Glossary (See related pages) Accelerated depreciation method   Method that produces larger depreciation charges in the early years of an asset's life and smaller charges in its later years. (See page(s) 320) Account   Record within an accounting system in which increases and decreases are entered and stored in a specific asset, liability, equity, revenue, or expense. (See page(s) 49) Account balance   Difference between total debits and total credits (including the beginning balance) for an account. (See page(s) 53) Account form balance sheet   Balance sheet that lists assets on the left side and liabilities and equity on the right. Account payable   Liability created by buying goods or services on credit; backed by the buyer's general credit standing. Accounting   Information and measurement system that identifies, records, and communicates relevant information about a company's business activities. (See page(s) 4) Accounting cycle   Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries). (See page(s) 109) Accounting equation   Equality involving a company's assets, liabilities, and equity; Assets = Liabilities + Equity; also called balance sheet equation. (See page(s) 12) Accounting information system   People, records, and methods that collect and process data from transactions and events, organize them in useful forms, and communicate results to decision makers. (See page(s) Web Appendix E) Accounting period   Length of time covered by financial statements; also called reporting period. (See page(s) 92) Accounts payable ledger   Subsidiary ledger listing individual creditor (supplier) accounts. (See page(s) Web Appendix E) Accounts receivable   Amounts due from customers for credit sales; backed by the customer's general credit standing. (See page(s) 280) Accounts receivable ledger   Subsidiary ledger listing individual customer accounts. (See page(s) Web Appendix E) Accounts receivable turnover   Measure of both the quality and liquidity of accounts receivable; indicates how often receivables are received and collected during the period; computed by dividing net sales by average accounts receivable. (See page(s) 294) Accrual basis accounting   Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP. (See page(s) 93) Accrued expenses   Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities. (See page(s) 99) Accrued revenues   Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues. (See page(s) 101) Accumulated depreciation   Cumulative sum of all depreciation expense recorded for an asset. Acid-test ratio   Ratio used to assess a company's ability to settle its current debts with its most liquid assets; defined as quick assets (cash, short-term investments, and current receivables) divided by current liabilities. (See page(s) 165) Adjusted trial balance   List of accounts and balances prepared after period end adjustments are recorded and posted. (See page(s) 103) Adjusting entry   Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account. (See page(s) 94) Aging of accounts receivable   Process of classifying accounts receivable by how long they are past due for purposes of estimating uncollectible accounts. (See page(s) 288) Allowance for Doubtful Accounts   Contra asset account with a balance approximating uncollectible accounts receivable; also called Allowance for Uncollectible Accounts. (See page(s) 285) Allowance method   Procedure that (a) estimates and matches bad debts expense with its sales for the period and/or (b) reports accounts receivable at estimated realizable value. (See page(s) 284) Amortization   Process of allocating the cost of an intangible asset to expense over its estimated useful life. (See page(s) 329) Annual financial statements   Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable. (See page(s) 93) Annual report   Summary of a company's financial results for the year with its current financial condition and future plans; directed to external users of financial information. (See page(s) A-1) Annuity   Series of equal payments at equal intervals. Appropriated retained earnings   Retained earnings separately reported to inform stockholders of funding needs. Asset book value   Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account. (See page(s) 319) Assets   Resources a business owns or controls that are expected to provide current and future benefits to the business. (See page(s) 12) Audit   Analysis and report of an organization's accounting system, its records, and its reports using various tests. (See page(s) 11) Authorized stock   Total amount of stock that a corporation's charter authorizes it to issue. Available-for-sale (AFS) securities   Investments in debt and equity securities that are not classified as trading securities or held-to-maturity securities. Average cost   See weighted average. (See page(s) 202, 217) Bad debts   Accounts of customers who do not pay what they have promised to pay; an expense of selling on credit; also called uncollectible accounts. (See page(s) 283) Balance column account   Account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry. (See page(s) 56) Balance sheet   Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date. (See page(s) 18) Balance sheet equation   (See accounting equation.) Bank reconciliation   Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement. (See page(s) 253) Bank statement   Bank report on the depositor's beginning and ending cash balances and a listing of its changes for a period. (See page(s) 251) Basic earnings per share   Net income less any preferred dividends and then divided by weighted-average common shares outstanding. Batch processing   Accumulating source documents for a period of time and then processing them all at once such as once a day, week, or month. (See page(s) Web Appendix E) Bearer bonds   Bonds made payable to whoever holds them (the bearer); also called unregistered bonds. Benchmarking   Practice of comparing and analyzing company financial performance or position with other companies or standards. Betterments   Expenditures to make a plant asset more efficient or productive; also called improvements. (See page(s) 325) Bond   Written promise to pay the bond's par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000. Bond certificate   Document containing bond specifics such as issuer's name, bond par value, contract interest rate, and maturity date. Bond indenture   Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations. Book value   Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account. (See page(s) 98) Book value per common share   Recorded amount of equity applicable to common shares divided by the number of common shares outstanding. Book value per preferred share   Equity applicable to preferred shares (equals its call price [or par value if it is not callable] plus any cumulative dividends in arrears) divided by the number of preferred shares outstanding. Bookkeeping   (See recordkeeping.) (See page(s) 4) Budget   Formal statement of future plans, usually expressed in monetary terms. Budget report   Report comparing actual results to planned objectives; sometimes used as a progress report. Budgeted balance sheet   Accounting report that presents predicted amounts of the company's assets, liabilities, and equity balances as of the end of the budget period. Budgeted income statement   Accounting report that presents predicted amounts of the company's revenues and expenses for the budget period. Budgeting   Process of planning future business actions and expressing them as formal plans. Business   An organization of one or more individuals selling products and/or services for profit. Business entity assumption   Principle that requires a business to be accounted for separately from its owner(s) and from any other entity. (See page(s) 10) Business segment   Part of a company that can be separately identified by the products or services that it provides or by the geographic markets that it serves; also called segment. C corporation   Corporation that does not qualify for nor elect to be treated as a proprietorship or partnership for income tax purposes and therefore is subject to income taxes; also called C corp. (See page(s) Web Appendix D) Call price   Amount that must be paid to call and retire a callable preferred stock or a callable bond. Callable bonds   Bonds that give the issuer the option to retire them at a stated amount prior to maturity. Callable preferred stock   Preferred stock that the issuing corporation, at its option, may retire by paying the call price plus any dividends in arrears. Canceled checks   Checks that the bank has paid and deducted from the depositor's account. (See page(s) 252) Capital budgeting   Process of analyzing alternative investments and deciding which assets to acquire or sell. Capital expenditures   Additional costs of plant assets that provide material benefits extending beyond the current period; also called balance sheet expenditures. (See page(s) 324) Capital expenditures budget   Plan