Accounting Glossary

ACCOUNTS:  Elements that have been divided into sub-classifications.

ACCOUNTING:  An information system that reports on the economic activities and financial condition of a business or other organization.

ACCOUNTING EQUATION:  The assets of a business and the creditor and investor claims on those assets.

ACCOUNTING EVENT:  An economic occurrence that changes an enterprise's assets, liabilities, or stockholder's equity.

ACCOUNTING PERIOD:  Income measured for a span of time.

ANNUAL REPORT:  Information normally provided, including financial statements, to stakeholders yearly.

ARTICULATION:  Interrelationships among the various elements of the financial statements.

ASSET SOURCE TRANSACTION:  Increases the business's assets (cash) and its stockholders' equity (common stock).

BALANCE SHEET:  draws its name for the accounting equation.  Total assets balance with (equals) claims (liabilities and stockholder's equity) on those assets.

CLAIMS:  Creditor claims are called liabilities and investor claims are called equity.

CODE OF PROFESSIONAL CONDUCT:  The importance of ethical conduct is universally recognized by accountants.  All the major professional accounting organizations require their members to follow formal codes of ethical conduct.

COMMON STOCK:  Certificates as receipts to acknowledge assets received from owners.

CREDITORS:  Lend financial resources to businesses.

DIVIDEND:  Businesses transfers some or all of its earned assets to owners. 

DOUBLE-ENTRY BOOKKEEPING:  All transactions affect the accounting equation in at least two places.

EARNINGS:  Net income, net earnings, or net profit.

ELEMENTS:  The information reported in financial statements organized into ten categories.

EQUITY:  Investors claims.

EXPENSES:  The assets and services consumed to generate revenue.

FINANCIAL ACCOUNTING:   The four financial statements described above are designed to meet the needs of stakeholders that exist outside of and separate from the business entity.  These stakeholders include investors, creditors, lawyers, financial analysts, news reporters, and others.  The branch of accounting that focuses on the needs of external stakeholders.

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB):  The primary authority for establishing accounting standards. 

FINANCIAL STATEMENTS:  Information reported that is organized into ten categories.

FINANCING ACTIVITIES:  Obtaining cash (inflow) from owners or paying cash (outflow) to owners (dividends).  Also include borrowing cash (inflow) from creditors and repaying the principal (outflow) to creditors.

GENERAL LEDGER:  The complete collection of a company's accounts.

GENERALLY ACCEPTED ACCOUNTING PRINCIPALS (GAAP):  The measurement rules established by the FASB.

HISTORICAL COST CONCEPT:   Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value.

HORIZONTAL STATEMENTS VALUE:  Help understand how business events affect financial statements.

INCOME:  The difference between the assets used and the assets produced.

INCOME STATEMENT:  Matches asset increases from operating a business with asset decreases from operating the business.

INTEREST:  A fixed amount of money received by creditors in exchange for business people borrowing funds.

INTERNAL CONTROLS:  Policies and procedures designed to reduce opportunities for fraud.

INVESTING ACTIVITIES:  Involve paying cash (outflow) to purchase productive assets.

INVESTORS:  Provide financial resources in exchange for ownership interests in businesses.

LIABILITIES:  Creditors claims.

LIQUIDATION:  If a business ceases to operate, its remaining assets are sold and the sale proceeds are returned to the investors and creditors.

LIQUIDITY:  Assets are displayed in the balance sheet based on their level of liquidity.  This means that assets are listed in order of how rapidly they will be converted into cash.

MANAGERIAL ACCOUNTING:  The accounting information designed to meet the needs of internal stakeholders such as managers and employees.

NET INCOME:  The result when revenues are greater than expenses.

NET LOSS:  The result when expenses exceed revenues.

OPERATING ACTIVITIES:  Involves paying cash (outflow) from selling productive assets or receiving cash (inflow) from selling productive assets.

PRODUCTIVE ASSETS:  sometimes called long-term assets because businesses normally use them for more than one year.

RELIABILITY CONCEPT:  Information is reliable if it can be independently verified.

REPORTING ENTITIES:  Accounting reports are prepared for particular individuals or organizations.

RETAINED EARNINGS:  The portion of the earned assets that is kept in the businesses.

REVENUE:  Represents an economic benefit a company obtains by providing customers with goods and services.

