Chapter 1

Accounting

A system of providing "quantitative information, primarily financial in nature,

about economic entities that is intended to be useful in making economic
decisions."

American Institute of Certified Public Accountants (AICPA)

The professional organization of certified public accountants in the United States.

Balance Sheet

Document which reports the resources of a company (the assets), the company's
obligations (the liabilities), and the owners' equity, which represents how much
money has been invested in the company by its owners.

Bookkeeping

The preservation of a systematic, quantitative record of an activity.

Certified Public Accountant

A person who has taken a minimum number of college-level accounting classes,

has passed the dreaded CPA exam, and has met other requirements set by his or
her state.
Financial Accounting

The name given to accounting information provided for and used by external
users.

Financial Accounting Standards Board (FASB)

Private, non-profit body that sets accounting standards in the United States.

Financial Statements

The three primary financial information documents: the balance sheet, income
statement, and statement of cash flows.

Income Statement

This document reports the amount of net income earned by a company during a
period, with annual and quarterly income statements being the most common.

Internal Revenue Service (IRS)

The government agency responsible for tax collection and tax law enforcement.

International Accounting Standards Board (IASB)

An independent, international body formed to develop worldwide accounting

standards.
International Financial Reporting Standards (IFRS)

The accounting standards produced by the IASB.

Managerial Accounting

The name given to accounting systems designed for internal users.

Public Company Accounting Oversight Board (PCAOB)

A private, non-profit organization that effectively serves as an arm of the SEC in

registering, inspecting, and disciplining the auditors of all publicly traded
companies.

Statement of Cash Flows

This document reports the amount of cash collected and paid out by a company
in the following three types of activities: operating, investing, and financing.
Chapter 2
Accounting Equation

Assets = Liabilities + Owners' Equity

Accumulated Other Comprehensive Income

The source of these increased assets

Assets

Assets are the firm's economic resources, formally defined as "probable future
economic benefits obtained or controlled by a particular entity as a result of past
transactions or events

Balance Sheet

A statement of financial position shows the financial resources the company owns
or controls and the claims on those resources

Book Value

The book value of an asset is the asset's cost minus the asset's accumulated
depreciation.

Comparability

Tnformation that becomes much more useful when it can be related to a

benchmark or standard

Conservatism
a pervasive factor in accounting, can be summarized as follows: When in doubt,
recognize all losses but don't recognize any gains.

Consistency

The consistency principle states that, once you adopt an accounting principle or
method, continue to follow it consistently in future accounting periods.

Disclosure

Earnings Per Share (EPS)

EPS tells the owner of one share of stock what he or she really wants to know

Entity Concept

The idea that personal financial activity is kept separate from business financial
activity

Expenses

The amount of assets consumed from the performance of business operations

and thus are the opposite of revenues
External Audit

audit conducted by external (independent) qualified accountant(s)

Financing Activities

Those activities whereby cash is obtained from, or repaid to, owners and creditors

Gains

Refers to money made on activities outside the normal business of a company

Going Concern Assumption

allows the readers of financial statements to assume that the company will
continue on long enough to carry out its objectives and commitments.

Historical Cost Convention

An accounting technique that values an asset for balance sheet purposes at the
price paid for the asset at the time of its acquisition

Income Statement

A company's financial performance for a specified period of time.

Investing Activities

The purchase and sale of land, buildings, and equipment. Investing activities also
include buying and selling stocks of other companies
Liabilities

the future sacrifices of economic benefits that the entity is presently obliged to
make to other entities as a result of past transactions or other past events

Liquidity,

the ease with which the item can be turned into cash

Losses

Refers to money lost on activities outside the normal business of a company

Materiality

the question of whether an item is large enough to make any difference to

anyone

Net Assets

total assets minus total liabilities. In a sole proprietorship the amount of net
assets is reported as owner's equity. In a corporation the amount of net assets is
reported as stockholders' equity.

Net Income

the difference between revenues and expenses. If revenues exceed expenses, net
income results. If, on the other hand, expenses exceed revenues, there will be a
net loss

Net Loss
the difference between revenues and expenses. If revenues exceed expenses, net
income results. If, on the other hand, expenses exceed revenues, there will be a
net loss

Notes to Financial Statements

These provide additional information pertaining to a company's operations and

financial position and are considered to be an integral part of the financial
statements.

Operating Activities

Those activities involved in producing and selling goods and services and thus
comprise the day-to-day business of a company

Owners' Equity

portion of the assets that the owners of the organization can really call their own

Paid-in Capital

The value of the assets given in exchange for shares of stock.