that lists dollar amounts to be both received from disposal of plant assets and spent to purchase plant assets. Capital leases   Long-term leases in which the lessor transfers substantially all risk and rewards of ownership to the lessee. Capital stock   General term referring to a corporation's stock used in obtaining capital (owner financing). Capitalize   Record the cost as part of a permanent account and allocate it over later periods. Carrying (book) value of bonds   Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value. Cash   Includes currency, coins, and amounts on deposit in bank checking or savings accounts. (See page(s) 243) Cash basis accounting   Accounting system that recognizes revenues when cash is received and records expenses when cash is paid. (See page(s) 93) Cash budget   Plan that shows expected cash inflows and outflows during the budget period, including receipts from loans needed to maintain a minimum cash balance and repayments of such loans. Cash disbursements journal   Special journal normally used to record all payments of cash; also called cash payments journal. (See page(s) Web Appendix E) Cash discount   Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period. (See page(s) 153) Cash equivalents   Short-term, investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date (usually within 90 days) so that market value is not sensitive to interest rate changes. (See page(s) 243) Cash flow on total assets   Ratio of operating cash flows to average total assets; not sensitive to income recognition and measurement; partly reflects earnings quality. Cash Over and Short   Income statement account used to record cash overages and cash shortages arising from errors in cash receipts or payments. (See page(s) 245) Cash receipts journal   Special journal normally used to record all receipts of cash. (See page(s) Web Appendix E) Change in an accounting estimate   Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods. (See page(s) 323 & •••) Chart of accounts   List of accounts used by a company; includes an identification number for each account. (See page(s) 52) Check   Document signed by a depositor instructing the bank to pay a specified amount to a designated recipient. (See page(s) 250) Check register   Another name for a cash disbursements journal when the journal has a column for check numbers. (See page(s) 261) Classified balance sheet   Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications. (See page(s) 110) Clock card   Source document used to record the number of hours an employee works and to determine the total labor cost for each pay period. Closing entries   Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retained earnings for a corporation). (See page(s) 106) Closing process   Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period. (See page(s) 106) Columnar journal   Journal with more than one column. (See page(s) Web Appendix E) Common stock   Corporation's basic ownership share; also generically called capital stock. (See page(s) 11, •• & ••) Common-size financial statement   Statement that expresses each amount as a percent of a base amount. In the balance sheet, total assets is usually the base and is expressed as 100%. In the income statement, net sales is usually the base. Comparative financial statement   Statement with data for two or more successive periods placed in side-by-side columns, often with changes shown in dollar amounts and percents. Compatibility principle   Information system principle that prescribes an accounting system to conform with a company's activities, personnel, and structure. (See page(s) Web Appendix E) Complex capital structure   Capital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock. Components of accounting systems   Five basic components of accounting systems are source documents, input devices, information processors, information storage, and output devices. (See page(s) Web Appendix E) Compound journal entry   Journal entry that affects at least three accounts. (See page(s) 61) Comprehensive income   Net change in equity for a period, excluding owner investments and distributions. (See page(s) C-•) Computer hardware   Physical equipment in a computerized accounting information system. Computer network   Linkage giving different users and different computers access to common databases and programs. (See page(s) Web Appendix E) Computer software   Programs that direct operations of computer hardware. Conservatism constrant   Principle that prescribes the less optimistic estimate when two estimates are about equally likely. (See page(s) 206) Consignee   Receiver of goods owned by another who holds them for purposes of selling them for the owner. (See page(s) 196) Consignor   Owner of goods who ships them to another party who will sell them for the owner. (See page(s) 196) Consistency concept   Principle that prescribes use of the same accounting method(s) over time so that financial statements are comparable across periods. (See page(s) 205) Consolidated financial statements   Financial statements that show all (combined) activities under the parent's control, including those of any subsidiaries. (See page(s) C-•) Contingent liability   Obligation to make a future payment if, and only if, an uncertain future event occurs. Continuous improvement   Concept requiring every manager and employee continually to look to improve operations. Contra account   Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance. (See page(s) 97) Contract rate   Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate. Contributed capital   Total amount of cash and other assets received from stockholders in exchange for stock; also called paid-in capital. (See page(s) 13) Contributed capital in excess of par value   Difference between the par value of stock and its issue price when issued at a price above par. Contribution margin   Sales revenue less total variable costs. Contribution margin income statement   Income statement that separates variable and fixed costs; highlights the contribution margin, which is sales less variable expenses. Contribution margin per unit   Amount that the sale of one unit contributes toward recovering fixed costs and earning profit; defined as sales price per unit minus variable expense per unit. Contribution margin ratio   Product's contribution margin divided by its sale price. Control   Process of monitoring planning decisions and evaluating the organization's activities and employees. Control principle   Information system principle that prescribes an accounting system to aid managers in controlling and monitoring business activities. (See page(s) Web Appendix E) Controllable costs   Costs that a manager has the power to control or at least strongly influence. Controlling account   General ledger account, the balance of which (after posting) equals the sum of the balances in its related subsidiary ledger. (See page(s) Web Appendix E) Convertible bonds   Bonds that bondholders can exchange for a set number of the issuer's shares. Convertible preferred stock   Preferred stock with an option to exchange it for common stock at a specified rate. Copyright   Right giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work during the creator's life plus 70 years. (See page(s) 330) Corporation   Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders. (See page(s) 11) Cost   All normal and reasonable expenditures necessary to get an asset in place and ready for its intended use. (See page(s) 315) Cost accounting system   Accounting system for manufacturing activities based on the perpetual inventory system. Cost-benefit principle   Information system principle that prescribes the benefits from an activity in an accounting system to outweigh the costs of that activity. (See page(s) Web Appendix E) Cost center   Department that incurs costs but generates no revenues; common example is the accounting or legal department. Cost object   Product, process, department, or customer to which costs are assigned. Cost of goods available for sale   Consists of beginning inventory plus net purchases of a period. Cost of goods manufactured   Total manufacturing costs (direct materials, direct labor, and factory overhead) for the period plus beginning goods in process less ending goods in process; also called net cost of goods manufactured and cost of goods completed. Cost of goods sold   Cost of inventory sold to customers during a period; also called cost of sales. (See page(s) 150) Cost principle   Accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions. (See page(s) 9) Cost variance   Difference between the actual incurred cost and the standard cost. Cost-volume-profit (CVP) analysis   Planning method that includes predicting the volume of activity, the costs incurred, sales earned, and profits received. Coupon bonds   Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection. Credit   Recorded on the right side; an entry that decreases asset and expense accounts, and increases