STAKEHOLDERS:  The individuals and organizations that need information about a business.

STATEMENT OF CASH FLOWS:  How a company obtained and used cash during the accounting period.

STATEMENT OF CHANGES IN STAKEHOLDER'S EQUITY:  Explains the effects of transactions on stockholder's equity during the accounting period.

STOCKHOLDERS:  The owners of a business.

STOCKHOLDER'S EQUITY:  Ownership interest in the business.

TRANSACTION:  A particular kind of event that involves transferring something of value between two entities.

ACCOUNTING CYCLE:  The end of one time period marks the beginning of the next time period.  Each time period typically lasts one year.

ACCOUNTS RECEIVABLE:  The balance in Accounts Receivable represents the amount of cash the company expects to collect in the future.

ACCRUAL:  describes an earnings event that is recognized before cash is exchanged.

ACCRUAL ACCOUNTING:  Recognizes revenues and expenses in the period in which they occur, regardless of when cash is collected or paid.

ACCRUED EXPENSES:  Expenses that are recognized before they are paid.

ADJUSTING ENTRY:  The entry to recognize an accrued expense.

ASSET EXCHANGE TRANSACTION:  When one asset account increases and another asset account decreases.

ASSET SOURCE TRANSACTION:  When an asset increases a company's assets and its equity.

ASSET USE TRANSACTION:  When an asset account and the equity account decrease.

CLAIMS EXCHANGE TRANSACTION:  The claims of creditors (liabilities) increase and the claims of stockholders (retained earnings) decrease.

CLOSING:  Moving the revenue, expense, and dividend account balances to retained earnings closing the books.

CLOSING THE BOOKS:  See closing.

CONSERVATISM:  Guides accountants to select the alternative that produces the lowest amount of net income.

COST:  In accounting, might be either an asset or an expense.  If a company has already consumed a purchased resource in the process of earning revenue, the cost of the resource is an expense.  On the other hand, if a company purchases a resource it will use in the future to generate revenue, the cost of the resource represents an asset.

DEFERRAL:  Describes an earnings event that is recognized after cash has been exchanged.

EXPENSE:  A decrease in assets or an increase in liabilities resulting from operating activities undertaken to generate revenue.

MATCHING CONCEPT:  A primary goal of accrual accounting is to appropriately match expenses with revenues.

PERIOD COSTS:  Expenses that are matched with the period in which they are incurred.

PERMANENT ACCOUNTS:  Balance sheet accounts that carry forward at the end of the month.

PREPAID ITEMS:  Deferred expense recognition.

PRICE-EARNING RATIO:  Frequently called the P/E ratio, is the most commonly reported measure of a company's value.

REALIZATION:  Refers to collecting money, generally from the sale of products or services.

RECOGNITION:  Formally reporting an economic item or event in the financial statements.

REVENUE:  An increase in assets or a decrease in liabilities that a company obtains by providing customers with goods or services.

SALARIES PAYABLE:  Represents the amount of cash the company is obligated to pay its employees.

TEMPORARY ACCOUNTS:  Revenue, expense, and dividend accounts that are used to capture accounting information for a single accounting cycle.

UNEARNED REVENUE:  Recognizing any revenue until the company performs work or services in the future.

VERTICAL STATEMENTS MODEL:  Financial statements used to obtained helpful insights by analyzing company trends over multiple accounting cycles.

ALLOWANCES:  Goods dissatisfied buyers agree to keep instead of returning if the seller offers to reduce the price.

CASH DISCOUNT:  The expression 2/10, n/30 (two-ten, net thirty) means seller will allow a 2 percent cash discount if the purchaser pays cash for the merchandise within 10 days from the date of purchase.  If the purchaser pays later than 10 days from the purchase date, the full amount is due within 30 days.

COMMON SIZE FINANCIAL STATEMENTS:  To more easily compare between accounting periods or between companies, analysts prepare common size financial statements by converting absolute dollar amounts to percentages.

COST OF GOODS AVAILABLE FOR SALE:  Is allocated between the asset account Merchandise Inventory and an expense account called Cost of Goods Sold.

COST OF GOODS SOLD:  The cost of inventory items that have not been sold (Merchandise Inventory) is reported as an asset on the balance sheet, and the cost of the items sold (Cost of Goods Sold) is expensed on the income statement.