Recognition

Relevance

A qualitative characteristic in accounting. Relevance is associated with

information that is timely, useful, has predictive value, and is going to make a
difference to a decision maker.
Reliability

A qualitative characteristic in accounting. It is achieved when information is

verifiable, objective (not subjective) and you can depend on it.

Retained Earnings

Represent the portion of stockholders' equity (resulting from cumulative

profitable operations) that has not been paid to the owners as dividends

The amount of assets created through the performance of business operations

Revenue Recognition

Statement of Cash Flows

Individual cash flow items that are classified according to three main activities:
operating, investing, and financing.
Stockholders' Equity

The portion of the balance sheet that represents the capital received from
investors in exchange for stock (paid-in capital), donated capital and retained
earnings

Time Period Concept

The time period principle is the concept that a business should report the
financial results of its activities over a standard time period, which is usually
monthly, quarterly, or annually.

Treasury Stock

Shown as a subtraction in the stockholders' equity section of the balance sheet

Chapter 4
"Other Assets"

Long-term assets that are not suitable for reporting under any of the previous
classifications

Accounts Payable

The flip side of accounts receivable—when one company sells on credit, creating
for itself an account receivable, the company on the other side of the transaction
is buying on credit, creating an account payable.

Accounts Receivable

Amounts owed to a business by its credit customers and are usually collected in
cash within 10 to 60 days.

Accumulated Depreciation

Reflects the wear and tear, or depreciation, of these items since they were
originally purchased.

Accumulated Other Comprehensive Income

The grouped together and reported changes which companies experience

increases and decreases in equity each year because of the movement of market
prices or exchange rates
Additional Paid-in Capital

Invested by stockholders that exceeds the par value of the issued shares.

Asset

Probable future economic benefit obtained or controlled by a particular entity as

a result of past transactions or events.

Asset Mix,

The proportion of total assets in each asset category, is determined to a large

degree by the industry in which the company operates.

Balance Sheet

A listing of an organization's assets and of its liabilities at a certain time.

Capital Lease Obligations

A long-term liability in the balance sheet.

Cash

Coins and currency as well as the balances in company checking and savings
accounts.

Common Stock

Stockholders' equity investment

Current Assets

Cash, accounts receivable, and inventory.

Current Liabilities

Those obligations expected to be paid within one year, the most common being
accounts payable.

Current Portion of Long-term Debt

Some liabilities, such as mortgages, are payable in equal monthly installments

over a specified number of years. The portion of these liabilities that is payable
within 12 months from the balance sheet date.

Deferred Income Tax Liability

The income tax expected to be paid in future years on income that has already
been reported in the income statement but which, because of the tax law, has not
yet been taxed.

Derivative

A financial instrument, such as an option or a future, that derives its value from
the movement of a price, an exchange rate, or an interest rate associated with
some other item.
Disclosure

Convey the details in a narrative note without ever including anything in the
financial statements themselves.

Equity

Residual interest in the assets of an entity that remains after deducting its
liabilities.

Executory Contract,

It is an exchange of promises about the future.

Financing Mix

The percentage of total financing (liabilities plus equity) in each individual

category.

Intangible Assets

Assets that have no physical or tangible characteristics.

Inventory

The name given to goods held for sale in the normal course of business.

Investment Securities

Composed of publicly traded stocks and bonds.

Liability

Probable future sacrifice of economic benefit arising from a present obligation of

a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events.

Long-term Debt

Long-term notes, bonds, mortgages, and similar obligations on the balance sheet

Long-term Investments

Those assets that you expect to still be around next year when you prepare the
balance sheet again.

Noncontrolling Interest,

Arises when a corporation has subsidiaries that are not 100 percent owned by the
corporation.

Par Value

The market value of the shares at issuance.

Preferred Stock

Stockholders' equity investment

Prepaid Expenses

Payments in advance for business expenses.

Property, Plant, and Equipment

Exactly what the label implies: land, buildings, machinery, tools, furniture,
fixtures, and vehicles used by a company in conducting its business activities.

Recognition

Boil down all the estimates and judgments into one number and report that one
number in formal financial statements.

Retained Earnings

The cumulative amount of a corporation's profits that have been reinvested on

behalf of the stockholders

Short-term Loans Payable

Formal, interest-bearing loans that are expected to be paid back within one year.

Stockholders' Equity

The difference between assets and liabilities in a corporation

Transaction Analysis

The process of determining how an economic event impacts the financial

statements

Treasury Stock

The repurchased shares when a company buys back its own shares

Unearned Revenue,

Represents Sears's obligation to provide service to customers who have paid

Sears for a service they have not yet received.

