Glossary

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. (See page(s) p. 413)



account	Record used for the classification and summary of transaction data. (See page(s) p. 9)



account balance	Difference between total debits and total credits in an account. (See page(s) p. 181)



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. (See page(s) p. 535)



accounting	Service-based profession that provides reliable and relevant financial information useful in making decisions. (See page(s) p. 3)



accounting controls	Procedures designed to safeguard assets and to ensure accuracy and reliability of the accounting records and reports. (See page(s) p. 316)



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. (See page(s) p. 61)



accounting equation	Expression of the relationship between the assets and the claims on those assets. (See page(s) p. 10)



accounting event	Economic occurrence that causes changes in an enterprise’s assets, liabilities, or equity. (See page(s) p. 11)



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. (See page(s) p. 17)



accounts receivable	Expected future cash receipts arising from permitting customers to buy now and pay later; usually are small with a short term to maturity. (See page(s) 56, 359)



accounts receivable turnover ratio	Financial ratio that measures how fast accounts receivable are turned into cash; computed by dividing sales by accounts receivable. (See page(s) p. 373)



accrual	Recognition of events before exchanging cash. (See page(s) p. 56)



accrual accounting	Method of accounting that records the effects of accounting events in the period in which such events occur regardless of when cash is exchanged. (See page(s) p. 55)



accumulated depreciation	Contra asset account that indicates the sum of all depreciation expense recognized for an asset since the date of acquisition. (See page(s) 112, 412)



adjusting entry	Entry that updates account balances prior to preparing financial statements. (See page(s) p. 64)



administrative controls	Procedures designed to evaluate performance and the degree of compliance with a firm’s policies and public laws. (See page(s) p. 316)



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. (See page(s) p. 72)



allocation	Recognition of expense by systematic assignment of the cost of an asset to periods of use. (See page(s) p. 109)



allowance	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. (See page(s) p. 223)



Allowance for Doubtful Accounts	Contra asset account that contains an amount equal to the accounts receivable that are expected to be uncollectible. (See page(s) p. 361)



allowance method of accounting for bad debts	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). (See page(s) p. 360)



American Institute of Certified Public Accountants’ Code of	Set of ethical rules and guidelines above and beyond the requirements of laws and regulations that certified public accountants must follow. (See page(s) p. 74)



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. (See page(s) 378, 408)



amortization of loan	Systematic repayment of principal and interest over the life of a loan. (See page(s) p. 459)



annual report	Document in which an organization provides information to stockholders, usually on an annual basis. (See page(s) p. 23)



annuity	Series of equal payments made over a specified number of periods. (See page(s) p. 480)



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. (See page(s) p. 528)



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. (See page(s) p. 514)



asset	Economic resource used by a business for the production of revenue. (See page(s) p. 10)



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. (See page(s) p. 56)



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). (See page(s) pp. 12, 56)



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). (See page(s) p. 57)



audit	Detailed examination of a company’s financial statements and the documents that support the information presented in those statements. (See page(s) p. 71)



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. (See page(s) p. 317)



authorized stock	Number of shares that the corporation is approved by the state to issue. (See page(s) p. 520)



available-for-sale securities	Marketable securities that are not properly classified as held-to-maturity or trading securities. (See page(s) p. 284)



average days in inventory ratio (sometimes called average	Financial ratio that measures the average number of days that inventory stays in stock before being sold. (See page(s) p. 281)



average number of days to collect accounts receivable	Length of the average collection period for accounts receivable; computed by dividing 365 (or 366) by the accounts receivable turnover ratio. (See page(s) p. 374)



bad debts 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. (See page(s) p. 361)



balance sheet	Statement that lists the assets of a business and the corresponding claims (liabilities and equity) on those assets. (See page(s) p. 18)



balloon payment	Large final payment due at the maturity of a debt that otherwise requires systematic smaller payments over the term of the loan prior to maturity. (See page(s) p. 460)