FOB (Free on Board) Destination:  If goods are delivered FOB destination, the seller is responsible for transportation costs.

FOB (Free on Board) Shipping Point:  If goods are delivered FOB shipping point, the buyer is responsible for the freight cost.

GAIN:  Indicates profit resulting from an incidental transaction not likely to regularly recur.

GROSS MARGIN:  The difference between the sales revenue and the cost of goods sold.

GROSS MARGIN PERCENTAGE:  Defined as Gross margin/Net Sales.

GROSS PROFIT:  see GROSS MARGIN.

LOSS:  Selling an asset for less than cost the expense that indicates it did not result from normal, recurring operating activities.

MERCHANDISING INVENTORY:  The goods purchased for resale.

MERCHANDISING BUSINESS:  generate revenue by selling goods.

MULTISTEP INCOME STATEMENT:  An income statement that separates routine operating results from non-operating results, which enables analysts to distinguish between recurring revenues and expenses and those related to peripheral transactions, such as gains and losses, interest revenue, and interest expense.

NET INCOME PERCENTAGE:  (Sometimes called return on sales) is determined as Net income/Net sales.  This is a percentage of sales that provides insight as to how much of each sales dollar is left as net income after all expenses are paid.

NET METHOD:  The inventory purchase increases both assets (merchandise inventory) and liabilities (accounts payable) on the balance sheet.

NET SALES:  Total sales minus sales returns, sales allowances, and sales discounts.

OPERATING INCOME (OR LOSS):  Income statements that show additional relationships.

OPPORTUNITY COST:  If the owner's money is used, it cannot be invested elsewhere, such as in an interest-earning savings account.  It is effectively a financing cost that is just as real as actual payment of interest expense.

PERIOD COSTS:  Selling and administrative costs that are usually recognized as expenses in the period in which they are incurred.

PERIODIC INVENTORY SYSTEM:  Offers a practical solution for recording inventory transactions in a low-technology, high-volume environment.

PERPETUAL INVENTORY SYSTEM:  Inventory records where the inventory accounts are adjusted perpetually (continually) throughout the accounting period.

PRODUCT COSTS:  Inventory items that are referred to as products:  price of goods purchased, shipping and handling costs, transit insurance, and storage costs.

PURCHASE DISCOUNT:  An additional charge if a company will incur if it chooses to delay payment.

RETAIL COMPANIES:  Companies that sell goods to the final consumer.

RETURN ON SALES:  See Net Income Percentage.

SALES DISCOUNTS:  Price reductions offered by sellers to encourage buyers to pay promptly.

SCHEDULE OF COSTS OF GOODS SOLD:  Is used for internal reporting purposes.  It is normally not shown in published financial statements. 

SELLING AND ADMINISTRATIVE COSTS:  Costs that is not included in inventory.

SHRINKAGE:  Decreases in inventory for reasons other than sales to customers.

SINGLE-STEP INCOME STATEMENT:  Income statements that display a single comparison of total revenues and total expenses.

TRANSPORTATION-IN (Freight In):  Freight cost when the buyer is responsible for shipping costs.

TRANSPORTATION-OUT (Freight Out):  Freight cost when the seller is responsible for shipping costs.

2/10, n/30:  See Cash Discount.

WHOLESALE COMPANIES:  Companies that sell to other businesses.

ACCOUNTING CONTROLS:  Designed to safeguard company assets and ensure reliable accounting records.

ADMINISTRATIVE CONTROLS:  Concerned with evaluating performance and assessing the degree of compliance with company policies and public laws.

AUTHORITY MANUAL:  Establishes a definitive chain of command.  Should guide both specific and general authorization.

AVERAGE NUMBER OF DAYS TO SELL INVENTORY (ALSO CALLED THE AVERAGE DAYS IN INVENTORY):  365/Inventory turnover.

BANK RECONCILIATION:  Explains the differences between the cash balance reported on the bank statement and the cash balance recorded in the depositor's accounting records.

BANK STATEMENT:  Presented from the bank's point of view.  Checking accounts are liabilities to a bank because the bank is obligated to pay back the money that customers have deposited in their accounts.

BANK STATEMENT CREDIT MEMO:  Describe activities that increase the customer's account balance (the bank's liability).