liability, revenue, and most equity accounts; abbreviated Cr. (See page(s) 53) Credit memorandum   Notification that the sender has credited the recipient's account in the sender's records. (See page(s) 159) Credit period   Time period that can pass before a customer's payment is due. (See page(s) 153) Credit terms   Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future. (See page(s) 153) Creditors   Individuals or organizations entitled to receive payments. (See page(s) 50) Cumulative preferred stock   Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid. Current assets   Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer. (See page(s) 112) Current liabilities   Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer. (See page(s) 112 & •••) Current portion of long-term debt   Portion of long-term debt due within one year or the operating cycle, whichever is longer; reported under current liabilities. Current ratio   Ratio used to evaluate a company's ability to pay its short term obligations, calculated by dividing current assets by current liabilities. (See page(s) 113) Customer orientation   Company position that its managers and employees be in tune with the changing wants and needs of consumers. CVP chart   Graphic representation of cost-volume-profit relations. Date of declaration   Date the directors vote to pay a dividend. Date of payment   Date the corporation makes the dividend payment. Date of record   Date directors specify for identifying stockholders to receive dividends. Days' sales in inventory   Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365; also called days' stock on hand. (See page(s) 209) Days' sales uncollected   Measure of the liquidity of receivables computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365; also called days' sales in receivables. (See page(s) 256) Debit   Recorded on the left side; an entry that increases asset and expense accounts, and decreases liability, revenue, and most equity accounts; abbreviated Dr. (See page(s) 53) Debit memorandum   Notification that the sender has debited the recipient's account in the sender's records. (See page(s) 154) Debt ratio   Ratio of total liabilities to total assets; used to reflect risk associated with a company's debts. (See page(s) 67) Debt-to-equity ratio   Defined as total liabilities divided by total equity; shows the proportion of a company financed by non-owners (creditors) in comparison with that financed by owners. Debtors   Individuals or organizations that owe money. (See page(s) 49) Declining-balance method   Method that determines depreciation charge for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset's beginning-period book value. (See page(s) 320) Deferred income tax liability   Corporation income taxes that are deferred until future years because of temporary differences between GAAP and tax rules. Departmental accounting system   Accounting system that provides information useful in evaluating the profitability or cost effectiveness of a department. Departmental contribution to overhead   Amount by which a department's revenues exceed its direct expenses. Depletion   Process of allocating the cost of natural resources to periods when they are consumed and sold. (See page(s) 328) Deposit ticket   Lists items such as currency, coins, and checks deposited and their corresponding dollar amounts. (See page(s) 250) Deposits in transit   Deposits recorded by the company but not yet recorded by its bank. (See page(s) 253) Depreciable cost   Cost of a plant asset less its salvage value. Depreciation   Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset. (See page(s) 97 & 317) Diluted earnings per share   Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation. Dilutive securities   Securities having the potential to increase common shares outstanding; examples are options, rights, convertible bonds, and convertible preferred stock. Direct costs   Costs incurred for the benefit of one specific cost object. Direct labor   Efforts of employees who physically convert materials to finished product. Direct labor costs   Wages and salaries for direct labor that are separately and readily traced through the production process to finished goods. Direct material   Raw material that physically becomes part of the product and is clearly identified with specific products or batches of product. Direct material costs   Expenditures for direct material that are separately and readily traced through the production process to finished goods. Direct method   Presentation of net cash from operating activities for the statement of cash flows that lists major operating cash receipts less major operating cash payments. Direct write-off method   Method that records the loss from an uncollectible account receivable at the time it is determined to be uncollectible; no attempt is made to estimate bad debts. (See page(s) 283) Discount on bonds payable   Difference between a bond's par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate. Discount on note payable   Difference between the face value of a note payable and the (lesser) amount borrowed; reflects the added interest to be paid on the note over its life. Discount on stock   Difference between the par value of stock and its issue price when issued at a price below par value. Discount period   Time period in which a cash discount is available and the buyer can make a reduced payment. (See page(s) 153) Discount rate   Expected rate of return on investments; also called cost of capital, hurdle rate, or required rate of return. (See page(s) B-2) Discounts lost   Expenses resulting from not taking advantage of cash discounts on purchases. Dividend in arrears   Unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock. Dividend yield   Ratio of the annual amount of cash dividends distributed to common shareholders relative to the common stock's market value (price). Dividends   Corporation's distributions of assets to its owners. (See page(s) 13 and 51) Double-declining-balance (DDB) depreciation   Depreciation equals beginning book value multiplied by 2 times the straight-line rate. Double-entry accounting   Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit. (See page(s) 53) Double taxation   Corporate income is taxed and then its later distribution through dividends is normally taxed again for shareholders. Earnings   (See net income.) Earnings per share (EPS)   Amount of income earned by each share of a company's outstanding common stock; also called net income per share. Effective interest method   Allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method. Efficiency   Company's productivity in using its assets; usually measured relative to how much revenue a certain level of assets generates. Electronic funds transfer (EFT)   Use of electronic communication to transfer cash from one party to another. (See page(s) 251) Employee benefits   Additional compensation paid to or on behalf of employees, such as premiums for medical, dental, life, and disability insurance, and contributions to pension plans. Employee earnings report   Record of an employee's net pay, gross pay, deductions, and year-to-date payroll information. Enterprise resource planning (ERP) software   Programs that manage a company's vital operations, which range from order taking to production to accounting. (See page(s) Web Appendix E) Entity   Organization that, for accounting purposes, is separate from other organizations and individuals. EOM   Abbreviation for end of month; used to describe credit terms for credit transactions. (See page(s) 153) Equity   Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities; also called net assets. (See page(s) 12) Equity method   Accounting method used for long-term investments when the investor has “significant influence” over the investee. (See page(s) C-•) Equity ratio   Portion of total assets provided by equity, computed as total equity divided by total assets. Equity securities with controlling influence   Long-term investment when the investor is able to exert controlling influence over the investee; investors owning 50% or more of voting stock are presumed to exert controlling influence. (See page(s) C-•) Equity securities with significant influence   Long-term investment when the investor is able to exert significant influence over the investee; investors owning 20 percent or more (but less than 50 percent) of voting stock are presumed to exert significant influence. (See page(s) C-•) Estimated liability   Obligation of an uncertain amount that can be reasonably estimated. Ethics   Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest. (See page(s) 8) Events   Happenings that both affect an organization's financial position and can be reliably measured. (See page(s) 13) Expanded accounting equation   Assets = Liabilities + Equity; Equity equals [Owner capital - Owner withdrawals + Revenues - Expenses] for a noncorporation; Equity equals [Contributed capital + Retained earnings + Revenues - Expenses] for