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Glossary
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2/10, n/30  Term indicating that the seller will give the purchaser a 2 percent discount on the gross invoice price if the purchaser pays cash for the merchandise within 10 days from the date of purchase.
absolute amounts  Dollar totals reported in accounts on financial reports that can be misleading because they make no reference to the relative size of the company being analyzed.
absorption (full) costing  Practice of capitalizing all product costs, including fixed manufacturing costs, in inventory and expensing costs when goods are sold.
accelerated depreciation methods  Depreciation methods that recognize depreciation expense more rapidly in the early stages of an asset's life than in the later stages of its life.
account balance  Difference between total debits and total credits in an account.
account groups  Self-balancing entities that account for a governmental unit's general fixed assets and the outstanding principal of its general long-term liabilities.
account receivable  Expected future cash receipt(s) arising from permitting a customer to buy now and pay later; characterized by relatively small balance with a short term to maturity.
accounting controls  Procedures designed to safeguard assets and to ensure accuracy and reliability of the accounting records and reports.
accounting cycle  A cycle consisting of these stages: recording accounting data, adjusting the accounts, preparing the financial statements, and closing the nominal accounts; when one accounting cycle ends, a new one begins.
accounting equation  Expression of the relationship between the assets and the claims on those assets.
accounting event  Economic occurrence that causes changes in an enterprise's assets, liabilities, or equity.
accounting period  Span of time covered by the financial statements, normally one year, but may be a quarter, a month or some other time span.
accounting  Service-based profession that provides reliable and relevant financial information useful in making decisions.
accounts receivable turnover ratio  Financial ratio that measures how fast accounts receivable are turned into cash; computed by dividing sales by accounts receivable.
accounts  Records used for the classification and summary of transaction data.
accrual accounting  Accounting system that recognizes expenses or revenues when they occur regardless of when cash is exchanged.
accrual  Recognition of events before exchanging cash.
accrual transactions  Transactions involving the recognition of revenue or expense before the corresponding cash receipt or payment.
accrued expenses  Expenses that are recognized before cash is paid. An example is accrued salaries expense.
accrued interest  Interest revenue or expense that is recognized before cash has been exchanged.
accumulated conversion factors  Factors used to convert a series of future cash inflows into their present value equivalent and that are applicable to cash inflows of equal amounts spread over equal interval time periods and that can be determined by computing the sum of the individual single factors used for each period.
accumulated depreciation  Contra asset account that indicates the sum of all depreciation expense recognized for an asset since the date of acquisition.
acid-test ratio  Measure of immediate debt-paying ability; calculated by dividing very liquid assets (cash, receivables, and marketable securities) by current liabilities.
activities  The actions taken by an organization to accomplish its mission.
activity base  Factor that causes changes in variable cost; is usually some measure of volume when used to define cost behavior.
activity-based management (ABM)  Management of the activities of an organization to add the greatest value by developing products that satisfy the needs of that organization's customers.
adjusting entry  Entry that updates account balances prior to preparing financial statements.
administrative controls  Procedures designed to evaluate performance and the degree of compliance with a firm's policies and public laws.
adverse opinion  Audit opinion for a set of financial statements issued by a certified public accountant that means that part of or all of the financial statements are not in compliance with GAAP and the auditors believe this noncompliance would be material to the average prudent investor.
aging of accounts receivable  The process of classifying each account receivable by the number of days it has been outstanding. The purpose of the aging process is to develop a more accurate estimate of the amount of uncollectible accounts.
allocation base  Cost driver that constitutes the basis for the allocation process.
allocation  Process of dividing a total cost into parts and apportioning the parts among the relevant cost objects.
allocation rate  Factor used to allocate or assign costs to a cost object; determined by taking the total cost to be allocated and dividing it by the appropriate cost driver.
allocation  Recognition of expense by systematic assignment of the cost of an asset to periods of use.
Allowance for Doubtful Accounts  Contra asset account that contains an amount equal to the accounts receivable that are expected to be uncollectible.
allowance method for uncollectible accounts  Method of accounting for bad debts in which bad debts are estimated and expensed in the same period in which the corresponding sales are recognized. The receivables are reported in the financial statements at net realizable value (the amount expected to be collected in cash).
allowances  Reduction in the selling price of goods extended to the buyer because the goods are defective or of lower quality than the buyer ordered to encourage a buyer to keep merchandise that would otherwise be returned.
amortization  Method of systematically allocating the costs of intangible assets to expense over their useful lives; also term for converting the discount on a note or a bond to interest expense over a designated period.
amortizing  See amortization.
annual report  Document in which an organization provides information to stockholders, usually on an annual basis.
annuity  Series of equal payments made over a specified number of periods.
applied overhead  Amount of overhead costs assigned during the period to work in process using the predetermined overhead rate.
appropriated retained earnings  Retained earnings restricted by the board of directors for a specific purpose (e.g., to repay debt or for future expansion); although a part of total retained earnings, not available for distribution as dividends.
articles of incorporation  Items on an application filed with a state agency for the formation of a corporation; contains such information as the corporation's name, its purpose, its location, its expected life, provisions for its capital stock, and a list of the members of its board of directors.
articulation  A term used to recognize interrelationships among the financial statements. For example, the amount of net income is determined on the income statement and is then added to beginning retained earnings for as a component in the calculation of the ending retained earnings balance that is shown on the statement of stockholders' equity.
asset exchange transaction  A transaction that decreases one asset while increasing another asset so that total assets do not change; for example, the purchase of land with cash.
asset source transaction  Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).
asset turnover ratio  The amount of net income divided by average total assets.
asset use transaction  Transaction that decreases an asset and a claim on assets; the three types are distributions (transfers to owners), liability payments (to creditors), or expenses (used to operate the business).
assets  Economic resources used by a business to produce revenue.
audits  Detailed examinations of financial statements and the documents that support the information presented in those statements.
authority manual  A document that outlines the chain of command for authority and responsibility. The authority manual provides guidelines for specific positions such as personnel officer as well a general authority such as all vice presidents are authorized to spend up to a designated limit.
authorized stock  Number of shares that the corporation is approved by the state to issue.
available-for-sale securities  Marketable securities that are not properly classified as held-to-maturity or trading securities.
average cost  The total cost of making products divided by the total number of products made.
average number of days to collect accounts receivable  Length of the average collection period for accounts receivable; computed by dividing 365 by the accounts receivable turnover ratio.
average number of days to sell inventory ratio  Financial ratio that measures the average number of days that inventory stays in stock before being sold.
avoidable costs  Future costs that can be avoided by taking a specified course of action. To be avoidable in a decision-making context, costs must differ among the alternatives. For example, if the cost of material used to make two different products is the same for both products, that cost could not be avoided by choosing to produce one product over the other. Therefore, the material's cost would not be an avoidable cost.
balance sheet  Statement that lists the assets of a business and the corresponding claims (liabilities and equity) on those assets.
balanced score card  A management evaluation tool that includes financial and non financial measures.
bank reconciliation  Schedule that identifies and explains differences between the cash balance reported by the bank and the cash balance in the firm's accounting records.
bank statement credit memo  Memo that describes an increase in the account balance.
bank statement debit memo  Memo that describes a decrease in the account balance.
bank statement  Statement issued by a bank (usually monthly) that denotes all activity in the bank account for that period.
basket purchase  Acquisition of several assets in a single transaction with no specific cost attributed to each asset.
batch-level costs  The costs associated with producing a batch of products. For example, the cost of setting up machinery to produce 1,000 products is a batch-level cost. The classification of batch-level costs is context sensitive. Postage for one product would be classified as a unit-level cost. In contrast, postage for a large number of products delivered in a single shipment would be classified as a batch-level cost.
benchmarking  Identifying the best practices used by world-class competitors.
best practices  Practices used by world-class companies.
board of directors  Group of individuals elected by the stockholders of a corporation to oversee its operations.
bond certificates  Debt securities used to obtain long-term financing in which a company borrows funds from a number of lenders, called bondholders; usually issued in denominations of $1,000.
bond discount  Difference between the selling price and the face amount of a bond sold for less than the face amount.
bond premium  Difference between the selling price and the face amount of a bond that is sold for more than the face amount.
bondholder  The party buying a bond (the lender or creditor).
book value  Historical (original) cost of an asset minus the accumulated depreciation; alternatively, undepreciated amount to date.