BANK STATEMENT DEBIT MEMO:  Describe transactions that reduce the customer's account balance (the bank's liability).

CASH:  Generally includes currency and other items that are payable on demand, such as checks, money orders, bank drafts, and certain savings accounts.

CERTIFIED CHECK:  guaranteed for payment by a bank.

CHECKS:  Multi-copy, pre-numbered forms, with the name of the issuing business or individual preprinted on the face of each check.

CONSISTENCY:  Generally requires that companies use the same cost flow method each period.

DEPOSIT TICKET:  Normally identifies the account number and the name of the account.

DEPOSITS IN TRANSITS:  Deposits in the bank's night depository or made the day following the receipt of cash.

FIDELITY BOND:  Provides insurance that protects a company from losses caused by employee dishonesty.

FIRST-IN, FIRST-OUT (FIFO) COST FLOW METHOD:  Requires that the cost of the items purchased first be assigned to cost of goods sold.

FULL DISCLOSURE:  Requires that financial statements disclose the cost flow method each period.

GENERAL AUTHORITY:  Applies across different levels of management. 

INVENTORY CONTROLS:  Policies and procedures used to provide reasonable assurance that the objectives of an enterprise will be accomplished.

INVENTORY COST FLOW METHODS:  Using only two cost layers ($100 and $110) with only one unit of inventory in each layer.  Actual businesses inventories are considerably more complex.  Most real-world inventories are composed of multiple cost layers with different quantities of inventory in each layer.  The underlying allocation concepts, however, remain unchanged.

INVENTORY TURNOVER:  Cost of goods sold/Inventory.

LAST-IN, FIRST-OUT (LIFO) COST FLOW METHOD:  Requires that the cost of the items purchased last be charged to cost of goods sold.

NON-SUFFICIENT FUNDS (NSF) CHECKS:  Checks that a company obtains from its customers and deposits in its checking account. 

OUTSTANDING CHECKS:  Disbursements that have been properly recorded as cash deductions on the depositor's books, but the bank has not deducted the amounts from the depositor's bank account because the checks have not yet been presented by the payee to the bank for payment; that is, the checks have not cleared the bank.

PHYSICAL FLOW OF GOODS:  Pertains to the flow of costs through the accounting records, not the actual physical flow of goods.

PROCEDURES MANUAL:  Manual where appropriated accounting procedures are documented, along with periodic reviews that are conducted to ensure that employees are following the procedures outlined in the manual.

SEPARATION OF DUTIES:  In the likelihood of fraud or theft, it is used as a deterrent to corruption

SERVICE CHARGES:  Banks frequently charge depositors fees for services performed, or a penalty if the depositor fails to maintain a specified minimum cash balance throughout the period.

SIGNATURE CARD:  Shows the bank account number and the signatures of the people authorized to sign checks.

SPECIFIC AUTHORIZATIONS:  Apply to specific positions within the organization.  For example, investment decisions are authorized at the division level while hiring decisions are authorized at the departmental level.

SPECIFIC IDENTIFICATION:  Cost of goods sold would be $100 if the first item purchased were sold or $110 if the second item purchased were sold.

TRUE CASH BALANCE:  The final total after adjustments are subtracted from the unadjusted bank balance.

UNADJUSTED BANK BALANCE:  A bank reconciliation normally begins with the cash balance reported by the bank.

UNADJUSTED BOOK BALANCE:  The true cash balance is independently reached a second time by making adjustments.

WEIGHTED-AVERAGE COST FLOW METHOD:  First calculate the average cost per unit by dividing the total cost of the inventory available by the total number of units available.

ACCOUNTS RECEIVABLE:  When a company allows a customer to "buy now and pay later," and the company has the right to collect cash in the future.

ACCOUNTS RECEIVABLE TURNOVER RATIO:  Sales/Accounts Receivable.

ACCRUED INTEREST:  The interest that lenders earn continually from loans to customers.

ADJUSTING ENTRY:  An entry that adjusts (updates) account balances prior to preparing financial statements.

AGING OF ACCOUNTS RECEIVABLE:  Classifies all receivables by their due dates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS:  Represents a company's estimate of the amount of uncollectible receivables.

ALLOWANCE METHOD OF ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS:  Reporting accounts receivable in the financial statements at net realizable value.