a corporation where dividends are subtracted from retained earnings. (See page(s) 13) Expenses   Outflows or using up of assets as part of operations of a business to generate sales. (See page(s) 13) External transactions   Exchanges of economic value between one entity and another entity. (See page(s) 13) External users   Persons using accounting information who are not directly involved in running the organization. (See page(s) 5) Extraordinary gains or losses   Gains or losses reported separately from continuing operations because they are both unusual and infrequent. Extraordinary repairs   Major repairs that extend the useful life of a plant asset beyond prior expectations; treated as a capital expenditure. (See page(s) 325) Factory overhead   Factory activities supporting the production process that are not direct material or direct labor; also called overhead and manufacturing overhead. Factory overhead costs   Expenditures for factory overhead that cannot be separately or readily traced to finished goods; also called overhead costs. Favorable variance   Difference in actual revenues or expenses from the budgeted amount that contributes to a higher income. Federal depository bank   Bank authorized to accept deposits of amounts payable to the federal government. Federal Insurance Contributions Act (FICA) Taxes   Taxes assessed on both employers and employees; for Social Security and Medicare programs. Federal Unemployment Taxes (FUTA)   Payroll taxes on employers assessed by the federal government to support its unemployment insurance program. FIFO method   (See first-in, first-out.) Financial accounting   Area of accounting mainly aimed at serving external users. (See page(s) 5) Financial Accounting Standards Board (FASB)   Independent group of fulltime members responsible for setting accounting rules. (See page(s) 9) Financial leverage   Earning a higher return on equity by paying dividends on preferred stock or interest on debt at a rate lower than the return earned with the assets from issuing preferred stock or debt; also called trading on the equity. Financial reporting   Process of communicating information relevant to investors, creditors, and others in making investment, credit, and business decisions. Financial statement analysis   Application of analytical tools to general-purpose financial statements and related data for making business decisions. Financial statements   Includes the balance sheet, income statement, statement of owner's (or stockholders') equity, and statement of cash flows. Financing activities   Transactions with owners and creditors that include obtaining cash from issuing debt, repaying amounts borrowed, and obtaining cash from or distributing cash to owners. Finished goods inventory   Account that controls the finished goods files, which acts as a subsidiary ledger (of the Inventory account) in which the costs of finished goods that are ready for sale are recorded. First-in, first-out (FIFO)   Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold. (See page(s) 201) Fiscal year   Consecutive 12-month (or 52-week) period chosen as the organization's annual accounting period. (See page(s) 93) Fixed cost   Cost that does not change with changes in the volume of activity. Flexibility principle   Information system principle that prescribes an accounting system be able to adapt to changes in the company, its operations, and needs of decision makers. (See page(s) Web Appendix E) Flexible budget   Budget prepared (using actual volume) once a period is complete that helps managers evaluate past performance; uses fixed and variable costs in determining total costs. FOB   Abbreviation for free on board; the point when ownership of goods passes to the buyer; FOB shipping point (or factory) means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to carrier; FOB destination means the seller pays shipping costs and buyer accepts ownership of goods at the buyer's place of business. (See page(s) 155) Foreign exchange rate   Price of one currency stated in terms of another currency. (See page(s) C-••) Form 940   IRS form used to report an employer's federal unemployment taxes (FUTA) on an annual filing basis. Form 941   IRS form filed to report FICA taxes owed and remitted. Form 10-K (or 10-KSB)   Annual report form filed with SEC by businesses (small businesses) with publicly-traded securities. (See page(s) A-1) Form W-2   Annual report by an employer to each employee showing the employee's wages subject to FICA and federal income taxes along with amounts withheld. Form W-4   Withholding allowance certificate, filed with the employer, identifying the number of withholding allowances claimed. Franchises   Privileges granted by a company or government to sell a product or service under specified conditions. (See page(s) 330) Full-disclosure principle   Principle that prescribes financial statements (including notes) to report all relevant information about an entity's operations and financial condition. (See page(s) 10) GAAP   (See generally accepted accounting principles.) General and administrative expenses   Expenses that support the operating activities of a business. (See page(s) 163) General and administrative expense budget   Plan that shows predicted operating expenses not included in the selling expenses budget. General journal   All-purpose journal for recording the debits and credits of transactions and events. (See page(s) 55) General ledger   (See ledger.) (See page(s) 49) General partner   Partner who assumes unlimited liability for the debts of the partnership; responsible for partnership management. (See page(s) Web Appendix D) General partnership   Partnership in which all partners have mutual agency and unlimited liability for partnership debts. (See page(s) Web Appendix D) Generally accepted accounting principles (GAAP)   Rules that specify acceptable accounting practices. (See page(s) 8) Generally accepted auditing standards (GAAS)   Rules that specify acceptable auditing practices. General-purpose financial statements   Statements published periodically for use by a variety of interested parties; includes the income statement, balance sheet, statement of owner's equity (or statement of retained earnings for a corporation), statement of cash flows, and notes to these statements. Going-concern assumption   Principle that prescribes financial statements to reflect the assumption that the business will continue operating. (See page(s) 10) Goods in process inventory   Account in which costs are accumulated for products that are in the process of being produced but are not yet complete; also called work in process inventory. Goodwill   Amount by which a company's (or a segment's) value exceeds the value of its individual assets less its liabilities. (See page(s) 331) Gross margin   (See gross profit.) (See page(s) 151) Gross margin ratio   Gross margin (net sales minus cost of goods sold) divided by net sales; also called gross profit ratio. (See page(s) 165) Gross method   Method of recording purchases at the full invoice price without deducting any cash discounts. Gross pay   Total compensation earned by an employee. Gross profit   Net sales minus cost of goods sold; also called gross margin. (See page(s) 150) Gross profit method   Procedure to estimate inventory when the past gross profit rate is used to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale. (See page(s) Web Appendix 5B) Held-to-maturity (HTM) securities   Debt securities that a company has the intent and ability to hold until they mature. (See page(s) C-•) Horizontal analysis   Comparison of a company's financial condition and performance across time. Hurdle rate   Minimum acceptable rate of return (set by management) for an investment. Impairment   Diminishment of an asset value. (See page(s) 324 & 329) Imprest system   Method to account for petty cash; maintains a constant balance in the fund, which equals cash plus petty cash receipts. Inadequacy   Condition in which the capacity of plant assets is too small to meet the company's production demands. (See page(s) 317) Income   (See net income.) (See page(s) 13) Income statement   Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses. (See page(s) 17) Income Summary   Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation). (See page(s) 106) Incremental cost   Additional cost incurred only if a company pursues a specific course of action. Indefinite life   Asset life that is not limited by legal, regulatory, contractual, competitive, economic, or other factors. (See page(s) 329) Indirect costs   Costs incurred for the benefit of more than one cost object. Indirect labor   Efforts of production employees who do not work specifically on converting direct materials into finished products and who are not clearly identified with specific units or batches of product. Indirect labor costs   Labor costs that cannot be physically traced to production of a product or service; included as part of overhead. Indirect material   