book value per share  Value of stock determined by dividing the total stockholders' equity by the number of shares of stock.
books of original entry  Journals in which a transaction is first recorded.
bottleneck  A constraint limiting the capacity of a company to produce or sell its products. An example is a piece of equipment that cannot produce enough component parts to keep employees in the assembly department busy.
break-even point  Point where total revenue equals total cost; can be expressed in units or sales dollars.
budget slack  Difference between inflated and realistic standards.
budgeting  Form of planning that formalizes a company's goals and objectives in financial terms.
by-products  Products that share common inputs with other joint products but have relatively insignificant market values relative to the other joint products.
call premium  Difference between the call price (the price that must be paid for a called bond) and the face amount of the bond.
call price  Specified price that must be paid for bonds that are called; usually higher than the face amount of the bonds.
callable bonds  Bonds that include a feature allowing the issuer to pay them off prior to maturity.
capital budget  Budget that describes the company's plans regarding investments, new products, or lines of business for the coming year; is used as input to prepare many of the operating budgets and becomes a formal part of the master budget.
capital budgeting  Financial planning activities that cover the intermediate range of time such as whether to buy or lease equipment, whether to purchase a particular investment, or whether to increase operating expenses to stimulate sales.
capital expenditures  (on an existing asset) Substantial amounts of funds spent to improve an asset's quality or to extend its life.
capital investments  Expenditures for the purchase of operational assets that involve a long-term commitment of funds that can be critically important to the company's ultimate success; normally recovered through the use of the assets.
carrying value  Face amount of a bond liability less any unamortized bond discount or plus any unamortized bond premium.
cash budget  A budget that focuses on cash receipts and payments that are expected to occur in the future.
cash  Coins, currency, checks, balances in checking and certain savings accounts, money orders, bank drafts, certificates of deposit, and other items that are payable on demand.
cash discount  Discount offered on merchandise sold to encourage prompt payment; offered by sellers of merchandise and represent sales discounts to the seller when they are used and purchase discounts to the purchaser of the merchandise.
cash inflows  Sources of cash.
cash outflows  Uses of cash.
Cash Short and Over  Account used to record the amount of cash shortages or overages; shortages are considered expenses and overages are considered revenues.
certified check  Check guaranteed by a bank to be drawn on an account having funds sufficient to pay the check.
certified public accountant (CPA)  Accountant who has met certain educational and experiential requirements and is licensed by the state government to provide audit services to the public.
certified suppliers  Suppliers who have gained the confidence of the buyer by providing quality goods and services at desirable prices and usually in accordance with strict delivery specifications; frequently provide the buyer with preferred customer status in exchange for guaranteed purchase quantities and prompt payment schedules.
chart of accounts  List of all ledger accounts and their corresponding account numbers.
checks  Prenumbered forms, sometimes multicopy, with the name of the business issuing them preprinted on the face, indicating to whom they are paid, the amount of the payment, and the transaction date.
claims exchange transaction  Transaction that decreases one claim and increases another so that total claims do not change. For example, the accrual of interest expense is a claims exchange transaction; liabilities increase, and the recognition of the expense causes retained earnings to decrease.
claims  Owners' and creditors' interests in a business's assets.
classified balance sheet  Balance sheet that distinguishes between current and noncurrent items.
closely held corporation  Corporation whose stock is exchanged between a limited number of individuals.
closing entries  Entries used to transfer the balances in the Revenue, Expense, and Dividends accounts to the Retained Earnings account at the end of the accounting period.
closing  see closing the books.
closing the books  Process of transferring balances from nominal accounts (Revenue, Expense, and Dividends) to the permanent account (Retained Earnings).
code of professional conduct  A set of guidelines established by the American Institute of Certified Public Accountants (AICPA) to promote high ethical conduct among its membership.
collateral  Assets pledged as security for a loan.
common size financial statements  Financial statements in which amounts are converted to percentages to allow a better comparison of period-to-period and company-to-company financial data since all information is placed on a common basis.
common stock  Basic class of corporate stock that carries no preferences as to claims on assets or dividends; certificates that evidence ownership in a company.
compound interest  Practice of reinvesting interest so that interest is earned on interest as well as on the initial principal.
compounding  Earning interest on interest.
comprehensive annual financial report (CAFR)  An annual report that provides information regarding all funds and account groups under the jurisdiction of a government reporting entity.
conservatism  A principle that guides accountants in uncertain circumstances to select the alternative that produces the lowest amount of net income.
consistency  A principle that encourages the continuing use of the same accounting method(s) so that financial statements are comparable across time.
consolidated financial statements  Financial statements that represent the combined operations of a parent company and its subsidiaries.
constraints  Factors that limit a business's ability to satisfy the demand for its products.
contingent liability  Obligations with amounts due that depend on events that will be resolved in the future.
continuity  Concept that describes the fact that a corporation's life may extend well beyond the time at which any particular shareholder decides to retire or to sell his or her stock.
continuous improvement  Total quality management (TQM) feature that refers to an ongoing process through which employees learn to eliminate waste, reduce response time, minimize defects, and simplify the design and delivery of products and services to customers.
contra asset account  Account subtracted from another account with which it is associated; has the effect of reducing the asset account with which it is associated.
contra liability account  Account reported in the liability section of the balance sheet that has a debit balance; reduces total liabilities. A discount on a Note Payable is an example of a contra liability account.
contribution margin  Difference between a company's sales revenue and total variable cost; represents the amount available to cover fixed cost and thereafter to provide a profit.
contribution margin per unit  The contribution margin per unit is equal to the sales price per unit minus the variable cost per unit.
contribution margin ratio  Result of dividing the contribution margin per unit by the sales price; can be used in cost-volume-profit analysis to determine the amount of the break-even sales volume expressed in dollars or to determine the dollar level of sales required to attain a desired profit.
controllability concept  The practice that evaluates a manager only on the revenue and costs under his or her direct control.
convertible bonds  that can be converted (exchanged) to an ownership interest (stock) in the corporation.
copyright  Legal protection of writings, musical compositions, and other intellectual property for the exclusive use of the creator or persons assigned the right by the creator.
corporation  Legal entity separate from its owners; formed when a group of individuals with a common purpose join together in an organization according to state laws.
cost  A resource such as cash that has been exchanged for another resource (asset) or that has been consumed in the process of earning revenue. Incurring a cost results in an asset exchange or an expense recognition.
cost accumulation  Process of determining the cost of a particular object by accumulating many individual costs into a single total cost.
cost allocation  Process of dividing a total cost into parts and assigning the parts to relevant objects.
cost averaging  Method to determine the average cost per unit of a product or service by dividing the total cost by the activity base used in defining the cost; often is more relevant to decision making than actual costs. Pricing, performance evaluation, and control depend most often on average costs.
cost behavior  How a cost reacts (goes up, down, or remains the same) relative to changes in some measure of activity (e.g., the behavior pattern of the cost of raw materials is to increase as the number of units of product made increases).
cost center  Type of responsibility center which incurs costs but does not generate revenue.
cost driver  Any factor, usually some measure of activity, that causes cost to be incurred, sometimes referred to as activity base or allocation base. Examples are labor hours, machine hours, or some other measure of activity whose change causes corresponding changes in the cost object.
cost method of accounting for treasury stock  Method of accounting for treasury stock in which the purchase of treasury stock is recorded at its cost to the firm but does not consider the original issue price or par value.
cost objects  Objects for which managers need to know the cost; can be products, processes, departments, services, activities, and so on.
cost of capital  Return paid to investors and creditors for the use of their assets (capital); usually represents a company's minimum rate of return.
cost of goods available for sale  Total costs paid to obtain goods and to make them ready for sale, including the cost of beginning inventory plus purchases and transportation-in costs, less purchase returns and allowances and purchase discounts.
cost of goods sold  Total cost incurred for the goods sold during a specific accounting period.
cost per equivalent unit  Unit cost of product determined by dividing total production costs by the number of equivalent whole units. It is used to allocate product costs between processing departments (compute ending inventory and the amount of costs transferred to the subsequent department).
cost pool  Many individual costs that have been accumulated into a single total for the purposes of allocation.
cost structure  Company's cost mix (relative proportion of variable and fixed costs to total cost). When sales change, the size of the corresponding change in net income is directly related to the company's cost structure. Companies with a large percentage of fixed cost to variable costs have more fluctuation in net income with changes in sales.