AVERAGE NUMBER OF DAYS TO COLLECT ACCOUNTS RECEIVABLE:  365/Accounts receivable turnover ratio.

COLLATERAL:  Assets belonging to the maker that are assigned as security to ensure that the principal and interest will be paid when due.

CONTRA ASSET ACCOUNT:  An account used to record decreases in the receivables account.

DIRECT WRITE-OFF METHOD:  A company recognizes uncollectible accounts expense in the period in which it identifies and writes off uncollectible accounts.

INTEREST:  The economic benefit earned by the payee for loaning the principal to the maker, normally expressed as an annual percentage of the principal amount.

LIQUIDITY:  Refers to how quickly assets are expected to be converted to cash during normal operations.

MAKER:  The person responsible for making payment on the due date.

MATCHING CONCEPT:  Revenue that is recognized (matched with) the period in which is earned regardless of when the related cash is collected.

MATURITY DATE:  The date on which the maker must repay the principal and make the financial interest payment to the payee.

NET REALIZABLE VALUE:  Represents the amount of receivables a company estimates it will actually collect.

NOTE RECEIVABLES:  Credit that is granted longer than 30 days and the seller requires the buyer to issue a note reflecting a credit agreement between the parties.

OPERATING CYCLE:  The average time it takes a business to convert inventory to accounts receivable plus the time it takes to convert accounts receivable into cash.

PAYEE:  The person to whom the note is made payable; also called the creditor or lender.

PERCENT OF RECEIVABLES METHOD:  As an alternative to the percent of revenue method, which focuses on estimating the expense of uncollectible accounts, companies may estimate the amount of the adjusting entry to record uncollectible accounts expense.

PRINCIPAL:  The amount of money loaned by the payee to the maker of the note.

PROMISSORY NOTE:  When a company extends credit for a long time or when the amount of credit it extends is large, both parties will enter into a credit agreement that is legally documented.

REINSTATE:  When a company receives payment from a customer whose account was previously written off; the customer's account would be reinstated and the cash received recorded the same way as any other collection on account.

UNCOLLECTIBLE ACCOUNTS EXPENSE:  Recognized in a year-end adjusting entry that reduces the book value of total assets, stockholder's equity (retained earnings), and the amount of reported net income.

ACCELERATED DEPRECIATION METHOD:  Since the double-declining-balance method recognizes depreciation expense more rapidly than the straight-line method does, it is recognized using double-declining-balance.

ACCUMULATED DEPRECIATION:  A contra asset account that recognizes depreciation expense as an asset use transaction that reduces the assets and equity.

AMORTIZATION:  Recognizing expense for intangible assets with identifiable useful lives.

BASKET PURCHASE:  Acquiring a group of assets in a single transaction.

BOOK VALUE:  Cost - accumulated depreciation.

CAPITAL EXPENDITURES:  Substantial amounts spent to improve the quality or extend the life of an asset.  They are accounted for in one of two ways, depending on whether the cost incurred improves the quality or extends the life of the asset.

CONTRA ASSET ACCOUNT:  Reducing an asset account when reporting on financial statements.

COPYRIGHT:  Protects writings, musical compositions, works of art, and other intellectual property for the exclusive benefit of the creator or persons assigned the right by the creator.

CURRENT ASSETS:  Assets, like inventory or office supplies, are called current assets because they are used relatively quickly (within a single accounting period.)

DEFERRED TAX LIABILITY:  The amount of tax delayed for future payment.

DEPLETION:  The term used to recognize expense for natural resources.

DEPRECIABLE COST:  The total amount of depreciation a company recognizes for an asset, it is the difference between its original cost and its salvage value.

DEPRECIATION:  The term used to recognize expense for property, plant, and equipment.

DEPRECIATION EXPENSE:  The amount of an asset's cost that is allocated to expense during an accounting period.

DOUBLE-DECLINING-BALANCE DEPRECIATION:  Produces a large amount of depreciation in the first year of an asset's life and progressively smaller levels of expense in each succeeding year.

ESTIMATED USEFUL LIFE:  The portion of the depreciable cost that represents its annual usage.

FRANCHISE:  Grant exclusive rights to sell products or perform services in certain geographic areas. 

GOODWILL:  Is the value attributable to favorable factors such as reputation, location, and superior products. 