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. (See page(s) p. 322)



bank statement	Statement issued by a bank (usually monthly) that denotes all activity in the bank account for that period. (See page(s) p. 321)



bank statement credit memo	Memo that describes an increase in the account balance. (See page(s) p. 321)



bank statement debit memo	Memo that describes a decrease in the account balance. (See page(s) p. 321)



basket purchase	Acquisition of several assets in a single transaction with no specific cost attributed to each asset. (See page(s) p. 409)



board of directors	Group of individuals elected by the stockholders of a corporation to oversee its operations. (See page(s) p. 517)



bond	Debt security 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. (See page(s) p. 468)



bond premium	Difference between the selling price and the face amount of a bond that is sold for more than the face amount. (See page(s) p. 473)



book value	Historical (original) cost of an asset minus the accumulated depreciation; alternatively, undepreciated amount to date. (See page(s) pp. 112, 414)



book value per share	Value of stock determined by dividing the total stockholders’ equity by the number of shares of stock. (See page(s) p. 520)



books of original entry	Journals in which a transaction is first recorded. (See page(s) p. 169)



call premium	Difference between the call price (the price that must be paid for a called bond) and the face amount of the bond. (See page(s) p. 465)



call price	Specified price that must be paid for bonds that are called; usually higher than the face amount of the bonds. (See page(s) p. 465)



callable bonds	Bonds that include a feature allowing the issuer to pay them off prior to maturity. (See page(s) p. 465)



capital expenditures	(on an existing asset) Substantial amounts of funds spent to improve an asset’s quality or to extend its life. (See page(s) p. 420)



capitalized	Recorded cost in an asset account until the item is used to produce revenue. (See page(s) p. 127)



carrying value	Face amount of a bond liability less any unamortized bond discount or plus any unamortized bond premium. (See page(s) p. 470)



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. (See page(s) p. 319)



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. (See page(s) p. 223)



cash inflows	Sources of cash. (See page(s) p. 561)



cash outflows	Uses of cash. (See page(s) p. 561)



Cash Short and Over	Account used to record the amount of cash shortages or overages; shortages are considered expenses and overages are considered revenues. (See page(s) p. 327)



certified check	Check guaranteed by a bank to be drawn on an account having funds sufficient to pay the check. (See page(s) p. 324)



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. (See page(s) p. 71)



chart of accounts	List of all ledger accounts and their corresponding account numbers. (See page(s) p. 169)



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. (See page(s) p. 321)



claims	Owners’ and creditors’ interests in a business’s assets. (See page(s) p. 10)



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. (See page(s) p. 57)



classified balance sheet	Balance sheet that distinguishes between current and noncurrent items. (See page(s) p. 330)



closely held corporation	Corporation whose stock is exchanged between a limited number of individuals. (See page(s) p. 515)



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. (See page(s) pp. 172)



closing the books or closing	Process of transferring balances from nominal accounts (Revenue, Expense, and Dividends) to the permanent account (Retained Earnings). (See page(s) p. 61)



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. (See page(s) p. 74)



collateral for loans	Assets pledged as security for a loan. (See page(s) p. 461)



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. (See page(s) p. 232)



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. (See page(s) pp. 10, 521)



compound interest	Practice of reinvesting interest so that interest is earned on interest as well as on the initial principal. (See page(s) p. 478)



compounding	Earning interest on interest. (See page(s) p. 478)



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. (See page(s) p. 535)



comprehensive income	Net income plus or minus unrealized gains or losses.



consolidated financial statements	Financial statements that represent the combined operations of a parent company and its subsidiaries. (See page(s) p. 288)



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. (See page(s) p. 517)



contra account	Account that normally has a balance opposite to that of the other accounts in a particular category (e.g., Accumulated Depreciation is classified as an asset, but it normally has a credit balance). (See page(s) p. 165)



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. (See page(s) pp. 112, 412)



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. (See page(s) p. 377)



contributed capital	Balance sheet term used to designate the portion of assets contributed to a business by its owners.