cost tracing  Relating specific costs to the objects that cause their incurrence.
cost-based transfer price  Transfer price based on the historical or standard cost incurred by the supplying segment.
cost-plus pricing strategy  Pricing strategy that sets the price at cost plus a markup equal to a percentage of the cost.
cost-volume-profit (CVP) analysis  Analysis that shows the interrelationships among sales prices, volume, fixed, and variable costs; an important tool in determining the break-even point or the most profitable combination of these variables.
credit  Entry that increases liability and equity accounts or decreases asset accounts.
creditors  Individuals or institutions that have loaned goods or services to a business.
cumulative dividends  Preferred dividends that accumulate from year to year until paid.
current (short-term) assets  Assets that will be converted to cash or consumed within one year or an operating cycle, whichever is longer.
current (short-term) liability  Obligation due within one year or an operating cycle, whichever is longer.
current ratio  Financial ratio that measures the relationship between current assets and current liabilities; determined by dividing current assets by current liabilities, with the result expressed in decimal format.
date of record  Date that establishes who will receive the dividend payment: shareholders who actually own the stock on the record date will be paid the dividend even if the stock is sold before the dividend is paid.
debentures  Unsecured bonds issued on the general credit of the organization.
debit  Entry that increases asset accounts or decreases liability and equity accounts.
debt security  Type of security acquired by loaning assets to the investee company.
debt to assets ratio  Financial ratio that measures a company's level of risk.
decentralization  Practice of delegating authority and responsibility for the operation of business segments.
declaration date  Date on which the board of directors actually declares a dividend.
deferral  Recognition of revenue or expense in a period after the cash is exchanged.
deferral transactions  Accounting transactions in which cash payments or receipts occur before the associated expense or revenue is recognized.
deferred tax liability  Taxes not paid until future years because of the difference in accounting methods selected for financial statements and methods required for tax purposes (e.g., a company may select straightline depreciation for financial statement reporting but will be required to use MACRS for tax reporting).
depletion  Method of systematically allocating the costs of natural resources to expense as the resources are removed from the land.
deposit ticket  Bank form that accompanies checks and cash deposited into a bank account; normally specifies the account number, name of the account, and a record of the checks and cash being deposited.
deposits in transit  Deposits recorded in a depositor's books but not received and recorded by the bank.
depreciable cost  Original cost minus salvage value
depreciation expense  Portion of the original cost of a long-term tangible asset allocated to an expense account in a given period.
depreciation  Method of systematically allocating the costs of longterm tangible assets to expense over their useful lives.
direct cost  Cost that is easily traceable to a cost object and for which the sacrifice to trace is small in relation to the information benefits attained.
direct labor  Wages paid to production workers whose efforts can be easily and conveniently traced to products.
direct method  (1) Allocation method that allocates service center costs directly to operating department cost pools. (2) Method of preparing the statement of cash flows that reports the total cash receipts and cash payments from each of the major categories of activities (collections from customers, payments to suppliers, etc.).
direct raw materials  Costs of raw materials used to make products that can be easily and conveniently traced to those products.
direct write-off method  Method of recognizing bad debts expense only when accounts are determined to be uncollectible.
disclaimer of opinion  Position that an auditor can take with respect to financial statements when there is not enough information to confirm compliance or noncompliance with GAAP; is neither positive nor negative.
discount  Amount of interest included in the face of a note; the discount (interest) is subtracted from the face amount of the note to determine the principal amount of cash borrowed.
discount note  a note that has the interest included in its face value.
Discount on Bonds Payable  Contra liability account used to record the amount of discount on a bond issue.
Discount on Notes Payable  Contra liability account subtracted from the Notes Payable account to determine the carrying value of the liability.
dividend  Transfer of wealth from a business to its owners.
dividend yield  Ratio for comparing stock dividends paid in relation to the market price; calculated as dividends per share divided by market price per share.
dividends in arrears  Cumulative dividends on preferred stock that have not been paid; must be paid prior to paying dividends to common stockholders.
double taxation  Policy to tax corporate profits distributed to owners twice, once when the income is reported on the corporation's income tax return and again when the dividends are reported on the individual's return.
double-declining-balance depreciation  Depreciation method that recognizes larger amounts of depreciation in the early stages of an asset's life and progressively smaller amounts as the asset ages.
double-entry accounting (bookkeeping)  Method of keeping records that provides a system of checks and balances by recording transactions in a dual format.
downstream costs  Costs, such as delivery costs and sales commissions, incurred after the manufacturing process is complete.
earnings per share  Measure of the value of a share of common stock in terms of company earnings; calculated as net income available to common stockholders divided by the average number of outstanding common shares.
earnings  The difference between revenues and expenses. Same as net income or profit
effective interest rate method  Method of amortizing bond discounts and premiums that computes interest based on the carrying value of liability. As the liability increases or decreases, the amount of interest expense also increases or decreases.
effective interest rate  Yield rate of bonds, which is usually equal to the market rate of interest on the day the bonds are sold.
elements  Primary components of financial statements including assets, liabilities, equity, contributions, revenue, expenses, distributions, and net income.
employee  An individual whose labor is supervisee, directed, and controlled by a business.
Employee's Withholding Allowance Certificate, Form W4  A form used by an employee to report the number of withholding allowances claimed by the employee. Each withholding allowance reduces the amount of income tax withheld from the employee's pay.
Employer's Quarterly Federal Tax Return, Form 941  The form used to show the amounts due and paid to the government for federal withholdings.
entity  See reporting entities.
entrenched management  Management that may have become ineffective but because of political implications may be difficult to remove.
equation method  Cost-volume-profit analysis technique that uses a basic mathematical relationship among sales, variable costs, fixed costs, and desired net income before taxes and provides a solution in terms of units.
equipment replacement decisions  Decisions regarding whether existing equipment should be replaced with newer equipment based on identification and comparison of the avoidable costs of the old and new equipment to determine which equipment is more profitable to operate.
equity method  Method of accounting for investments in marketable equity securities; is required when the investor owns more than 20 percent of the investee company. The amount of investments carried under the equity method represents a measure of the book value of the investee rather than the cost or market value of the investment security.
equity  Portion of assets remaining after the creditors' claims have been satisfied (i.e., Assets Liabilities Equity); also called residual interest or net assets.
equity security  An equity security is certificate that evidences an ownership interest in a company. An example is a common stock certificate.
equivalent whole units  Result of expressing partially completed goods in an equivalent number of fully completed goods.
estimated useful life  Time for which an asset is expected to be used by a business.
ex-dividend  Stock traded after the date of record but before the payment date; does not receive the benefit of the upcoming dividend.
expense transactions  Transactions completed in the process of operating a business that decrease assets or increase liabilities.
expenses  Economic sacrifices (decreases in assets or increase in liabilities) that are incurred in the process of generating revenue.
face value  Amount of the bond to be paid back (to the bondholders) at maturity.
facility-level costs  Costs incurred on behalf of the whole company or a segment of the company; not related to any specific product, batch, or unit of production or service and unavoidable unless the entire company or segment is eliminated.
fair value  The price at which securities or other assets sell in free markets. Also called market value.
favorable variance  Variance that occurs when actual costs are less than standard costs or when actual sales are higher than standard sales.
Federal Unemployment Tax Act (FUTA)  The Act that requires employers to pay unemployment tax for the establishment of a fund that is used to provide temporary relief to qualified unemployed persons.
fidelity bond  Insurance policy that a company buys to insure itself against loss due to employee dishonesty.
financial accounting  Field of accounting designed to meet the information needs of external users of business information (creditors, investors, governmental agencies, financial analysts, etc.); its objective is to classify and record business events and transactions to facilitate the production of external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).
Financial Accounting Standards Board (FASB)  Privately funded organization with the primary authority for the establishment of accounting standards in the United States.
financial audit  Detailed examination of a company's financial statements and the documents that support the information presented in those statements; includes a verification process that tests the reliability of the underlying accounting system used to produce the financial reports.
financial leverage  Concept of increasing earnings through debt financing; investment of money at a higher rate than that paid to borrow the money.
financial resources  Money or credit arrangements supplied to a business by investors (owners) and creditors.
financial statements  Primary means of communicating the financial information of an organization to the external users. The four generalpurpose financial statements are the income statement, statement of changes in equity, balance sheet, and statement of cash flows.
financing activities  Cash inflows and outflows from transactions with investors and creditors (except interest). These cash flows include cash receipts from the issue of stock, borrowing activities, and cash disbursements associated with dividends.
finished goods  End result of the manufacturing process measured by the accumulated cost of raw materials, labor, and overhead.