HALF-YEAR CONVENTION:  Designed to simplify computing taxable income.  Instead of requiring taxpayers to calculate depreciation from the exact date of purchase to the exact date of disposal, the tax code requires one-half year's depreciation in the year of disposal.

HISTORICAL COST CONCEPT:  Requires that an asset be recorded at the amount paid for it.  This amount includes the purchase price plus any costs necessary to get the asset in the location and condition for its intended use. 

INTANGIBLE ASSETS:  Rights or privileges; they cannot be seen or touched, like patents.

LONG-TERM OPERATIONAL ASSETS:  Other assets, like equipment or buildings, are used for extended periods of time (two or more accounting periods.)

MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS):  The maximum depreciation currently allowed by tax law is computed using an acceleration depreciation method.  It specifies the useful life for designated categories of assets.

NATURAL RESOURCES:  Mineral deposits oil and gas reserves, timber stands, coal mines, and stone quarries; conceptually, they are inventories.  When sold, the cost of these assets is frequently expensed as cost of goods sold.

PATENT:  Grants its owner an exclusive legal right to produce and sell a product that has one or more unique features. 

PROPERTY, PLANT, AND EQUIPMENT:  Sometimes called plant assets or fixed assets, some examples are furniture, cash registers, machinery, delivery trucks, computers, mechanical robots, and buildings.

RELATIVE FAIR MARKET VALUE METHOD:  Method of assigning value to individual assets acquired in a basket purchase in which each asset is assigned a percentage of the total price paid for all assets.  The percentage assigned equals the market value of a particular asset divided by the total of the market values of all assets acquired in the basket purchase.

REVENUE EXPENDITURES:  Reducing net income when incurred, companies subtract repair and maintenance costs from revenue.

SALVAGE VALUE:  The expected market value of a fully depreciated asset.

STRAIGHT-LINE DEPRECIATION:  Produces equal amounts of depreciation expense each year.

TANGIBLE ASSETS:  Have a physical presence, they can be seen and touched; examples include equipment, machinery, natural resources, and land.

TRADEMARK:  A name or symbol that identifies a company or a product. 

UNITS-OF-PRODUCTION DEPRECIATION:  Accomplishes this goal by basing depreciation expense on actual asset usage.  The general formula for computing units-of-production depreciation: 

Cost - Salvage value/Total estimated units of production x Units of production in current year = Annual depreciation expense

AMORTIZATION:  Repaying a portion of the principal with regular payments that also include interest.

BOND CERTIFICATES:  A company's obligation to pay interest and to repay the principal.

BONDHOLDER:  The buyer of a bond, also called lender.

CLASSIFIED BALANCE SHEETS:  Balance sheets that distinguish between current and noncurrent items.

COLLATERAL:  To reduce risk that they won't get paid, lenders frequently require borrowers (debtors) to pledge designated assets for loans.

CURRENT (SHORT-TERM) ASSET:  Expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer.

CURRENT (SHORT-TERM) LIABILITIES:  Liabilities due within one year or an operating cycle, whichever is longer.

CURRENT RATIO:  The primary ratio used to evaluate liquidity--Current assets/Current liabilities.

DEBT TO ASSETS RATIO:  Reveals the percentage of a company's assets that is financed with borrowed money.  The higher the ratio, the greater the financial risk.  The debt to asset ratio is defined as:  Total debt/Total assets.

FACE VALUE:  The amount due at maturity of a bond.

FIXED INTEREST RATE:  Interest rates that remain constant during the term of a loan.

GENERAL UNCERTAINTIES:  All businesses face uncertainties such as competition and damage from floods or storms.  Such uncertainties are not contingent liabilities, however, because they do not arise from past events.

GOING CONCERN ASSUMPTION:  Unless there is evidence to the contrary, companies are assumed to be going concerns that will continue to operate.  Under this, companies expect to pay their obligations in full.

INSTALLMENT NOTES:  Loans that require payments of principal and interest at regular intervals (amortizing loans).

ISSUER:  The seller of a bond is the borrower.

LINE OF CREDIT:  Enables a company to borrow or repay funds as needed.

LIQUIDITY:  Describes the ability to generate sufficient short-term cash flows to pay obligations as they come due.