Valuation

Once it has been determined that an item should be recognized in financial

statements, the question then arises about what dollar amount to assign to the
item.
Chapter 5
Accrual Accounting

The process that accountants use in adjusting raw transaction data into refined
measures of a firm’s economic performance.

Comprehensive Income

The number used to reflect an overall measure of the change in a company’s

wealth during the period

Cost of Goods Sold,

When a business sells goods to customers, the cost of the goods sold is recorded
as an expense

Discontinued Operations

Report the Hughes results in a separate category called income from discontinued
operations.

Earnings Per Share (EPS),

The amount of net income associated with each share of stock.

Economic Value Added,

A system of earnings-based compensation

Expanded Accounting Equation

Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends)

Expenses

The value of resources used in generating the reported revenue.

Extraordinary Items

Gains and losses that result from transactions that are both unusual in nature and
infrequent in occurrence

Financial Capital Maintenance

The approach that accountants typically use in computing a company’s income is

the first option described above in which inflation is ignored and a company is
said to have income when its financial resources increase.

Gain

The amount of a company makes money on activities that are peripheral to its
primary operations

Gross Profit

The difference between the selling price of the product and the cost of the
product.
Income From Continuing Operations

the segments of a company's business that it considers to be normal, and expects

to operate in for the foreseeable future

Loss

The amount of a company loses money on activities that are peripheral to its
primary operations

Matching

The concept typically used in practice to determine when an expense should be

recognized

Multiple-step Income Statement

The multi-step income statement includes multiple sub-totals within the income
statement.

Net Income

The accountant’s attempt to summarize in one number the overall economic

performance of a company for a given period.

Operating Income

The performance of the fundamental business operations conducted by a

company

Physical Capital Maintenance

income is earned only when one experiences an increase in actual physical
resources.

Restructuring Charges

The fact that companies have exercised considerable discretion in determining

the amount and timing of a restructuring charge.

Revenue

The value of the goods and services provided by a company in its business
operations.

Revenue Recognition

a cornerstone of accrual accounting together with matching principle. They both

determine the accounting period, in which revenues and expenses are
recognized.

Single-step Income Statement

With this format, all revenues are grouped together, all expenses are grouped
together, and net income is computed as the difference between total revenues
and total expenses.
Chapter 6
Cash Equivalents

Short-term, highly liquid investments such as Treasury bills, commercial paper,

and money market funds.

Direct Method

reporting the information contained in the last column of the adjustment

worksheet

Financing Activities

Obtaining resources from owners and providing them a return on their

investment, and obtaining resources from creditors and repaying those
borrowings

Indirect Method

A method for creating a statement of cash flows a company may use during any
given reporting period. The indirect method uses accrual accounting information
to present the cash flows from the operations section of the cash flow statement.

Investing Activities

Cash inflows and outflows from (1) acquiring and selling productive assets such as
property, plant, and equipment, (2) acquiring and selling investment securities,
and (3) lending money and collecting on those loans
Non-cash Investing and Financing Activities

Some investing and financing activities affect a company's financial position but
not the company's cash flows during the period.

Operating Activities

All transactions relating to a company's delivering or producing its goods for sale
and providing its services

Pro Forma,

A prediction of what the actual cash flow statement will look like in future years if
the operating, investing, and financing plans are implemented.

Statement of Cash Flows,

Summarize a company's cash flows for a period of time.

Chapter 3
Asset Turnover

Sales divided by assets and is interpreted as the number of dollars in sales

generated by each dollar of assets.

Assets-to-equity Ratio

Assets divided by equity and is interpreted as the number of dollars of assets

acquired for each dollar invested by stockholders.

Average Collection Period

Shows the average number of days that elapse between sale and cash collection.

Cash Flow Adequacy Ratio

Cash from operations divided by expenditures for fixed asset additions and
acquisitions of new businesses

Cash Times Interest Earned Ratio

A financial analysis tool that indicates the interest payment ability of an entity

Common-size Financial Statements

All amounts for a given year being shown as a percentage of that denominator for
the year.

Current Ratio
A comparison of current assets (cash, receivables, and inventory) with current
liabilities. It is computed by dividing total current assets by total current liabilities.

Debt Ratio

A frequently used measure of leverage, computed as total liabilities divided by

total assets.

Debt-to-equity Ratio

Total liabilities divided by total equity and is interpreted as the number of dollars
of borrowing for each dollar of equity investment

DuPont Framework

A systematic approach to identifying general factors causing ROE to deviate from

normal.