Finished Goods Inventory  Asset account used to accumulate the product costs (direct materials, direct labor, and overhead) associated with completed products that have not yet been sold.
first-in, first-out (FIFO) cost flow method  (1) Inventory cost flow method that treats the first items purchased as the first items sold for the purpose of computing cost of goods sold. Method used to determine equivalent units when accuracy is deemed to be important; accounts for the degree of completion of both beginning and ending inventories but is more complicated than the weighted-average method.
fiscal year  Year for which a company's accounting records are kept.
fixed cost  Cost that in total remains constant when activity volume changes; varies per unit inversely with changes in the volume of activity.
fixed interest rate  Interest rate (charge for the use of money) that does not change over the life of the loan.
flexible budget variances  Differences between budgets based on standard amounts at the actual level of activity and actual results; caused by differences in standard and actual unit cost since the volume of activity is the same.
flexible budgets  Budgets that show expected revenues and costs at a variety of different activity levels.
FOB (free on board) destination  Term that designates the seller as the responsible party for freight costs (transportation-in costs).
FOB (free on board) shipping point  Term that designates the buyer as the responsible party for freight costs (transportation-in costs).
franchise  Exclusive right to sell products or perform services in certain geographic areas.
full disclosure  A principle that requires financial statements to include all relevant information about an entity's operations and financial condition. Full disclosure is frequently accomplished by adding footnotes to the financial statements.
fund accounting  Type of accounting used by governmental entities.
fund  Independent accounting entity with a self-balancing set of accounts segregated for the purposes of carrying on specific activities.
future value  Amount an investment will be worth at some point in the future, assuming a specified interest rate and the reinvestment of interest each period that it is earned.
gains  Increases in assets or decreases in liabilities that result from peripheral or incidental transactions.
general authority  Policies and procedures that apply across different levels of a company's management, such as everyone flies coach class.
general journal  Journal in which all types of accounting transactions can be entered but which is commonly used to record adjusting and closing entries and unusual types of transactions.
general ledger  Complete set of accounts used in accounting systems.
general uncertainties  Uncertainties such as competition and damage from storms. These uncertainties are distinguished from contingent liabilities because they arise from future rather than past events.
general, selling, and administrative costs  All costs not associated with obtaining or manufacturing a product; in practice are sometimes referred to as period costs because they are normally expensed in the period in which the economic sacrifice is incurred.
generally accepted accounting principles (GAAP)  Rules and regulations that accountants agree to follow when preparing financial reports for public distribution.
going concern assumption  Assumption that a company will continue to operate indefinitely, will pay its obligations and should therefore report those obligations at their full face value in the financial statements.
goodwill  Added value of a successful business that is attributable to factors-reputation, location, and superior products-that enable the business to earn above-average profits; stated differently, the excess paid for an existing business over the appraised value of the net assets.
gross earnings  The total amount of wages or salaries before any deductions. Gross earnings include the total of regular pay plus any bonuses, overtime or shift differentials.
gross margin (gross profit)  Difference between sales revenue and cost of goods sold; the amount a company makes from selling goods before subtracting operating expenses.
gross margin method  Method of estimating ending inventory that assumes that the percentage of gross margin to sales remains relatively stable from one accounting period to the next.
gross margin percentage  Expression of gross margin as a percentage of sales computed by dividing gross margin by net sales; the amount of each dollar of sales that is profit before deducting any operating expenses.
gross profit  See gross margin.
half-year convention  Tax rule that requires six months of depreciation expense to be taken in the year of purchase of the asset and the year of disposal regardless of the purchase date.
held-to-maturity securities  Debt securities intended to be held until maturity.
high-low method  Method of estimating the fixed and variable components of a mixed cost; determines the variable cost per unit by dividing the difference between the total cost of the high and low points by the difference in the corresponding high and low volumes. The fixed cost component is determined by subtracting the variable cost from the total cost at either the high or low volume.
historical cost concept  Actual price paid for an asset when it was purchased.
horizontal analysis  Analysis technique that compares amounts of the same item over several time periods.
horizontal statements model  Arrangement of a set of financial statements horizontally across a sheet of paper.
hybrid cost systems  Cost system that blends some of the features of a job-order costing system with some of the features of a process cost system.
ideal standard  Highest level of efficiency attainable, based on all input factors interacting perfectly under ideal or optimum conditions.
imprest basis  Description of the periodic replenishment of a fund to maintain it at its specified original amount.
income  Added value created in transforming resources into more desirable states.
income statement  Statement that measures the difference between the asset increases and the asset decreases associated with running a business. This definition is expanded in subsequent chapters as additional relationships among the elements of the financial statements are introduced.
incremental revenue  Additional cash inflows from operations generated by using an additional capital asset.
independent auditor  Certified public accountant licensed to perform audits who is independent of the company being audited.
independent contractor  An individual who is paid by a business but retains individual control and supervisory authority over the work performed.
indirect cost  Cost that cannot be easily traced to a cost object and for which the economic sacrifice to trace is not worth the informational benefits.
indirect method  Method of preparing the statement of cash flows that uses the net income from the income statement as a starting point for reporting cash flow from operating activities; adjustments necessary to convert accrual-based net income to a cash-equivalent basis are shown in the operating activities section of the statement of cash flows.
information overload  Situation in which presentation of too much information confuses the user of the information.
installment notes  Obligations requiring principal repayments at regular intervals over the life of the loan.
intangible assets  Assets that may be represented by pieces of paper or contracts that appear tangible; however, the true value of an intangible asset lies in the rights and privileges extended to its owners.
interdepartmental service  Service performed by one service department for the benefit of another service department.
interest  Fee paid for the use of borrowed funds; also refers to revenue from debt securities.
interest-bearing notes  Notes that require the payment of the face value plus accrued interest at maturity.
internal controls  A company's policies and procedures designed to reduce the opportunity for fraud and to provide reasonable assurance that its objectives will be accomplished.
internal rate of return  Rate that will produce a present value of an investment's future cash inflows that equals cash outflows required to acquire the investment; alternatively, the rate that produces in a net present value of zero.
inventory cost flow methods  Methods used to allocate the cost of goods available for sale between cost of goods sold and inventory.
inventory holding costs  Costs associated with acquiring and retaining inventory including cost of storage space; lost, stolen, or damaged merchandise; insurance; personnel and management costs; and interest.
inventory turnover  Ratio of cost of goods sold to inventory that indicates how many times a year the average inventory is sold (turned over).
investee  Company that receives assets or services in exchange for a debt or equity security.
investing activities  One of the three categories of cash inflows and outflows shown on the statement of cash flows; includes cash received and spent by the business on productive assets and investments in the debt and equity of other companies.
investment center  Type of responsibility center for which revenue, expense and capital investments can be measured.
investment securities  Certificates that describe the rights and privileges that investors receive when they loan or give assets or services to investees.
investors  Companies or individuals who give assets or services and receive security certificates in exchange.
issued stock  Stock sold to the public.
issuer of a bond  Party that issues the bond (the borrower).
issuer of a note  Individual or business borrowing funds (the party receiving the cash when a note is issued).
job cost sheet  Document used in a job-order cost system to accumulate the materials, labor, and overhead costs of a job through the various stages of production; at job completion, contains a summary of all costs that were incurred to complete that job; also known as joborder cost sheet or job record.
job-order cost system  System used to determine the costs of distinct, one-of-a-kind products. Costs are traced to products that are produced individually (e.g., custom designed building) or produced in batches (e.g., an order for 100 wedding invitations).
joint costs  Common costs incurred in the process of making two or more products.
joint products  Products derived from joint cost.
journals  Book of original entry in which accounting data are entered chronologically before posting to the ledger accounts.
just in time (JIT)  Inventory flow system that minimizes the amount of inventory on hand by making inventory available for customer consumption on demand, therefore eliminating the need to store inventory. The system reduces explicit holding costs including financing, warehouse storage, supervision, theft, damage, and obsolescence. It also eliminates hidden opportunity costs such as lost revenue due to the lack of availability of inventory.