convertible bonds	Bonds that can be converted (exchanged) to an ownership interest (stock) in the corporation. (See page(s) p. 465)



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. (See page(s) p. 423)



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. (See page(s) p. 514)



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. (See page(s) p. 525)



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. (See page(s) p. 218)



cost of goods sold	Total cost incurred for the goods sold during a specific accounting period. (See page(s) p. 218)



credit	Entry that increases liability and equity accounts or decreases asset accounts. (See page(s) p. 156)



creditor	Individual or institution that has loaned goods or services to a business. (See page(s) p. 5)



cumulative dividends	Preferred dividends that accumulate from year to year until paid. (See page(s) p. 521)



current (short-term) asset	Asset that will be converted to cash or consumed within one year or an operating cycle, whichever is longer. (See page(s) pp. 330, 407)



current (short-term) liability	Obligation due within one year or an operating cycle, whichever is longer. (See page(s) p. 330)



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. (See page(s) p. 331)



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. (See page(s) p. 526)



debenture	Unsecured bond issued based on the general credit of the organization. (See page(s) p. 464)



debit	Entry that increases asset accounts or decreases liability and equity accounts. (See page(s) p. 156)



debt security	Type of security acquired by loaning assets to the investee company. (See page(s) p. 283)



debt to assets ratio	Financial ratio that measures a company’s level of risk. (See page(s) p. 124)



declaration date	Date on which the board of directors actually declares a dividend. (See page(s) p. 526)



deferral	Recognition of revenue or expense in a period after the cash is exchanged. (See page(s) p. 109)



deferral transactions	Accounting transactions in which cash payments or receipts occur before the associated expense or revenue is recognized. (See page(s) p. 566)



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 straight-line depreciation for financial statement reporting but will be required to use MACRS for tax reporting). (See page(s) p. 419)



demand	Consumer preferences expressed by offering money for goods or services.



depletion	Method of systematically allocating the costs of natural resources to expense as the resources are removed from the land. (See page(s) p. 408)



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. (See page(s) p. 321)



deposits in transit	Deposits recorded in a depositor’s books but not received and recorded by the bank. (See page(s) p. 323)



depreciable cost	(See page(s) p. 414)



depreciation	Method of systematically allocating the costs of long-term tangible assets to expense over their useful lives. (See page(s) p. 408)



depreciation expense	Portion of the original cost of a long-term tangible asset allocated to an expense account in a given period. (See page(s) p. 112)



direct method	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, payment to suppliers). (See page(s) p. 575)



direct write-off method	Method of recognizing bad debts expense only when accounts are determined to be uncollectible. (See page(s) p. 368)



disclaimer of audit 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. (See page(s) p. 73)



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. (See page(s) p. 377)



discount notes	Notes that have the interest included in their face value. (See page(s) p. 376)



Discount on Bonds Payable	Contra liability account used to record the amount of discount on a bond issue. (See page(s) p. 470)



Discount on Notes Payable	Contra liability account subtracted from the Notes Payable account to determine the carrying value of the liability. (See page(s) p. 377)



dividend	Transfer of wealth from a business to its owners. (See page(s) pp. 13, 285)



dividends in arrears	Cumulative dividends on preferred stock that have not been paid; must be paid prior to paying dividends to common stockholders. (See page(s) p. 521)



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. (See page(s) p. 516)



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. (See page(s) p. 410)



double-entry accounting (bookkeeping)	Method of keeping records that provides a system of checks and balances by recording transactions in a dual format. (See page(s) pp. 12, 156)



earnings	The difference between revenues and expenses. Same as net income or profit (See page(s) p. 4)



effective interest rate	Yield rate of bonds, which is usually equal to the market rate of interest on the day the bonds are sold. (See page(s) p. 469)