Material used to support the production process but not clearly identified with products or batches of product. Indirect method   Presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows. Information processor   Component of an accounting system that interprets, transforms, and summarizes information for use in analysis and reporting. (See page(s) Web Appendix E) Information storage   Component of an accounting system that keeps data in a form accessible to information processors. (See page(s) Web Appendix E) Infrequent gain or loss   Gain or loss not expected to recur given the operating environment of the business. Input device   Means of capturing information from source documents that enables its transfer to information processors. (See page(s) Web Appendix E) Installment note   Liability requiring a series of periodic payments to the lender. Intangible assets   Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits. (See page(s) 112 & 329) Interest   Charge for using money (or other assets) loaned from one entity to another. (See page(s) 290) Interim statements   Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods. (See page(s) 93) Internal controls or Internal control system   All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. (See page(s) 238) Internal rate of return (IRR)   Rate used to evaluate the acceptability of an investment; equals the rate that yields a net present value of zero for an investment. Internal transactions   Activities within an organization that can affect the accounting equation. (See page(s) 13) Internal users   Persons using accounting information who are directly involved in managing the organization. (See page(s) 6) International Accounting Standards Board (IASB)   Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS). (See page(s) 9) Inventory   Goods a company owns and expects to sell in its normal operations. (See page(s) 151) Inventory turnover   Number of times a company's average inventory is sold during a period; computed by dividing cost of goods sold by average inventory; also called merchandise turnover. (See page(s) 208) Investing activities   Transactions that involve purchasing and selling of long term assets, includes making and collecting notes receivable and investments in other than cash equivalents. Investment center   Center of which a manager is responsible for revenues, costs, and asset investments. Invoice   Itemized record of goods prepared by the vendor that lists the customer's name, items sold, sales prices, and terms of sale. (See page(s) 259) Invoice approval   Document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization. (See page(s) 260) Journal   Record in which transactions are entered before they are posted to ledger accounts; also called book of original entry. (See page(s) 54) Journalizing   Process of recording transactions in a journal. (See page(s) 54) Just-in-time (JIT) manufacturing   Process of acquiring or producing inventory only when needed. Known liabilities   Obligations of a company with little uncertainty; set by agreements, contracts, or laws; also called definitely determinable liabilities. Land improvements   Assets that increase the benefits of land, have a limited useful life, and are depreciated. (See page(s) 316) Large stock dividend   Stock dividend that is more than 25% of the previously outstanding shares. Last-in, first-out (LIFO)   Method to assign cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. (See page(s) 201) Lean business model   Practice of eliminating waste while meeting customer needs and yielding positive company returns. Lease   Contract specifying the rental of property. (See page(s) 331 & •••) Leasehold   Rights the lessor grants to the lessee under the terms of a lease. (See page(s) 331) Leasehold improvements   Alterations or improvements to leased property such as partitions and storefronts. (See page(s) 331) Ledger   Record containing all accounts (with amounts) for a business; also called general ledger. (See page(s) 49) Lessee   Party to a lease who secures the right to possess and use the property from another party (the lessor). (See page(s) 331) Lessor   Party to a lease who grants another party (the lessee) the right to possess and use its property. (See page(s) 331) Liabilities   Creditors' claims on an organization's assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events. (See page(s) 12) Licenses   (See franchises.) (See page(s) 330) Limited liability   Owner can lose no more than the amount invested. Limited liability company   Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management. (See page(s) Web Appendix D) Limited liability partnership   Partnership in which a partner is not personally liable for malpractice or negligence unless that partner is responsible for providing the service that resulted in the claim. (See page(s) Web Appendix D) Limited life   Asset life that is constrained to a definite time period of legal, regulatory, contractual, competitive, economic, or other factors. (See page(s) 329) Limited partners   Partners who have no personal liability for partnership debts beyond the amounts they invested in the partnership. (See page(s) Web Appendix D) Limited partnership   Partnership that has two classes of partners, limited partners and general partners. (See page(s) Web Appendix D) Liquid assets   Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities. (See page(s) 243) Liquidating cash dividend   Distribution of assets that returns part of the original investment to stockholders; deducted from contributed capital accounts. Liquidation   Process of going out of business; involves selling assets, paying liabilities, and distributing remainder to owners. Liquidity   Availability of resources to meet short-term cash requirements. (See page(s) 243 & •••) List price   Catalog (full) price of an item before any trade discount is deducted. (See page(s) 152) Long-term investments   Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds. (See page(s) 112 & C-••) Long-term liabilities   Obligations not due to be paid within one year or the operating cycle, whichever is longer. (See page(s) 112 & •••) Lower of cost or market (LCM)   Required method to report inventory at market replacement cost when that market cost is lower than recorded cost. (See page(s) 205) Maker of the note   Entity who signs a note and promises to pay it at maturity. (See page(s) 290) Management by exception   Management process to focus on significant variances and give less attention to areas where performance is close to the standard. Managerial accounting   Area of accounting mainly aimed at serving the decision-making needs of internal users; also called management accounting. (See page(s) 6) Manufacturer   Company that uses labor and operating assets to convert raw materials to finished goods. Manufacturing budget   Plan that shows the predicted costs for direct materials, direct labor, and overhead to be incurred in manufacturing units in the production budget. Manufacturing statement   Report that summarizes the types and amounts of costs incurred in a company's production process for a period; also called cost of goods manufacturing statement. Market prospects   Expectations (both good and bad) about a company's future performance as assessed by users and other interested parties. Market rate   Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers' risk level. Market value per share   Price at which stock is bought or sold. Master budget   Comprehensive business plan that includes specific plans for expected sales, product units to be produced, merchandise (or materials) to be purchased, expenses to be incurred, plant assets to be purchased, and amounts of cash to be borrowed or loans to be repaid, as well as a budgeted income statement and balance sheet. Matching principle   Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses. (See page(s) 94 & 284) Materiality constraint   Prescribes that accounting for items that significantly impact financial statement and any inferences from them adhere strictly to GAAP. (See page(s) 284) Materials requisition   Source document production managers use to request materials for production; used to assign materials costs to specific jobs or overhead. Maturity date of a note   Date when a note's principal and interest are due. (See page(s) 290) Merchandise   (See merchandise inventory.) (See page(s) 150) Merchandise inventory   Goods that a company owns and expects to sell to customers; also called merchandise or inventory. (See page(s) 151) Merchandise purchases budget   Plan that shows the units or costs of merchandise to be purchased by a merchandising company during the budget period. Merchandiser   Entity that earns net income by buying and selling merchandise. (See page(s) 150) Merit rating   Rating assigned to an employer by a state based on the employer's record of employment. Minimum legal capital   Amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditors. Modified Accelerated