labor efficiency variance  Variance occurring in a standard cost accounting system when the actual amount or quantity of direct labor used differs from the standard amount required.
labor rate variance  Variance that occurs when the actual pay rate differs from the standard pay rate for direct labor.
labor resources  Both intellectual and physical labor used in the process of converting goods and services to products of greater value.
last-in, first-out (LIFO) cost flow method  Inventory cost flow method that treats the last items purchased as the first items sold for the purpose of computing cost of goods sold.
lax standards  Easily attainable goals that can be accomplished with minimal effort.
legal capital  Amount of assets that should be maintained as protection for creditors; the number of shares multiplied by the par value.
liabilities  Obligations of a business to relinquish assets, provide services, or accept other obligations.
limited liability companies (LLC)  Organizations offering many of the best features of corporations and partnerships and with many legal benefits of corporations (e.g., limited liability and centralized management) but permitted by the Internal Revenue Service to be taxed as a partnership, thereby avoiding double taxation of profits.
limited liability  Concept that investors in a corporation may not be held personally liable for the actions of the corporation (the creditors cannot lay claim to the owners' personal assets as payment for the corporation's debts).
line of credit  Preapproved credit arrangement with a lending institution in which a business can borrow money by simply writing a check up to the approved limit.
liquidation  Process of dividing up the assets and returning them to the resource providers. Creditors normally receive first priority in business liquidations; in other words, assets are distributed to creditors first. After creditor claims have been satisfied, the remaining assets are distributed to the investors (owners) of the business.
liquidity  Ability to convert assets to cash quickly and meet short-term obligations.
liquidity ratios  Measures of short-term debt-paying ability.
long-term operational assets  Assets used by a business to generate revenue; condition of being used distinguishes them from assets that are sold (inventory) and assets that are held (investments).
losses  Decreases in assets or increases in liabilities that result from peripheral or incidental transactions.
low-ball pricing  Pricing a product below competitors' price to lure customers away and then raising the price once customers depend on the supplier for the product.
lower-of-cost-or-market rule  Accounting principle of reporting inventories at market value if their value declined below their cost, regardless of the cause.
maker  The party issuing a note (the borrower).
making the numbers  Expression that indicates that marketing managers attained the sales volume indicated in the master budget.
management by exception  Use of management resources on areas that are not performing in accordance with expectations; a philosophy that directs management to concentrate on areas with significant variances.
managerial accounting  Branch of accounting that provides information useful to internal decision makers and managers in operating an organization.
manufacturing businesses  Makers of goods sold to customers.
Manufacturing Overhead account  Temporary account used during an accounting period to accumulate the actual overhead costs incurred and the total amount of overhead applied to the Work in Process account. At the end of the period, a debit balance in the account implies that overhead has been underapplied and a credit balance implies that overhead has been overapplied. The account is closed at year end in an adjusting entry to the inventory and Cost of Goods Sold accounts. If the balance is insignificant, it is closed only to Cost of Goods Sold.
manufacturing overhead  Production costs that cannot be traced directly to products.
margin  Component in the determination of the return on investment. Computed by dividing operating income by sales.
margin of safety  Difference between break-even sales and budgeted sales expressed in units, dollars, or as a percentage; the amount by which actual sales can fall below budgeted sales before a loss is incurred.
market  Gathering of people or organizations for the purpose of buying and selling resources.
market interest rate  Current interest rate available on a wide range of alternative investments.
market value  Value at which securities sell in the secondary market; also called fair value.
marketable securities  Securities that are readily traded in the secondary securities market.
market-based transfer price  Transfer price based on the external market price less any savings in cost; the closest approximation to an arm's-length transaction that segments can achieve.
master budget  Composition of the numerous separate but interdependent departmental budgets that cover a wide range of operating and financial factors such as sales, production, manufacturing expenses, and administrative expenses.
matching concept  Process of matching expenses with the revenues they produce; three ways to match expenses with revenues include matching expenses directly to revenues, matching expenses to the period in which they are incurred, and matching expenses systematically with revenues.
material  amounts or matters that make a difference, see materiality.
material variance  Variance that would affect decision making.
materiality  Concept that recognizes practical limits in financial reporting by allowing flexible handling of matters not considered material; information is considered material if the decisions of a reasonable person would be influenced by its omission or misstatement; can be measured in absolute, percentage, quantitative, or qualitative terms.
materials price variance  Variance that occurs when actual prices paid for raw materials differ from the standard prices.
materials quantity variance  Variance that occurs when the actual amounts of raw materials used to produce a good differ from the standard amounts required to produce that good.
materials requisition  A form used to request or order the materials needed to begin a designated job; can be a paper document or an electronic impulse delivered through a computer. Materials requisitioned for a job are summarized by the accounting department on a job cost sheet.
maturity date  The date that a liability is set to be settled (the date the borrower is expected to repay a debt).
medicare  Health insurance provided by the government primarily for retired workers.
merchandise inventory  Supply of finished goods held for resale to customers.
merchandising businesses  Companies that buy and sell merchandise inventory.
minimum rate of return  Minimum amount of profitability required to persuade a company to accept an investment opportunity; also known as desired rate of return, required rate of return, hurdle rate, cutoff rate, and discount rate.
mixed costs (semivariable costs)  Costs composed of a mixture of fixed and variable components.
Modified Accelerated Cost Recovery System (MACRS)  Prescribed method of depreciation for tax purposes that provides the maximum depreciation expense deduction permitted under tax law.
mortgage bond  Type of secured bond that conditionally transfers title of a designated piece of property to the bondholder until the bond is paid.
most-favored customer status  Arrangement by which a supplier and customer achieve mutual benefit by providing each other with favorable treatment that is not extended to other associates.
multistep income statement  Income statement format that matches particular revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses.
natural resources  Mineral deposits, oil and gas reserves, and reserves of timber, mines, and quarries are examples; sometimes called wasting assets because their value wastes away as the resources are removed.
negotiated transfer price  Transfer price established by agreement of both the selling and buying segments of the firm.
net income  Increase in net assets resulting from operating the business.
net income percentage  Another term for return on sales. Refer to return on sales for the definition.
net loss  Decrease in net assets resulting from operating the business.
net margin  Profitability measurement that indicates the percentage of each sales dollar resulting in profit; calculated as net income divided by net sales.
net method  A method of accounting for cash discounts that records inventory purchases at the net price (the list price minus the purchase discount).
net pay  Employee's gross pay less all deductions (withholdings).
net present value  Evaluation technique that uses a desired rate of return to discount future cash flows back to their present value equivalents and then subtracts the cost of the investment from the present value equivalents to determine the net present value. A zero or positive net present value (present value of cash inflows equals or exceeds the present value of cash outflows) implies that the investment opportunity provides an acceptable rate of return.
net realizable value  Face amount of receivables less an allowance for accounts whose collection is doubtful (amount actually expected to be collected).
net sales  Sales less returns from customers and allowances or cash discounts given to customers.
noncash investing and financing activities  Business transactions that do not directly affect cash, such as exchanging stock for land or purchasing property by using a mortgage; are reported as both an inflow and outflow in a separate section of the statement of cash flows.
non-sufficient-funds (NSF) check  Customer's check deposited but returned by the bank on which it was drawn because the customer did not have enough funds in its account to pay the check.
nonvalue-added activities  Tasks undertaken that do not contribute to a product's ability to satisfy customer needs.
note payable  Liability that results from the execution of a legal document called a note that describes technical terms, including interest charges, maturity date, collateral, and so on.
notes receivable  Notes that evidence rights to receive cash in the future; usually specify the maturity date, rate of interest, and other credit terms.
not-for-profit entities  Organizations (also called nonprofit or nonbusiness entities) whose primary motive is something other than making a profit, such as providing goods and services for the social good. Examples include state-supported universities and colleges, hospitals, public libraries, and public charities.
operating activities  Cash inflows and outflows associated with operating the business. These cash flows normally result from revenue and expense transactions including interest.
operating budgets  Budgets prepared by different departments within a company that will become a part of the company's master budget; typically include a sales budget, an inventory purchases budget, a selling and administrative budget, and a cash budget.
operating cycle  Time required to turn cash into inventory, inventory into receivables, and receivables back to cash.
operating income  Income determined by subtracting operating expenses from operating revenues. Gains and losses and other peripheral activities are added to or subtracted from operating income to determine net income or loss.
