the process of allocating the cost of a long-term asset to expense over its useful life

depreciation method - the pattern in which the assets’s depreciable cost (original cost minus residual value) is allocated over time

direct method - adjusts the items in teh income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent interest, and taxes

direct write-off method - recording bad debt expense at the time we know the account is actually uncollectible

discontinued operation - the sale or disposal of a significant component of a company’s operations

discount - a bond’s issue price is below the face amount

dividends - distributions to stockholders, typically in the form of cash

dividends in arrears - unpaid dividends on cumulative preferred stock

dividend yield - dividends per share divided by the stock price

double taxation - corporate income is taxed once on earnings at the corporate level and again on dividends at the individual level

early extinguishment of debt - the issuer retires debt before its scheduled maturity date

earnings per share (eps) - net income available to common shareholders divided by average shares of common stock outstanding

economic entity assumption - all economic events with a particular economic entity can be identified

ethics - a code or moral system that provides criteria for evaluating right and wrong behavior

equity financing - obtaining investment from stockholders (stockholders’ equity)

expenses - costs of providing products and services and other business activities during the current period

external transactions - transactions the firm conducts with a separate economic entity

faithful representation - accounting information that is complete, neutral, and free from error

fica taxes - based on the federal insurance contributions act; tax withheld from employees’ paychecks and matched by employers for social security and medicare

financial accounting - measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes

financial accounting standards board (fasb) - an independent, private body that has primary responsibility for the establishment of GAAP in the united states

financial statements - periodic reports published by the company for the purpose of providing information to external users

financing activities - transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock, paying dividends, and purchasing treasury stock

first-in, first-out method (FIFO) - inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out)

franchise - inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out)

fraud triangle - the three elements present for every fraud—motivation, rationalization, and opportunity

freight-in - cost to transport inventory to the company, which is included as part of inventory cost

freight-out - cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense

fringe benefits - additional employee benefits paid for by the employer

generally accepted accounting principles (GAAP) - the rules of financial accounting

general ledger - a collection of each account with its individual transactions and resulting account balance

gift card breakage - the point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote

going concern assumption - in the absence of information to the contrary, a business entity will continue to operate indefinitely

goodwill - goodwill equals the purchase price less the fair value of the net assets acquired

gross profit - the difference between net sales and cost of goods sold

gross profit ratio - measure the amount by which the sale of inventory exceeds its cost per dollar of sales. it equals gross profit divided by net sales

growth stock - stocks that tend to have higher price-earnings ratios and are expected to have higher future earnings

horizontal analysis - analyzes trends in financial statement data for a single company over time

impairment - occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation)

improvement - the cost of replacing a major component of an asset

income before income taxes - operating income plus nonoperating revenues less nonoperating expenses

income statement - a financial statement that reports the company’s revenues and expenses over an interval of time

indirect method - begins with net income and then lists adjustments to net income in order to arrive at operating cash flows

initial public offering (ipo) - the first time a corporation issues stock to the public

installment payment - includes both an amount that represents interest and an amount that represents a reduction of the carrying value

intangible assets - long-term assets that lack physical substance, and whose existence is often based on a legal contract

internal controls - a company’s plans to (1) safeguard the company’s assets and (2) improve the accuracy and reliability of accounting information

international accounting standards board (iasb) - an international accounting standard-setting body responsible for the convergence of accounting standards worldwide

international financing reporting standards (ifrs) - the standards being developed and promoted by the international accounting standards board

inventory - items a company intends for sale to customers in the ordinary course of business

inventory turnover ratio - the number of times a firm sells its average inventory balance during a reporting period. it equals cost of goods sold divided by average inventory

investing activities - transactions involving the purchase and sale of long-term assets and current investments

invoice - a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms

issued stock - shares sold to investors; includes treasury shares

journal - a chronological record of all transactions affecting a firm

journal entry - the format used for recording business transactions

land improvements - improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

last-in, first-out method (lifo) - inventory costing method that assumes the last units purchased (the last in) are the first ones sold

lease - a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time.

liabilities - amounts owed to creditors

1. liability - an obligation of a company to transfer some economic benefit in the future

lifo adjustment - an adjustment used to convert a company’s own inventory records maintained throughout the year on a FIFO basis to lifo basis for preparing financial statements at the end of the year

lifo conformity rule - IRS rule requiring a company that uses lifo for tax reporting to also use lifo for financial reporting

limited liability - stockholders in a corporation can lose no more than the amount they invested in the company

line of credit - an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

liquidity - having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts

lower of cost and net realizable value - method where companies report inventory in the balance sheet at the lower of cost and net realizable value, where net realizable value equals estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation

material - large enough to influence a decision

market interest rate - an implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond

monetary unit assumption - a unit or scale of measurement can be used to measure financial statement elements

multiple-step income statement - an income statement that reports multiple levels of income (or profitability)

natural resources - assets like oil, natural gas, and timber that we can physically use up or deplete

net accounts receivable - the difference between total accounts receivable and the allowance for uncollectible accounts

net income - the difference between revenues and expenses for the period

net realizable value - estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation

net revenues - a company’s total revenues less and discounts, returns and allowances

noncash activities - significant investing and financing activities that do not affect cash

no-par value stock - common stock that has not been assigned a par value

notes payable - written promises to repay amounts borrowed plus interest

notes receivable - formal credit arrangements evidenced by a written debt instrument, or note

nsf check - a check received and deposited by a company that is later determined by the bank to have insufficient funds. also known as a “bad” check from a customer

occupational fraud - the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources

operating activities - transactions involving revenue and expense activities

operating income - profitability from normal operations that equals gross profit less operation expenses

organization chart - traces the line of authority within the corporation

outstanding stock - issued shares that currently are held by investors; does not include treasury shares

paid-in capital - the amount stockholders have invested in the company

patent - an exclusive right to manufacture a product or to use a process

partnership - business owned by two or more persons

par value - the legal capital assigned per share of stock

payment date - the date of the actual distribution of dividends

petty cash fund - a small amount of cash kept on hand to pay for minor purchases

percentage-of-receivables method - method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

periodic inventory system - inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

periodicity assumption - the economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting

permanent accounts - all accounts that appear in the balance sheet; account balances are carried forward from period to period

perpetual inventory system - inventory system that maintains a continual record of inventory purchased and sold

post-closing trial balance - a list of all accounts and their balances at a particular date after we have updated account balances for closing entries

posting - the process of transferring the debit and credit information from the journal to individual accounts in the general ledger

preferred stock - stock with preference over common stock in the payment of dividends and the distribution of assets

premium - a bond’s issue price is above the face amount

prepaid expenses - arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period

price-earnings (pe) ratio - the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis

1. compares a company’s share price with its earnings per share

privately held corporation - does not allow investment by the general public and normally has fewer stockholders

private placement - sale of debt securities directly to a single investor

profitability ratios - measure the earnings or operating effectiveness of a company

profit margin - net income divide by net sales; indicates the earnings per dollar of sales

property dividend - the distribution of a noncash asset to stockholders

publicly held corporation - allows investment by the general public and is regulated by the securities and exchange commission

purchase cards - company-issued debit cards or credit cards that allow authorized employees to make purchases on behalf of the company

quality of earnings - refers to the ability of reported earnings to reflect the copmany’s true earnings, as well as the usefulness of reported earnings to predict future earnings

quick assets - includes only cash, current investments, and accounts receivable

receivables turnover ratio - number of times during a year that the average accounts receivable balance is collected (or “turns over”). it equals net credit sales divided by average accounts receivable

record date - the date on which a company looks at its records to determine who the stockholders of the company are

redeemable - shares can be returned to the corporation at a fixed price

relevance - accounting information that possesses confirmatory value and/or predictive value, and that is material

repairs and maintenance - expense that maintain a given level of benefits in the period incurred

residual value - the amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value

retained earnings - all net income minus all dividends over the life of the company; internal source of equity

1. earnings not distributed as dividends to stockholders over the life of the company

return on assets - net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets

return on equity (roe) - net income divided by average stockholders’ equity; measures the income generated per dollar of equity

revenues - amounts recognized when the company sells products or services to customers

revenue recognition principle - record revenue in the period in which we provide goods and services to customers for the amount the company is entitled to receive

sales allowance - seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s good or service

sales discount - reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time

sales return - customer returns a product

sales tax payable - sales tax collected from customers by the seller, representing current liabilities payable to the government

sarbanes-oxley act (sox) - formally titled the public company accounting reform and investor protection act of 2002, this act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators

s corporation - allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership

secured bonds - bonds that are supported by specific assets pledged as collateral

separation of duties - authorizing transactions, and controlling related assets should be separated among employees

serial bonds - bonds that require payment of the principal amount of the bond over a series of maturity dates

service life - how long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life

sinking fund - an investment fund used to set aside money to be used to pay debts as they come due

sole proprietorship - a business owned by one person

solvency - refers to a company’s ability to pay its current and long-term obligations

specific identification method - inventory costing method that matches or identifies each unit of inventory with its actual cost

stated interest rate - the rate specified in the bond contract used to calculate the cash payments for interest

stated value - the legal capital assigned per share to no-par stock

statement of cash flows - a financial statement that measures activities involving cash receipts and cash payments over an interval of time

statement of stockholders’ equity - a financial statement that summarizes the changes in stockholders’ equity over an interval of time

stock dividends - additional shares of a company’s own stock given to stockholders

stockholders’ equity - owner's claims to resources, which arise primarily from contributions by the owners and company operations

stock split - a large stock dividend that includes a reduction in teh par or stated value pr share

straight-line method - allocates an equal amount of depreciation to each year of the asset’s service life

subsidiary ledger - a group of individual accounts associated with a particular general ledger control account

t-account - a simplified form of a general ledger account with space at the top for the account title, one side for recording debits, and one side for recording credits

temporary accounts - all revenue, expense, and dividend accounts; account balances are maintained for a single period and then closed (or zeroed out) and transferred to the balance of the retained earnings account at the end of the period

term bonds - bonds that require payment of the full principal amount at a single maturity date

timeliness - information being available to users early enough to allow them to use it in the decision process

times interest earned ratio - ratio that compares interest expense with income available to pay those charges

trade discount - reduction in the listed price of a good or service

trademark - a word, slogan, or symbol that distinctively identifies a company, product, or service

treasury stock - a company’s own issued stock that it has purchased

trial balance - a list of all accounts and their balances at a particular date, showing that total debits equal total credits

uncollectible accounts - customers’ accounts that no longer are considered collectible

unemployment taxes - a tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

understandability - users must understand the information within the context of the decision they are making

unsecured bonds - bonds that are not supported by specific assets pledged as collateral

value stocks - stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings

venture capital firms - provide additional financing, often in the millions, for a percent ownership in the company

verifiability - a consensus among different measures

vertical analysis - expresses each item in a financial statement as a percentage of the same base amount measured in the same period

weighted-average cost method - inventory cost method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale

working capital - the difference between current assets and current liabilities