LONG-TERM LIABILITIES:  Long-term debt agreements vary with respect to requirements for paying interest charges and repaying principal (the amount borrowed).

NOTE PAYABLE:  a liability that results from executing a legal document called a promissory note which describes the interest rate, maturity date, collateral, and so on.

OPERATING CYCLE:  Defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash.

RESTRICTIVE COVENANTS:  In addition to requiring collateral, creditors often obtain additional protection in loan agreements.  Such covenants may restrict additional borrowing, limit dividend payments, or restrict salary increases.

SOLVENCY:  The ability to repay liabilities in the long run. 

STATED INTEREST RATE:  Bonds that require the issuer to make cash interest payments based on this at regular intervals over the life of a bond.

VARIABLE INTEREST RATE:  Interest rates that fluctuate up or down during the loan period.

WARRANTIES:  To attract customers, many customers guarantee their products or services, they extend for a specified period of time, the seller promises to replace or repair defective products without charge. 

APPROPRIATED RETAINED EARNINGS:  A retained earnings restriction, often called appropriation, is an equity exchange event.  It transfers a portion of existing retained earnings to Appropriated Retained Earnings.

ARTICLES OF INCORPORATION:  Include the following information:  (1) the corporation's name and proposed date of incorporation; (2) the purpose of the corporation; (3) the location of the business and its expected life (which can be perpetuity, meaning endless); (4) provisions for capital stock; and (5) the names and addresses of the members of the first board of directors, the individuals with the ultimate authority for operating the business. 

AUTHORIZED STOCK:  As part of the regulatory function, states approve the maximum number of shares of stock corporations are legally permitted to issue.

BOARD OF DIRECTORS:  Elected by the stockholders of a corporation, oversee company operations and hire professional executives to manage the company on a daily basis.

BOOK VALUE PER SHARE:  Calculated by dividing total stockholder's equity (assets - liabilities) by the number of shares of stock owned by investors.

CLOSELY HELD CORPORATIONS:  The exchanges (buying and selling of shares of stock, often called trading) that are limited to transactions between individuals.  Once a corporation reaches a certain size, it may list its stock on a stock exchange such as the New York Stock Exchange or the American Stock Exchange.

COMMON STOCK:  Common stockholders bear the highest risk of losing their investment if a company is forced to liquidate.  On the other hand, they reap the greatest rewards when a corporation prospers.  Common stockholders generally enjoy several rights including:  (1) the right to buy and sell stock, (2) the right to share in the distribution of profits, (3) the right to share in the distribution of corporate assets in the case of liquidation, (4) the right to vote on significant matters that affect the corporate charter, and (5) the right to participate in the election of directors.

CONTINUITY:  Unlike partnerships or proprietorships, which terminate with the departure of their owners, a corporation's life continues when a shareholder dies or sells his or her stock.  Because of continuity of existence, many corporations formed in the 1800's still thrive today.

CORPORATION:  Is a separate legal entity created by the authority of a state government. 

COST METHOD OF ACCOUNTING FOR TREASURY STOCK:  Recording the full amount paid in the treasury stock account; although other methods could be used, this method is the most common.

CUMULATIVE DIVIDENDS:  If a corporation is unable to pay the preferred dividend in any year, the dividend is not lost but begins to accumulate.

DATE OF RECORD:  Cash dividends are paid to investors who owned the preferred stock.

DECLARATION DATE:  Although corporations are not required to declare dividends, they are legally obligated to pay dividends once they have been declared.  They must recognize a liability on the declaration date.  The increase in liabilities is accompanied by a decrease in retained earnings.  The income statement and statement of cash flows are not affected.

DIVIDENDS IN ARREARS:  Cumulative dividends that have not been paid.  When a company pays dividends, any preferred stock arrearages must be paid before any other dividends are paid. 

DOUBLE TAXATION:  Corporations pay income taxes on their earnings and then owners pay income taxes on distributions (dividends) received from corporations.  As a result, distributed corporate profits are taxed twice--first when income is reported on the corporation's income tax return and a second time when distributions are reported on individual owner's tax returns.  This is a significant disadvantage of the corporate form of business organization.