Financial Ratios

Relationships between financial statement amounts

Financial Statement Analysis

Areas in which additional data must be gathered, including details of significant

transactions, market share information, competitors' plans, and customer
demand forecasts.

Fixed Asset Turnover

Sales divided by average fixed assets and is interpreted as the number of dollars
in sales generated by each dollar of fixed assets.
Leverage

Borrowing that allows a company to purchase more assets than its stockholders
are able to pay for through their own investment.

Liquidity

A company's ability to pay its debts in the short run

Margin

The profitability of each dollar in sales

Number of Days' Sales in Inventories

Calculated by dividing average inventory by average daily cost of goods sold and is
interpreted as the average number of days of sales that can be made using only
the supply of inventory on hand.

Price-earnings Ratio

an equity valuation multiple. It is defined as market price per share divided by

annual earnings per share.
Return On Assets

Net income divided by total assets and is the number of pennies of net income
generated by each dollar of assets.

Return On Equity

The overall measure of the performance of a company.

Return On Sales

Net income divided by sales and is interpreted as the number of pennies in profit
generated from each dollar of sales.

Turnover

The degree to which assets are used to generate sales

Chapter 7
Cash Budget

An important tool in helping management plan its cash needs. This discussion
briefly introduces you to budgeting cash receipts.
Chapter 8
Audit Committee

Members of a company’s board of directors who are responsible for dealing with
the external and internal auditors.

Control Activities

Policies and procedures used by management to meet their objectives.

Control Environment

The actions, policies, and procedures that reflect the overall attitudes of top
management about control and its importance to the entity.

Control Procedures

Policies and procedures used by management to meet their objectives.

Detective Controls

Internal control activities that are designed to detect the occurrence of errors and
fraud.

External Auditors

Independent CPAs who are retained by organizations to perform audits of

financial statements.

GAAP Oval
A diagram that represents the flexibility a manager has, within GAAP, to report
one earnings number from among many possibilities based on different methods
and assumptions.

Generally Accepted Auditing Standards (GAAS)

Auditing standards developed by the PCAOB for public companies and AICPA for
private companies.

Income Smoothing

The practice of carefully timing the recognition of revenues and expenses to even
out the amount of reported earnings from one year to the next.

Independent Checks

Procedures for continual internal verification of other controls.

Internal Auditors

An independent group of experts (in controls, accounting, and operations) who

monitor operating results and financial records, evaluate internal controls, assist
with increasing the efficiency and effectiveness of operations, and detect fraud.

Internal Control Structure

Policies and procedures established to provide management with reasonable

assurance that the objectives of an entity will be achieved.

Internal Earnings Targets

Financial goals established within a company.

Organizational Structure

Lines of authority and responsibility.

Physical Safeguards

Physical precautions used to protect assets and records.

Preventative Controls

Internal control activities that are designed to prevent the occurrence of errors
and fraud.

Public Company Accounting Oversight Board (PCAOB)

Board of five full-time members established by the Sarbanes-Oxley Act to oversee

the accounting and auditing profession.

Sarbanes-Oxley Act

A law passed by Congress in 2002 that gives the SEC significant oversight
responsibility and control over companies issuing financial statements and their
external auditors.

Securities and Exchange Commission (SEC)

The government body responsible for regulating the financial reporting practices
of most publicly owned corporations in connection with the buying and selling of
stocks and bonds.
Segregation of Duties

A strategy to provide an internal check on performance through separation of

authorization of transactions from custody of related assets, operational
responsibilities from record-keeping responsibilities, and custody of assets from
accounting personnel.
Chapter 9
Capital Budgeting

Systematic planning for long-term investments in operating assets.

Controlling

Implementing management plans and identifying how plans compare with actual
performance.

Cost-volume-profit (C-V-P) Analysis

Techniques for determining how changes in revenues, costs, and level of activity
affect the profitability of an organization.

Differential Costs

Future costs that change as a result of a decision; also called incremental or

relevant costs.

Direct Costs

Costs that are specifically traceable to a unit of business or segment being

analyzed.

Direct Labor

Wages paid to those who physically work on direct materials to transform them
into a finished product and are traceable to specific products.

Direct Materials
Materials that become part of the product and are traceable to it.

Evaluating

Analyzing results, rewarding performance, and identifying problems.

Fixed Costs

Costs that remain constant in total, regardless of activity level, over a certain
range of activity.

Indirect Costs

Costs normally incurred for the benefit of several segments within the
organization; sometimes called common costs or joint costs.