Cost Recovery System (MACRS)   Depreciation system required by federal income tax law. (See page(s) 322) Monetary unit assumption   Principle that assumes transactions and events can be expressed in money units. (See page(s) 10) Mortgage   Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the mortgage. Multinational   Company that operates in several countries. (See page(s) C-••) Multiple-step income statement   Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses. (See page(s) 163) Mutual agency   Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership's business. (See page(s) Web Appendix D) Natural business year   Twelve-month period that ends when a company's sales activities are at their lowest point. (See page(s) 93) Natural resources   Assets physically consumed when used; examples are timber, mineral deposits, and oil and gas fields; also called wasting assets. (See page(s) 328) Net assets   (See equity.) Net income   Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings. (See page(s) 13) Net loss   Excess of expenses over revenues for a period. (See page(s) 13) Net method   Method of recording purchases at the full invoice price less any cash discounts. Net pay   Gross pay less all deductions; also called take-home pay. Net present value (NPV)   Dollar estimate of an asset's value that is used to evaluate the acceptability of an investment; computed by discounting future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment. Net realizable value   Expected selling price (value) of an item minus the cost of making the sale. (See page(s) 196) Noncontrollable costs   Costs that a manager does not have the power to control or strongly influence. Noncumulative preferred stock   Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared. Noninterest-bearing note   Note with no stated (contract) rate of interest; interest is implicitly included in the note's face value. Nonparticipating preferred stock   Preferred stock on which dividends are limited to a maximum amount each year. No-par value stock   Stock class that has not been assigned a par (or stated) value by the corporate charter. Nonsufficient funds (NSF) check   Maker's bank account has insufficient money to pay the check; also called hot check. Note   (See promissory note.) Note payable   Liability expressed by a written promise to pay a definite sum of money on demand or on a specific future date(s). Note receivable   Asset consisting of a written promise to receive a definite sum of money on demand or on a specific future date(s). Objectivity principle   Principle that prescribes independent, unbiased evidence to support financial statement information. Obsolescence   Condition in which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage. (See page(s) 317) Off-balance-sheet financing   Acquisition of assets by agreeing to liabilities not reported on the balance sheet. Online processing   Approach to inputting data from source documents as soon as the information is available. (See page(s) Web Appendix E) Operating activities   Activities that involve the production or purchase of merchandise and the sale of goods or services to customers, including expenditures related to administering the business. Operating cycle   Normal time between paying cash for merchandise or employee services and receiving cash from customers. (See page(s) 110) Operating leases   Short-term (or cancelable) leases in which the lessor retains risks and rewards of ownership. Opportunity cost   Potential benefit lost by choosing a specific action from two or more alternatives. Ordinary repairs   Repairs to keep a plant asset in normal, good operating condition; treated as a revenue expenditure and immediately expensed. (See page(s) 324) Organization expenses (costs)   Costs such as legal fees and promoter fees to bring an entity into existence. Out-of-pocket cost   Cost incurred or avoided as a result of management's decisions. Output devices   Means by which information is taken out of the accounting system and made available for use. (See page(s) Web Appendix E) Outsourcing   Manager decision to buy a product or service from another entity; part of a make-or-buy decision; also called make or buy. Outstanding checks   Checks written and recorded by the depositor but not yet paid by the bank at the bank statement date. (See page(s) 253) Outstanding stock   Corporation's stock held by its shareholders. Owner, capital   Account showing the owner's claim on company assets; equals owner investments plus net income (or less net losses) minus owner withdrawals since the company's inception; also referred to as equity. Owner investment   Assets put into the business by the owner. Owner's equity   (See equity.) Owner withdrawals   (See withdrawals.) Paid-in capital   (See contributed capital.) Paid-in capital in excess of par value   Amount received from issuance of stock that is in excess of the stock's par value. Par value   Value assigned a share of stock by the corporate charter when the stock is authorized. Par value of a bond   Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond. Par value stock   Class of stock assigned a par value by the corporate charter. Parent   Company that owns a controlling interest in a corporation (requires more than 50% of voting stock). (See page(s) C-•) Participating preferred stock   Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock. Partner return on equity   Partner net income divided by average partner equity for the period. (See page(s) Web Appendix D) Partnership   Unincorporated association of two or more persons to pursue a business for profit as co-owners. (See page(s) 10) Partnership contract   Agreement among partners that sets terms under which the affairs of the partnership are conducted; also called articles of partnership. (See page(s) Web Appendix D) Partnership liquidation   Dissolution of a partnership by (1) selling noncash assets and allocating any gain or loss according to partners' income-and-loss ratio, (2) paying liabilities, and (3) distributing any remaining cash according to partners' capital balances. (See page(s) Web Appendix D) Patent   Exclusive right granted to its owner to produce and sell an item or to use a process for 17 years. (See page(s) 330) Payee of the note   Entity to whom a note is made payable. (See page(s) 290) Payroll bank account   Bank account used solely for paying employees; each pay period an amount equal to the total employees' net pay is deposited in it and the payroll checks are drawn on it. Payroll deductions   Amounts withheld from an employee's gross pay; also called withholdings. Payroll register   Record for a pay period that shows the pay period dates, regular and overtime hours worked, gross pay, net pay, and deductions. Pension plan   Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred. Period costs   Expenditures identified more with a time period than with finished products costs; includes selling and general administrative expenses. Periodic inventory system   Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available. (See page(s) 152) Permanent accounts   Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called real accounts. (See page(s) 106) Perpetual inventory system   Method that maintains continuous records of the cost of inventory available and the cost of goods sold. Petty cash   Small amount of cash in a fund to pay minor expenses; accounted for using an imprest system. (See page(s) 247) Planning   Process of setting goals and preparing to achieve them. Plant assets   Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets. (See page(s) 97 & 314) Pledged assets to secured liabilities   Ratio of the book value of a company's pledged assets to the book value of its secured liabilities. Post-closing trial balance   List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted. (See page(s) 109) Posting   Process of transferring journal entry information to the ledger; computerized systems automate this process. (See page(s) 54) Posting reference (PR) column   A column in journals in which individual ledger account numbers are entered when entries are posted to those ledger accounts. (See page(s) 56) Preemptive right   Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued. Preferred stock   Stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets. Premium on bonds   Difference between a bond's par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium. Premium on stock   (See contributed capital in excess of par value.) Prepaid expenses   Items paid for in advance of receiving their benefits; classified as assets. (See page(s) 95) Price-earnings (PE) ratio   Ratio of a company's current market value per share to its earnings per share; also called price-to-earnings. Price variance   Difference between actual and budgeted revenue or cost caused by the difference between the actual price per unit and the budgeted price per unit. Principal of a note   Amount that the signer of a note agrees to pay back when