operating leverage  Operating condition in which a percentage change in revenue produces a proportionately larger percentage change in net income; measured by dividing the contribution margin by net income. The higher the proportion of fixed cost to total costs, the greater the operating leverage.
opportunity cost  Cost of lost opportunities such as the failure to make sales due to an insufficient supply of inventory or the wage a working student forgoes to attend class.
ordinary annuity  Annuity whose cash inflows occur at the end of each accounting period.
outsourcing  The practice of buying goods and services from another company rather than producing them internally.
outstanding checks  Checks deducted from the depositor's cash account balance but not yet presented to the bank for payment.
outstanding stock  Stock owned by outside parties; normally the amount of stock issued less the amount of treasury stock.
overapplied overhead  Result of allocating more overhead costs to the Work in Process account than the amount of the actual overhead costs incurred.
overhead  Costs associated with producing products that cannot be cost effectively traced to products including indirect costs such as indirect materials, indirect labor, utilities, rent, and depreciation.
overhead costs  Indirect costs of doing business that cannot be directly traced to a product, department, or process, such as depreciation.
paid-in capital in excess of par value  Any amount received above the par or stated value of stock when stock is issued.
par value  Arbitrary value assigned to stock by the board of directors.
parent company  Company that holds a controlling interest (more than 50 percent ownership) in another company.
participative budgeting  Budget technique that allows subordinates to participate with upper-level managers in setting budget objectives, thereby encouraging cooperation and support in the attainment of the company's goals.
partnership agreement  Legal document that defines the responsibilities of each partner and describes the division of income and losses.
partnerships  Business entities owned by at least two people who share talents, capital, and the risks of the business.
patent  Legal right granted by the U.S. Patent Office ensuring a company or an individual the exclusive right to a product or process.
payback method  Technique that evaluates investment opportunities by determining the length of time necessary to recover the initial net investment through incremental revenue or cost savings; the shorter the period, the better the investment opportunity.
payee  The party collecting cash.
payment date  Date on which a dividend is actually paid.
percent of receivables method  A method of estimating the amount of uncollectible accounts by taking a percent of the outstanding receivables balance. The percentage is frequently based on a combination of factors such as historical experience, condition of the economy, and the company's credit policies.
percent of revenue method  A method of estimating the amount of uncollectible accounts by taking a percent of revenue that was earned on account during the accounting period. The percentage is frequently based on a combination of factors such as historical experience, condition of the economy, and the company's credit policies.
percentage analysis  Analysis of relationships between two different items to draw conclusions or make decisions.
period costs  General, selling, and administrative costs that are expensed in the period in which the economic sacrifice is made.
periodic inventory system  Method of accounting for changes in the Inventory account only at the end of the accounting period.
permanent accounts  Accounts that contain information transferred from one accounting period to the next.
perpetual (continuous) budgeting  Continuous budgeting activity normally covering a 12-month time span by replacing the current month's budget at the end of each month with a new budget; keeps management constantly involved in the budget process so that changing conditions are incorporated on a timely bases.
perpetual inventory system  Method of accounting for inventories that increases the Inventory account each time merchandise is purchased and decreases it each time merchandise is sold.
petty cash fund  Small amount of cash set aside in a fund to pay for small outflows for which writing checks is not practical.
petty cash voucher  A document prepared by the petty cash custodian that evidences a petty cash disbursement. The person who receives the cash signs the voucher as evidence of receiving the money. Supporting documents, such as an invoice, restaurant bill, or parking fee receipt, should be attached to the petty cash voucher.
physical flow of goods  Physical movement of goods through the business; normally a FIFO flow so that the first goods purchased are the first goods delivered to customers, thereby reducing the likelihood of obsolete inventory.
physical resources  Natural resources used in the transformation process to create resources of more value.
postaudit  Repeat calculation using the techniques originally employed to analyze an investment project; accomplished with the use of actual data available at the completion of the investment project so that the actual results can be compared with expected results based on estimated data at the beginning of the project. Its purpose is to provide feedback as to whether the expected results were actually accomplished in improving the accuracy of future analysis.
posting  Process of copying information from journals to ledgers.
practical standard  Level of efficiency in which the ideal standard has been modified to allow for normal tolerable inefficiencies.
predetermined overhead rate  Rate determined by dividing the estimated overhead costs for the period by some measure of estimated total production activity for the period, such as the number of labor hours or machine hours. The base chosen should provide some logical measure of overhead use. The rate is determined before actual costs or activity are known. Throughout the accounting period, the rate is used to allocate overhead costs to the Work in Process Inventory account based on actual production activity.
preferred stock  Stock that receives some form of preferential treatment (usually as to dividends) over common stock; normally has no voting rights.
prepaid items  Deferred expenses. An example is prepaid insurance.
present value index  Present value of cash inflows divided by the present value of cash outflows. Higher index numbers indicate higher rates of return.
present value table  Table that consists of a list of factors to use in converting future values into their present value equivalents; composed of columns that represent different return rates and rows that depict different periods of time.
prestige pricing  Pricing strategy that sets the price at a premium (above average markup above cost) under the assumption that people will pay more for the product because of its prestigious brand name, media attention, or some other reason that has piqued the interest of the public.
price-earnings (P/E) ratio  Measurement used to compare the values of different stocks in terms of earnings; calculated as market price per share divided by earnings per share.
primary securities market  Market made up of transactions between the investor and investee.
principal  Amount of cash actually borrowed.
pro forma financial statements  Budgeted financial statements prepared from the information in the master budget.
procedures manual  Manual that sets forth the accounting procedures to be followed.
process cost system  System used to determine the costs of homogeneous products, such as chemicals, foods or paints, that distributes costs evenly across total production; determines an average by dividing the total product costs of each production department by the number of units of product made in that department during some designated period of time. The total costs in the last production department include all costs incurred in preceding departments so that the unit cost determined for the last department reflects the final unit cost of the product.
product costing  Classification and accumulation of individual inputs (materials, labor, and overhead) for determining the cost of making a good or providing a service.
product costs  All costs related to obtaining or manufacturing a product intended for sale to customers; are accumulated in inventory accounts and expensed as cost of goods sold at the point of sale. For a manufacturing company, product costs include direct materials, direct labor, and manufacturing overhead.
productive assets  Assets used to operate the business; frequently called long-term assets.
product-level costs  Costs incurred to support different kinds of products or services; can be avoided by the elimination of a product line or a type of service.
profit center  Type of responsibility center for which both revenues and costs can be indentified.
profit  Value created by transforming goods and services to more desirable states.
profitability ratios  Measurements of a firm's ability to generate earnings.
property, plant, and equipment  Category of assets, sometimes called plant assets, used to produce products or to carry on the administrative and selling functions of a business; includes machinery and equipment, buildings, and land.
purchase discount  Reduction in the gross price of merchandise extended under the condition that the purchaser pay cash for the merchandise within a stated time (usually within 10 days of the date of the sale).
qualified opinion  Opinion issued by a CPA that falls between an unqualified opinion (see later definition) and an adverse opinion; means that for the most part, the company's financial statements are in compliance with GAAP, but the auditors have reservations about something in the statements or have other reasons not to give a fully unqualified opinion; reasons that a qualified opinion is being issued are explained in the auditor's report.
qualitative characteristics  Nonquantifiable features such as company reputation, welfare of employees, and customer satisfaction that can be affected by certain decisions.
quantitative characteristics  Numbers in decision making subject to mathematical manipulation, such as the dollar amounts of revenues and expenses.
quick ratio  See acid-test ratio.
ratio analysis  See percentage analysis.