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. (See page(s) p. 482)



elements	Primary components of financial statements including assets, liabilities, equity, contributions, revenue, expenses, distributions, and net income. (See page(s) p. 5)



entity	Specific unit (individual, business, or institution) for which the accountant records and reports economic information; has boundaries that are distinct and separate from those of the owners, creditors, managers, and employees. (See page(s) p. 23)



entrenched management	Management that may have become ineffective but because of political implications may be difficult to remove. (See page(s) p. 517)



equity	Portion of assets remaining after the creditors’ claims have been satisfied (i.e., Assets _ Liabilities _ Equity); also called residual interest or net assets. (See page(s) p. 10)



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. (See page(s) p. 288)



equity security	An equity security is certificate that evidences an ownership interest in a company. An example is a common stock certificate. (See page(s) p. 283)



estimated useful life	Time for which an asset is expected to be used by a business. (See page(s) p. 410)



ex-dividend	Stock traded after the date of record but before the payment date; does not receive the benefit of the upcoming dividend. (See page(s) p. 526)



expense	An economic sacrifice (decrease in assets or increase in liabilities) that is incurred in the process of generating revenue. (See page(s) pp. 13, 59, 76)



expense transactions	Transactions completed in the process of operating a business that decrease assets or increase liabilities. (See page(s) p. 564)



face value	Amount of the bond to be paid back (to the bondholders) at maturity. (See page(s) p. 464)



fair value	The price at which securities or other assets sell in free markets. Also called market value. (See page(s) p. 284)



fidelity bond	Insurance policy that a company buys to insure itself against loss due to employee dishonesty. (See page(s) p. 316)



financial accounting	Accounting information designed to satisfy the needs of an organization’s external users, including business owners, creditors, and government agencies. (See page(s) p. 6)



Financial Accounting Standards Board (FASB)	Privately funded organization with the primary authority for the establishment of accounting standards in the United States. (See page(s) p. 9)



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. (See page(s) p. 71)



financial leverage	Concept of increasing earnings through debt financing; investment of money at a higher rate than that paid to borrow the money. (See page(s) pp. 126, 475)



financial resources	Money or credit arrangements supplied to a business by investors (owners) and creditors. (See page(s) p. 5)



financial statements	Primary means of communicating the financial information of an organization to the external users. The four general-purpose financial statements are the income statement, statement of changes in equity, balance sheet, and statement of cash flows. (See page(s) p. 8)



financing activities	Cash transactions associated with owners and creditors; also one of the three categories of cash inflows and outflows shown on the statement of cash flows. This category of cash activities shows the amount of cash provided by these resource providers and the amount of cash that is returned to them. (See page(s) pp. 18, 562)



first-in, first-out (FIFO) cost flow method	Inventory cost flow method that treats the first items purchased as the first items sold for the purpose of computing cost of goods sold. (See page(s) p. 268)



fiscal year	Year for which a company’s accounting records are kept. (See page(s) p. 155)



fixed interest rate	Interest rate (charge for the use of money) that does not change over the life of the loan. (See page(s) p. 459)



FOB (free on board) destination	Term that designates the seller as the responsible party for freight costs (transportationin costs). (See page(s) p. 224)



FOB (free on board) shipping point	Term that designates the buyer as the responsible party for freight costs (transportationin costs). (See page(s) p. 224)



footnotes to the financial statements	Explanations of the information in the financial statements such as estimates used and options allowable under GAAP that have been chosen. (See page(s) p. 174)



franchise	Exclusive right to sell products or perform services in certain geographic areas. (See page(s) p. 423)



fund	Independent accounting entity with a self-balancing set of accounts segregated for the purposes of carrying on specific activities. (See page(s) p. 535)



fund accounting	Type of accounting used by governmental entities. (See page(s) p. 535)



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. (See page(s) p. 479)



gains	Increases in assets or decreases in liabilities that result from peripheral or incidental transactions. (See page(s) p. 121)



general authority	Policies and procedures that apply across different levels of a company’s management, such as everyone flies coach class. (See page(s) p. 317)