Indirect Labor

Labor that is necessary to a manufacturing or service business but is not directly

related to the actual production of the product.

Indirect Materials

Materials that are necessary to a manufacturing or service business but are not
directly included in or are not a significant part of the actual product.
Manufacturing Overhead

All costs incurred in the manufacturing process other than direct materials and
direct labor.

Operational Budgeting

Managerial planning decisions regarding current and immediate future (a year or

less) operations that are characterized by regularity and frequency.

Opportunity Costs

The benefits lost or forfeited as a result of selecting one alternative course of

action over another.

Out-of-pocket Costs

Costs that require an outlay of cash or other resources.

Period Costs

Costs not directly related to a product, service, or asset. They are charged as
expenses to the income statement in the period in which they are incurred.

Planning

Outlining the activities that need to be performed for an organization to achieve

its objectives.
Product Costs

Costs associated with products or services offered.

Production Prioritizing

Management's continual evaluation of various product lines and divisions'

profitability in order to analyze and identify opportunities to improve profits.

Return On Investment

A measure of operating performance and efficiency in utilizing assets; computed

in its simplest form by dividing net income by average total assets (also known as
return on assets or ROA).

Strategic Planning

Broad, long-range planning usually conducted by top management.

Sunk Costs

Costs that are past costs and do not change as a result of a future decision.

Variable Costs

Costs that change in total in direct proportion to changes in activity level.

Chapter 10
Activity-based Costing (ABC)

A method of attributing overhead costs to products based on measurable factors

that relate to activities that create overhead costs.

Batch-level Activities

Activities that take place in order to support a batch or production run, regardless
of the size of the batch.

Cost Drivers

Numerical measure used to reflect the amount of a specific cost that is associated
with a particular activity.

Cost Pool

Total cost being generated by a specific overhead cost activity.

Facility Support Activities

Activities necessary to have a facility in order to participate in the development

and production of products or services; activities are not related to any particular
line of products or services.

Product-line Activities

Activities that take place in order to support a product line, regardless of the
number of batches or individual units produced.
Unit-level Activities

Activities that take place each time a unit of product is produced.

Chapter 11
Break-even Point

The amount of sales at which total costs of the number of units sold equal total
revenues; the point at which there is no profit or loss.

Contribution Margin

The difference between total sales and variable costs; the portion of sales
revenue available to cover fixed costs and provide a profit.

Contribution Margin Ratio

The percentage of net sales revenue left after variable costs are deducted; the
contribution margin divided by net sales revenue.

Cost Behavior

The way a cost is affected by changes in activity levels.

Cost-volume-profit (C-V-P) Analysis

Techniques for determining how changes in revenues, costs, and level of activity
affect the profitability of an organization.

Fixed Costs

Costs that remain constant in total, regardless of activity level, at least over a
certain range of activity.

High-low Method
A method of segregating the fixed and variable components of a mixed cost by
analyzing the costs at the highest and the lowest activity levels within a relevant
range.

Method

A method of segregating the fixed and variable components of a mixed cost by

plotting on total costs at several activity levels and drawing a regression line
through the points.

Mixed Costs

Costs that contain both variable and fixed costs components.

Operating Leverage

The extent to which fixed costs replace variable costs as part of a company's cost
structure; the higher the proportion of fixed costs to variable costs, the faster
income increases or decreases with changes in sales volume.

Per-unit Contribution Margin

The excess of the sales price of one unit over its variable costs.

Profit Graph

A graph that shows how profits vary with changes in volume.

Regression Line
On a scattergraph, the straight line that most closely expresses the relationship
between the variables.

Relevant Range

The range of operating level, or volume of activity, over which the relationship
between total costs (variable plus fixed) and activity level is approximately linear.

Return On Sales Revenue

A measure of operating performance; computed by dividing net income by total

sales revenue. Similar to profit margin.

Sales Mix

The relative proportion of total sales dollars (or total units sold) that is
represented by each of a company's products.

Scattergraph

A method of segregating the fixed and variable components of a mixed cost by

plotting on total costs at several activity levels and drawing a regression line
through the points.

Stepped Costs

Costs that change in total in a stair-step fashion (in large amounts) with changes
in volume of activity.

Target Income

A profit level desired by management.

Variable Cost Rate

The change in cost divided by the change in activity; the slope of the regression
line.

Variable Costs

Costs that change in total in direct proportion to changes in activity level.

Visual-fit

A method of segregating the fixed and variable components of a mixed cost by

plotting on total costs at several activity levels and drawing a regression line
through the points.