Raw Materials Inventory  Asset account used to accumulate the costs of materials such as lumber, metals, paints, chemicals that will be used to make the company's products.
raw materials  Physical commodities (e.g., wood, metal, paint) used in the manufacturing process.
realization  A term that usually refers to transactions that involve the collection or payment of cash.
recognition  Reporting an accounting event in the financial statements.
recovery of investment  Recovery of the funds used to acquire the original investment.
reengineering  Business practices designed by companies to make production and delivery systems more competitive in world markets by eliminating or minimizing waste, errors, and costs.
relative fair market value method  Method of assigning value to individual assets acquired in a basket purchase in which each asset is assigned a percentage of the total price paid for all assets. The percentage assigned equals the market value of a particular asset divided by the total of the market values of all assets acquired in the basket purchase.
relaxing the constraints  The process of opening bottlenecks that constrain the profitable operations of a business.
relevant costs  Future-oriented costs that differ between business alternatives; also known as avoidable costs.
relevant information  Decision-making information about costs, costs savings, or revenues that have these features: (1) future-oriented information and (2) the information differs between the alternatives; decision specific (information that is relevant in one decision may not be relevant in another decision).
relevant range  Range of activity over which the definitions of fixed and variable costs apply.
reliability concept  Information is reliable if it can be independently verified. Reliable information is factual rather than subjective.
reporting entities  Particular businesses or other organizations for which financial statements are prepared.
residual income  Approach that evaluates managers on their ability to maximize the dollar value of earnings above some targeted level of earnings.
responsibility accounting  Accounting system in which the accountability for results is assigned to a segment manager of the firm based on the amount of control or influence the manager possesses over those results.
responsibility center  Point in an organization where the control over revenue or expense items is located.
responsibility reports  Reports of the performance of various responsibility centers of the firm with respect to controllable items; show the variances that result from comparing budgeted and actual controllable items.
restrictive covenants  Special provisions specified in the loan contract that are designed to prohibit management from taking certain actions that place creditors at risk.
retail companies  Companies that sell goods to consumers.
retained earnings  Equity account that includes of all earnings retained in the business since inception (revenues minus expenses and distributions for all accounting periods).
return on assets ratio  Ratio that measures the relationship between the level of net income and the size of the investment in assets.
return on equity  Measure of the profitability of a firm based on earnings generated in relation to stockholders' equity; calculated as net income divided by stockholders' equity.
return on equity ratio  Ratio that measures the relationship between the amount of net income and the stockholders' equity of a company.
return on investment  Measure of profitability based on the asset base of the firm. It is calculated as net income divided by average total assets. ROI is a product of net margin and asset turnover.
return on sales  Percent of net income generated by each $1 of sales; computed by dividing net income by net sales.
revenue  An economic benefit (an increase in assets or a decrease in liabilities) that is gained by providing goods and services to customers.
revenue transactions  Transactions completed in the process of operating a business that increase assets or decrease liabilities by providing services or products.
salaries payable  Amounts of future cash payments owed to employees for services that have already been performed.
salaries  The term used to describe amounts due employees who are paid a set amount per week, month, or other earnings period regardless of how many hours they work during that period.
sales discount  Cash discount extended by the seller of goods to encourage prompt payment. When the buyer of the goods takes advantage of the discount and pays less than the original selling price, the difference between the selling price and the cash collected is the sales discount.
sales price variance  Difference between actual sales and expected sales based on the standard sales price per unit times the actual level of activity.
sales volume variance  Difference between sales based on a static budget (standard sales price times standard level of activity) and sales based on a flexible budget (standard sales price times actual level of activity).
salvage value  Expected selling price of an asset at the end of its useful life.
Sarbanes-Oxley Act of 2002  An act of Congress that was established to promote ethical behavior in corporate governance and fairness in financial reporting. Key provisions of the act include a requirement that a company's chief executive officer (CEO) and chief financial officer (CFO) must certify in writing that they have reviewed the financial reports being issued, and that the reports present fairly the company's financial status. An executive who falsely certifies the company's financial reports is subject to significant fines and imprisonment. The act also establishes the Public Company Accounting Oversight Board (PCAOB). This Board assumes the primary responsibility for developing and enforcing auditing standards for CPAs who audit SEC companies. The Sarbanes-Oxley Act also prohibits auditors from providing most types of non-audit services to companies they audit.
scattergraph method  Method of estimating the variable and fixed components by which cost data are plotted on a graph and a regression line is visually drawn through the points so that the total distance between the data points and the line is minimized.
schedule of cost of goods manufactured and sold  Schedule that summarizes the flow of manufacturing product costs; its result, cost of goods sold, is shown as a single line item on the company's income statement.
schedule of cost of goods sold  Schedule that reflects the computation of the amount of the cost of goods sold under the periodic inventory system; an internal report not shown in the formal financial statements.
secondary securities market  Market in which securities are exchanged between investors.
secured bonds  Bonds secured by specific identifiable assets.
Securities Act of 1933 and Securities Exchange Act of 1934  Acts passed after the stock market crash of 1929 designed to regulate the issuance of stock and govern the stock exchanges; created the Securities and Exchange Commission (SEC), which has the authority to establish accounting policies for companies registered on the stock exchanges.
Securities and Exchange Commission (SEC)  Government organization responsible for overseeing the accounting rules to be followed by companies required to be registered with it.
segment  Component part of an organization that is designated as a reporting entity.
selling and administrative costs  Costs that cannot be directly traced to products that are recognized as expenses in the period in which they are incurred. Examples include advertising expense and rent expense.
sensitivity analysis  Spreadsheet analysis that executes "what-if " questions to assess the sensitivity of profits to simultaneous changes in fixed cost, variable cost, and sales volume.
separation of duties  Internal control feature of, whenever possible, assigning the functions of authorization, recording, and custody to different individuals.
serial bonds  Bonds that mature at specified intervals throughout the life of the total issue.
service businesses  Organizations-accountants, lawyers, and dry cleaners-that provide services to consumers.
service charges  Fees charged by a bank for services performed or a penalty for the depositor's failing to maintain a specified minimum cash balance throughout the period.
shrinkage  A term that reflects decreases in inventory for reasons other than sales to customers.
signature card  Bank form that records the bank account number and the signatures of the people authorized to write checks on an account.
simple interest  Interest computed by multiplying the principal by the interest rate by the number of periods. Interest earned in a period is not added to the principal, so that no interest is earned on the interest of previous periods.
single-payment (lump-sum)  A one-time receipt of cash which can be converted to its present value using a conversion factor.
single-step income statement  Single comparison between total revenues and total expenses.
sinking fund  Fund to which the bond issuer annually contributes to ensure the availability of cash for the payment of the face amount on the maturity date.
social security  Insurance provided by the Federal government to qualified workers. Also called old age, survivors, and disability insurance (OASDI).
sole proprietorships  Businesses (usually small) owned by one person.
solvency  Ability of a business to pay liabilities in the long run.
solvency ratios  Measures of a firm's long-term debt-paying ability.
source documents  Documents such as a cash register tape, invoice, time card, or check stub that provide accounting information to be recorded in the accounting journals and ledgers.
special journals  Journals designed to improve the efficiency of recording specific types of repetitive transactions.
special order decisions  Decisions of whether to accept orders from nonregular customers who want to buy goods or services significantly below the normal selling price. If the order's relevant revenues exceed its avoidable costs, the order should be accepted. Qualitative features such as the order's effect on the existing customer base if accepted must also be considered.
specific authorizations  Policies and procedures that apply to designated levels of management, such as the policy that the right to approve overtime pay may apply only to the plant manager.
specific identification  Inventory method that allocates costs between cost of goods sold and ending inventory using the cost of the specific goods sold or retained in the business.
spending variance  Difference between actual fixed overhead costs and budgeted fixed overhead costs.
split-off point  Point in the production process where products become separate and identifiable.
spread  Difference between the rate a bank pays to obtain money (e.g., interest paid on savings accounts) and the rate that the bank earns on money it lends to borrowers.
stakeholders  Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies.
standard  The expected unit price or cost based on a certain set of anticipated circumstances.
start-up (setup) costs  The costs associated with the activities of changing machinery, the production configuration, inspection, etc., to prepare for making a new product or a batch of a product.
stated interest rate  Rate of interest specified in the bond contract that will be paid at specified intervals over the life of the bond.
stated value  Arbitrary value assigned to stock by the board of directors.
statement of activities  Statement that reports the revenues, expenses, gains, and losses that increase or decrease the net assets of a not-for-profit organization.
statement of cash flows  Statement that explains how a business obtained and used cash during an accounting period.
statement of changes in stockholders' equity  Statement that summarizes the transactions occurring during the accounting period that affected the owners' equity
statement of financial position  Statement that reports the assets, liabilities, and net assets of a not-for-profit organization.
static budgets  Budgets such as the master budget based solely on the level of planned activity; remain constant even when volume of activity changes.
stock certificate  Evidence of ownership interest issued when an investor contributes assets to a corporation; describes the rights and privileges that accompany ownership.
stock dividend  Proportionate distribution of additional shares of the declaring corporation's stock.
stock split  Proportionate increase in the number of outstanding shares; designed to reduce the market value of the stock and its par value.
stockholders  Owners of a corporation.
stockholders' equity  Stockholders' equity represents the portion of the assets that is owned by the stockholders.
straight-line amortization  Method of amortization that allocates bond discount or premium in equal amounts to each period over the life of the bond.
straight-line depreciation  Method of computing depreciation that allocates the cost of an asset to expense in equal amounts over its life. The formula for calculating straight line depreciation is [(Cost - Salvage)/ Useful Life]
strategic planning  Planning activities associated with long-range decisions such as defining the scope of the business, determining which products to develop, deciding whether to discontinue a business segment, and determining which market niche would be most profitable.
suboptimization  Situation in which managers act in their own selfinterests even though the organization as a whole suffers.
subordinated debentures  Unsecured bonds that have a lower priority than general creditors, that is, are paid off after the general creditors are paid in the case of liquidation.
subsidiary company  Company controlled (more than 50 percent owned) by another company.
sunk costs  Costs that have been incurred in past transactions and therefore are not relevant for decision making.