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. (See page(s) p. 169)



general ledger	Complete set of accounts used in accounting systems. (See page(s) p. 14)



generally accepted accounting principles (GAAP)	Rules and regulations that accountants agree to follow when preparing financial reports for public distribution. (See page(s) p. 8)



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. (See page(s) p. 360)



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. (See page(s) p. 424)



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. (See page(s) p. 218)



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. (See page(s) p. 279)



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. (See page(s) p. 232)



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. (See page(s) p. 418)



held-to-maturity securities	Debt securities intended to be held until maturity. (See page(s) p. 284)



historical cost concept	Actual price paid for an asset when it was purchased. (See page(s) pp. 14, 73, 409)



horizontal statements model	Arrangement of a set of financial statements horizontally across a sheet of paper. (See page(s) p. 19)



imprest basis	Description of the periodic replenishment of a fund to maintain it at its specified original amount. (See page(s) p. 327)



income	Added value created in transforming resources into more desirable states. (See page(s) p. 4)



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. (See page(s) p. 17)



independent auditor	Certified public accountant licensed to perform audits who is independent of the company being audited. (See page(s) p. 71)



indirect method	Method of preparing the statement of cash flows that uses the net income from the income statement as a starting point for the reporting of cash flow from operating activities. The 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. (See page(s) p. 575)



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. (See page(s) p. 408)



interest	Fee paid for the use of borrowed funds; also refers to revenue from debt securities. (See page(s) pp. 6, 285)



interest-bearing notes	Notes that require the payment of the face value plus accrued interest at maturity. (See page(s) p. 376)



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. (See page(s) pp. 75, 316)



inventory	Supply of goods that is in the process of being made or is finished and ready for sale; also describes stockpiles of goods used in the business (office supplies, cleaning supplies). (See page(s) p. 217)



inventory cost flow methods	Methods used to allocate the cost of goods available for sale between cost of goods sold and inventory. (See page(s) p. 267)



inventory turnover	Ratio of cost of goods sold to inventory that indicates how many times a year the average inventory is sold (turned over). (See page(s) p. 281)



investee	Company that receives assets or services in exchange for a debt or equity security. (See page(s) p. 283)



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. (See page(s) pp. 18, 562)



investment	Commitment of assets (usually cash) by a business to acquire other assets that will be used to produce revenue. (See page(s) p. 63)



investment securities	Certificates that describe the rights and privileges that investors receive when they loan or give assets or services to investees. (See page(s) p. 283)



investor	Company or individual who gives assets or services and receives a security certificate in exchange. (See page(s) pp. 5, 283)



issued stock	Stock sold to the public. (See page(s) p. 520)



issuer of a bond	Party that issues the bond (the borrower). (See page(s) p. 68)



issuer of a note	Individual or business borrowing funds (the party receiving the cash when a note is issued). (See page(s) p. 377)



journal	Book of original entry in which accounting data are entered chronologically before posting to the ledger accounts. (See page(s) p. 169)



labor resources	Both intellectual and physical labor used in the process of converting goods and services to products of greater value. (See page(s) p. 6)



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. (See page(s) p. 268)



ledger	Collection of all accounts used by a business; primary information source for the financial statements. (See page(s) p. 168)



legal capital	Amount of assets that should be maintained as protection for creditors; the number of shares multiplied by the par value. (See page(s) p. 519)



liabilities	Obligations of a business to relinquish assets, provide services, or accept other obligations. (See page(s) p. 10)



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). (See page(s) p. 516)



limited liability company (LLC)	Organizational form offering many of the best features of corporations and partnerships and with many legal benefits of a corporation (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. (See page(s) p. 516)



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. (See page(s) p. 462)



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. (See page(s) p. 5)



liquidity	Ability to convert assets to cash quickly and meet short-term obligations. (See page(s) pp. 18, 330)



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). (See page(s) p. 407)



losses	Decreases in assets or increases in liabilities that result from peripheral or incidental transactions. (See page(s) p. 120)



lower-of-cost-or-market rule