it matures, not including interest. (See page(s) 290) Principles of internal control   Principles prescribing management to establish responsibility, maintain records, insure assets, separate recordkeeping from custody of assets, divide responsibility for related transactions, apply technological controls, and perform reviews. (See page(s) 239) Prior period adjustment   Correction of an error in a prior year that is reported in the statement of retained earnings (or statement of stockholders' equity) net of any income tax effects. Pro forma financial statements   Statements that show the effects of proposed transactions and events as if they had occurred. (See page(s) 112) Product costs   Costs that are capitalized as inventory because they produce benefits expected to have future value; include direct materials, direct labor, and overhead. Production budget   Plan that shows the units to be produced each period. Profit   (See net income.) Profit center   Business unit that incurs costs and generates revenues. Profit margin   Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin. (See page(s) 113) Profitability   Company's ability to generate an adequate return on invested capital. Promissory note (or note)   Written promise to pay a specified amount either on demand or at a definite future date; is a note receivable for the lender but a note payable for the lendee. (See page(s) 290) Proprietorship   (See sole proprietorship.) (See page(s) 10) Proxy   Legal document giving a stockholder's agent the power to exercise the stockholder's voting rights. Purchase discount   Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period. (See page(s) 153) Purchase order   Document used by the purchasing department to place an order with a seller (vendor). (See page(s) 259) Purchase requisition   Document listing merchandise needed by a department and requesting it be purchased. (See page(s) 259) Purchases journal   Journal normally used to record all purchases on credit. (See page(s) Web Appendix E) Ratio analysis   Determination of key relations between financial statement items as reflected in numerical measures. Raw materials inventory   Goods a company acquires to use in making products. Realizable value   Expected proceeds from converting an asset into cash. (See page(s) 285) Receiving report   Form used to report that ordered goods are received and to describe their quantity and condition. (See page(s) 260) Recordkeeping   Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping. (See page(s) 4) Registered bonds   Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners. Relevance principle   Information system principle prescribing that its reports be useful, understandable, timely, and pertinent for decision making. (See page(s) Web Appendix E) Relevant benefits   Additional or incremental revenue generated by selecting a particular course of action over another. Relevant range of operations   Company's normal operating range; excludes extremely high and low volumes not likely to occur. Report form balance sheet   Balance sheet that lists accounts vertically in the order of assets, liabilities, and equity. Responsibility accounting budget   Report of expected costs and expenses under a manager's control. Responsibility accounting system   System that provides information that management can use to evaluate the performance of a department's manager. Restricted retained earnings   Retained earnings not available for dividends because of legal or contractual limitations. Retail inventory method   Method to estimate ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail. (See page(s) Web Appendix 5B) Retailer   Intermediary that buys products from manufacturers or wholesalers and sells them to consumers. (See page(s) 150) Retained earnings   Cumulative income less cumulative losses and dividends. (See page(s) 13 & •••) Retained earnings deficit   Debit (abnormal) balance in Retained Earnings; occurs when cumulative losses and dividends exceed cumulative income; also called accumulated deficit. Return   Monies received from an investment; often in percent form. (See page(s) 23) Return on assets   (See return on total assets) (See page(s) 20) Return on equity   Ratio of net income to average equity for the period. Return on total assets   Ratio reflecting operating efficiency; defined as net income divided by average total assets for the period; also called return on assets or return on investment. (See page(s) C-••) Revenue expenditures   Expenditures reported on the current income statement as an expense because they do not provide benefits in future periods. (See page(s) 324) Revenue recognition principle   The principle prescribing that revenue is recognized when earned. (See page(s) 10) Revenues   Gross increase in equity from a company's business activities that earn income; also called sales. (See page(s) 13) Reverse stock split   Occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share. Reversing entries   Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period. Risk   Uncertainty about an expected return. (See page(s) 24) Rolling budget   New set of budgets a firm adds for the next period (with revisions) to replace the ones that have lapsed. S corporation   Corporation that meets special tax qualifications so as to be treated like a partnership for income tax purposes. (See page(s) Web Appendix D) Safety stock   Quantity of inventory or materials over the minimum needed to satisfy budgeted demand. Sales   (See revenues.) Sales budget   Plan showing the units of goods to be sold or services to be provided; the starting point in the budgeting process for most departments. Sales discount   Term used by a seller to describe a cash discount granted to buyers who pay within the discount period. (See page(s) 153) Sales journal   Journal normally used to record sales of goods on credit. (See page(s) Web Appendix E) Sales mix   Ratio of sales volumes for the various products sold by a company. Salvage value   Estimate of amount to be recovered at the end of an asset's useful life; also called residual value or scrap value. (See page(s) 317) Sarbanes–Oxley Act (SOX)   Created the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws. (See page(s) 238) Schedule of accounts payable   List of the balances of all accounts in the accounts payable ledger and their total. (See page(s) Web Appendix E) Schedule of accounts receivable   List of the balances for all accounts in the accounts receivable ledger and their total. (See page(s) Web Appendix E) Secured bonds   Bonds that have specific assets of the issuer pledged as collateral. Securities and Exchange Commission (SEC)   Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public. (See page(s) 9) Segment return on assets   Segment operating income divided by segment average (identifiable) assets for the period. (See page(s) Web Appendix E) Selling expense budget   Plan that lists the types and amounts of selling expenses expected in the budget period. Selling expenses   Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers. (See page(s) 163) Serial bonds   Bonds consisting of separate amounts that mature at different dates. Service company   Organization that provides services instead of tangible products. Shareholders   Owners of a corporation; also called stockholders. (See page(s) 11) Shares   Equity of a corporation divided into ownership units; also called stock. (See page(s) 11) Short-term investments   Debt and equity securities that management expects to convert to cash within the next 3 to 12 months (or the operating cycle if longer); also called temporary investments or marketable securities. (See page(s) C-•) Short-term note payable   Current obligation in the form of a written promissory note. Shrinkage   Inventory losses that occur as a result of theft or deterioration. (See page(s) 160) Signature card   Includes the signatures of each person authorized to sign checks on the bank account. (See page(s) 250) Simple capital structure   Capital structure that consists of only common stock and nonconvertible preferred stock; consists of no dilutive securities. Single-step income statement   Income statement format that includes cost of goods sold as an expense and shows only one subtotal for total expenses. (See page(s) 164) Sinking fund bonds   Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account. Small stock dividend   Stock dividend that is 25% or less of a corporation's previously outstanding shares. Social responsibility   Being accountable for the impact that one's actions might have on society. Sole proprietorship   Business owned by one person that is not organized as a corporation; also called proprietorship. (See page(s) 10) Solvency   Company's long-run financial viability and its ability to cover long term obligations. Source documents   Source of information for accounting entries that can be in either paper or electronic form; also called business papers. (See page(s) 48) Special journal   Any journal