T-account method  Method of determining net cash flows by analyzing beginning and ending balances on the balance sheet and inferring the period's transactions from the income statement.
T-account  Simplified account form, named for its shape, with the account title placed at the top of a horizontal bar, debit entries listed on the left side of the vertical bar, and credit entries shown on the right side.
tangible assets  Assets that can be touched, such as equipment, machinery, natural resources, and land.
target pricing (target costing)  Pricing strategy that begins with the determination of a price at which a product will sell and then focuses on the development of that product with a cost structure that will satisfy market demands.
temporary accounts  Accounts used to collect information for a single accounting period (usually revenue, expense, and distribution accounts).
term bonds  Bonds in an issue that mature on a specified date in the future.
theory of constraints (TOC)  Practice used by many businesses to increase profitability by managing bottlenecks or constrained resources by identifying the bottlenecks restricting the operations of the business and then opening them by relaxing the constraints.
time value of money  Recognition that the present value of a promise to receive a dollar some time in the future is worth less than a dollar because of interest, risk, and inflation factors. For example, a person may be willing to pay $0.90 today for the right to receive $1.00 one year from today.
times interest earned ratio  Ratio that computes how many times a company would be able to pay its interest by using the amount of earnings available to make interest payments; amount of earnings is net income before interest and income taxes.
total quality management (TQM)  Management philosophy that includes: (1) a continuous systematic problem-solving philosophy that engages personnel at all levels of the organization to eliminate waste, defects, and nonvalue-added activities; and (2) to manage quality costs in a manner that leads to the highest level of customer satisfaction.
trademark  Name or symbol that identifies a company or an individual product.
trading securities  Securities bought and sold to generate profit from short-term appreciation in stock and bond prices.
transaction  Particular event that involves the transfer of something of value between two entities.
transfer price  Price at which products or services are transferred between divisions or other subunits of an organization.
transferability  Concept referring to the practice of dividing the ownership of corporations into small units that are represented by shares of stock, which permits the easy exchange of ownership interests.
transferred-in costs  Costs transferred from one department to the next; combined with the materials, labor, and overhead costs incurred in the department so that when goods are complete, the total product cost of all departments is transferred to the Finished Goods Inventory account.
transportation-in (freight-in)  Cost of freight on goods purchased under terms FOB shipping point that is usually added to the cost of inventory and is a product cost.
transportation-out (freight-out)  Freight cost for goods delivered to customers under terms FOB destination; a period cost expensed when it is incurred.
treasury stock  Stock first issued to the public and then bought back by the corporation.
trend analysis  Study of the performance of a business over a period of time.
trial balance  List of ledger accounts and their balances that provides a check on the mathematical accuracy of the recording process.
true cash balance  Actual balance of cash owned by a company at the close of business on the date of the bank statement.
turnover  Component in the determination of the return on investment. Computed by dividing sales by operating assets.
unadjusted bank balance  Ending cash balance reported by the bank as of the date of the bank statement.
unadjusted book balance  Balance of the Cash account as of the date of the reconciliation before making any adjustments.
unadjusted rate of return  Measure of profitability computed by dividing the average incremental increase in annual net income by the average cost of the original investment (original cost / 2).
uncollectibe accounts expense  Expense associated with uncollectible accounts receivable; amount recognized may be estimated using the allowance method, or actual losses may be recorded using the direct write-off method.
underapplied overhead  Result of allocating less overhead costs to the Work in Process account than the amount of the actual overhead costs incurred.
unearned revenue  Revenue for which cash has been collected but the service has not yet been performed.
unfavorable variance  Variance that occurs when actual costs exceed standard costs or when actual sales are less than standard sales.
unit-level costs  Costs incurred each time a company makes a single product or performs a single service and that can be avoided by eliminating a unit of product or service. Likewise, unit-level costs increase with each additional product produced or service provided.
units-of-production depreciation  Depreciation method based on a measure of production rather than a measure of time; for example, an automobile may be depreciated based on the expected miles to be driven rather than on a specific number of years.
unqualified opinion  Opinion on financial statements audited by a CPA that means the auditor believes the financial statements are in compliance with GAAP.
unrealized gain or loss  Paper gain or loss on investment securities that has not yet been realized and is not realized until the securities are sold or otherwise disposed of.
unsecured bonds  Also known as debentures, bonds issued on the general credit of the organization.
unsubordinated debentures  Unsecured bonds that have equal claims with the general creditors.
upstream costs  Costs incurred before the manufacturing process begins, for example, research and development costs.
users  Individuals or organizations that use financial information for decision making.
value chain  Linked sequence of activities that create value for the customer.
value-added activity  Any unit of work that contributes to a product's ability to satisfy customer needs.
value-added principle  The benefits attained (value added) from the process should exceed the cost of the process.
variable cost  Cost that in total changes in direct proportion to changes in volume of activity; remains constant per unit when volume of activity changes.
variable costing  Product costing system that capitalizes only variable cost in inventory; its income statement subtracts variable costs from revenue to determine contribution margin. Fixed costs, including product cost, are subtracted from the contribution margin to determine net income. In this format the amount of net income is not affected by the volume of production.
variable interest rate  Interest rate that fluctuates (may change) from period to period over the life of the loan.
variances  Differences between standard and actual amounts.
vertical analysis  Analysis technique that compares items on financial statements to significant totals.
vertical integration  Attainment of control over the entire spectrum of business activity from production to sales; as an example a grocery store that owns farms.
vertical statements model  Arrangement of a full set of financial statements on a single page with account titles arranged from the top to the bottom of the page.
visual fit line  Line drawn by visual inspection to minimize the total distance between the data points and the line; used to estimate fixed and variable cost.
volume variance  Difference between the budgeted fixed cost and the amount of fixed costs allocated to production.
Wage and Tax Statement, Form W2  Form used by employers to notify each employee of the amount of his or her gross earnings for the year and the amounts withheld the employer.
wages  The term used to describe amounts due employees who are paid according to the number of hours they actually work.
warranties  Promises to correct a deficiencies or dissatisfactions in quality, quantity, or performance of products or services sold.
weighted average method  Method often used in a process cost system for determining equivalent units; ignores the state of completion of items in beginning inventory and assumes that items in beginning inventory are complete.
weighted-average cost flow method  Inventory cost flow method in which the cost allocated between inventory and cost of goods sold is based on the average cost per unit, which is determined by dividing total costs of goods available for sale during the accounting period by total units available for sale during the period. If the average is recomputed each time a purchase is made, the result is called a moving average.
wholesale companies  Companies that sell goods to other businesses.
withdrawals  Distributions to the owners of proprietorships and partnerships.
Work in Process Inventory  Asset account used to accumulate all product costs (direct materials, direct labor, and overhead) associated with incomplete products in production.
work ticket  Mechanism (paper or electronic) used to accumulate the time spent on a job by each employee; sent to the accounting department where wage rates are recorded and labor costs are determined. The amount of labor costs for each ticket is summarized on the appropriate job-order cost sheet; sometimes called a time card.
working capital  Current assets minus current liabilities.
working capital ratio  Another term for the current ratio; calculated by dividing current assets by current liabilities.





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