used for recording and posting transactions of a similar type. (See page(s) Web Appendix E) Specific identification   Method to assign cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of inventory. (See page(s) 199) Spreadsheet   Computer program that organizes data by means of formulas and format; also called electronic work sheet. Standard costs   Costs that should be incurred under normal conditions to produce a product or component or to perform a service. State Unemployment Taxes (SUTA)   State payroll taxes on employers to support its unemployment programs. Stated value stock   No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued. Statement of cash flows   A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing. (See page(s) 18 & •••) Statement of owner's equity   Report of changes in equity over a period; adjusted for increases (owner investment and net income) and for decreases (withdrawals and net loss). Statement of partners' equity   Financial statement that shows total capital balances at the beginning of the period, any additional investment by partners, the income or loss of the period, the partners' withdrawals, and the partners' ending capital balances; also called statement of partners' capital. (See page(s) Web Appendix D) Statement of retained earnings   Report of changes in retained earnings over a period; adjusted for increases (net income), for decreases (dividends and net loss), and for any prior period adjustment. (See page(s) 17) Statement of stockholders' equity   Financial statement that lists the beginning and ending balances of each major equity account and describes all changes in those accounts. Statements of Financial Accounting Standards (SFAS)   FASB publications that establish U.S. GAAP. Stock   (See shares.) (See page(s) 11) Stock dividend   Corporation's distribution of its own stock to its stockholders without the receipt of any payment. Stock options   Rights to purchase common stock at a fixed price over a specified period of time. Stock split   Occurs when a corporation calls in its stock and replaces each share with more than one new share; decreases both the market value per share and any par or stated value per share. Stock subscription   Investor's contractual commitment to purchase unissued shares at future dates and prices. Stockholders   (See shareholders.) (See page(s) 11) Stockholders' equity   A corporation's equity; also called shareholders' equity or corporate capital. Straight-line depreciation   Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life. (See page(s) 97 & 318) Straight-line bond amortization   Method allocating an equal amount of bond interest expense to each period of the bond life. Subsidiary   Entity controlled by another entity (parent) in which the parent owns more than 50% of the subsidiary's voting stock. (See page(s) C-•) Subsidiary ledger   List of individual sub-accounts and amounts with a common characteristic; linked to a controlling account in the general ledger. (See page(s) Web Appendix E) Sunk cost   Cost already incurred and cannot be avoided or changed. Supplementary records   Information outside the usual accounting records; also called supplemental records. (See page(s) 156) Supply chain   Linkages of services or goods extending from suppliers, to the company itself, and on to customers. T-account   Tool used to show the effects of transactions and events on individual accounts. (See page(s) 53) Target cost   Maximum allowable cost for a product or service; defined as expected selling price less the desired profit. Temporary accounts   Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called nominal accounts. (See page(s) 106) Term bonds   Bonds scheduled for payment (maturity) at a single specified date. Time period assumption   Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years. (See page(s) 10, 92) Time ticket   Source document used to report the time an employee spent working on a job or on overhead activities and then to determine the amount of direct labor to charge to the job or the amount of indirect labor to charge to overhead. Times interest earned   Ratio of income before interest expense (and any income taxes) divided by interest expense; reflects risk of covering interest commitments when income varies. Total asset turnover   Measure of a company's ability to use its assets to generate sales; computed by dividing net sales by average total assets. (See page(s) 332) Total quality management (TQM)   Concept calling for all managers and employees at all stages of operations to strive toward higher standards and reduce number of defects. Trade discount   Reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers. (See page(s) 152) Trademark or Trade (Brand) name   Symbol, name, phrase, or jingle identified with a company, product, or service. (See page(s) 330) Trading on the equity   (See financial leverage.) Trading securities   Investments in debt and equity securities that the company intends to actively trade for profit. (See page(s) C-•) Transaction   Exchange of economic consideration affecting an entity's financial position that can be reliably measured. Treasury stock   Corporation's own stock that it reacquired and still holds. Trial balance   List of accounts and their balances at a point in time; total debit balances equal total credit balances. Unadjusted trial balance   List of accounts and balances prepared before accounting adjustments are recorded and posted. (See page(s) 103) Unavoidable expense   Expense (or cost) that is not relevant for business decisions; an expense that would continue even if a department, product, or service is eliminated. Unclassified balance sheet   Balance sheet that broadly groups assets, liabilities, and equity accounts. (See page(s) 110) Uncontrollable costs   Costs that a manager does not have the power to determine or strongly influence. Unearned revenue   Liability created when customers pay in advance for products or services; earned when the products or services are later delivered. (See page(s) 50 & 98) Unfavorable variance   Difference in revenues or costs, when the actual amount is compared to the budgeted amount, that contributes to a lower income. Unit contribution margin   Amount a product's unit selling price exceeds its total unit variable cost. Units-of-production depreciation   Method that charges a varying amount to depreciation expense for each period of an asset's useful life depending on its usage. (See page(s) 319) Unlimited liability   Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares. (See page(s) Web Appendix D) Unrealized gain (loss)   Gain (loss) not yet realized by an actual transaction or event such as a sale. (See page(s) C-•) Unsecured bonds   Bonds backed only by the issuer's credit standing; almost always riskier than secured bonds; also called debentures. Unusual gain or loss   Gain or loss that is abnormal or unrelated to the company's ordinary activities and environment. Useful life   Length of time an asset will be productively used in the operations of a business; also called service life. (See page(s) 317) Value chain   Sequential activities that add value to an entity's products or services; includes design, production, marketing, distribution, and service. Variable cost   Cost that changes in proportion to changes in the activity output volume. Variance analysis   Process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences. Vendee   Buyer of goods or services. (See page(s) 259) Vendor   Seller of goods or services. (See page(s) 259) Vertical analysis   Evaluation of each financial statement item or group of items in terms of a specific base amount. Voucher   Internal file used to store documents and information to control cash disbursements and to ensure that a transaction is properly authorized and recorded. (See page(s) 246) Voucher register   Journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved. (See page(s) 261) Voucher system   Procedures and approvals designed to control cash disbursements and acceptance of obligations. (See page(s) 246) Wage bracket withholding table   Table of the amounts of income tax withheld from employees' wages. Warranty   Agreement that obligates the seller to correct or replace a product or service when it fails to perform properly within a specified period. Weighted average   Method to assign inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that sale. (See page(s) 202, 217) Weighted average method   (See weighted average.) Wholesaler   Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. (See page(s) 150) Withdrawals   Payment of cash or other assets from a proprietorship or partnership to its owner or owners. Work sheet   Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements. (See page(s) 119) Working capital   Current assets minus current liabilities at a point in time. Working papers   Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements. (See page(s) 119)
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