ENTRENCHED MANAGEMENT:  While the management structure used by corporations is generally effective, it sometimes complicates dismissing incompetent managers.  The chief executive officer (CEO) is usually a member of the board of directors and is frequently influential in choosing other board members.  The CEO is also in a position to reward loyal board members.  As a result, board members may be reluctant to fire the CEO or other top executives even if the individuals are performing poorly.

EX-DIVIDEND:    Any stock sold after the date of record before the payment date is traded ex-dividend, meaning the buyer will not receive the upcoming dividend.  The date of record is merely the cutoff date.  It does not affect the financial statements.

ISSUED STOCK:  Authorized stock that has been sold to the public. 

LEGAL CAPITAL:  Par value multiplied by the number of shares of stock issued represents the minimum amount of assets that must be retained in the company as protection for creditors.  To ensure that the amount of legal capital is maintained in a corporation, many states require that purchasers pay at least the par value for a share of stock initially purchased from a corporation.  To minimize the amount of assets that owners must maintain in the business, many corporations issue stock with very low par values, often $1 or less.  Therefore, legal capital as defined by par value has come to have very little relevance to investors or creditors.  As a result, many states allow corporation to issue no-par stock.

LIMITED LIABILITY:  Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies.  In fact, partners are responsible not only for their own actions but also for those akin by any other partner on behalf of the partnership.  The benefit of limited liability is one of the most significant reasons the corporate form of business organizations is so popular.

LIMITED LIABILITY COMPANIES (LLC):  Double taxation can be a burden for small companies.  To reduce that burden, tax laws permit small closely held corporations to elect "S Corporation" status.  S Corporations are taxed as proprietorships or partnerships.  Also, many states have recently enacted laws permitting the formation of limited liability companies (LLC's) which offer many of the benefits of corporate ownership yet are in general taxed as partnerships.  Since proprietorships and partnerships are not separate legal entities, company earnings are taxable to the owners rather than the company itself.

MARKET VALUE:  The price an investor must pay to purchase a share of stock.

OUTSTANDING STOCK:  (Total issued stock minus treasury stock) is stock owned by investors outside the corporation.

PAID-IN-CAPITAL IN EXCESS OF PAR VALUE:  Any amount received above the par or stated value.

PARTNERSHIPS:  Allow persons to share their talents, capital, and the risks and rewards of business ownership.

PARTNERSHIP AGREEMENT:  Since two or more individuals share ownership, partnerships require clear agreements about how authority, risks, and profits will be shared.  Prudent partners minimize misunderstandings by hiring attorneys to prepare a partnership agreement which defines the responsibilities of each partner and describes how income or losses will be divided.

PAYMENT DATE:  The payment date has the same effect as paying any other liability.  Assets (cash) and liabilities (dividends payable) both decrease.  The income statement is not affected.  The cash outflow is reported in the financing activities section of the statement of cash flows. 

PREFERRED STOCK:  Holders of preferred stock receive certain privileges relative to holders of common stock.  In exchange for special privileges in some areas, preferred stockholders give up rights in other areas.  Preferred stockholders usually have no voting rights and the amount of their dividends is usually limited.  Preferences granted preferred stockholders include:  (1) Preference as to assets--preferred stock often has a liquidation value.  In case of bankruptcy, preferred stockholders must be paid the liquidation value before any assets are distributed to common stockholders, but still fall behind creditor claims; (2) Preference as to dividends--frequently guaranteed the right to receive dividends before common stockholders.  The amount of the preferred dividend is normally state on the stock certificate.  It may be stated as a dollar value (say, $5) per share or as a percentage of the par value.

SARBANES-OXLEY ACT OF 2002:  A number of high-profile business failures around the turn of the century raised questions about the effectiveness of self-regulation and the usefulness of audits to protect the public.  This act creates a five-member Public Company Accounting Oversight Board (PCAOB) with the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies.  The PCAOB is empowered to impose disciplinary and remedial sanctions for violations of its rules, securities laws, and professional auditing and accounting standards.  Public corporations operate in a complex regulatory environment that requires the services of attorneys and professional accountants.

SECURITIES ACT OF 1933 AND SECURITIES EXCHANGE ACT OF 1934:  The extensive regulation of trading on stock exchanges began in the 1930's.  The stock market crash of 1929 and the subsequent Great Depression led congress to pass the Securities Act of 1933 and the Securities Exchange Act of 1934 to regulate issuing stock and to govern the exchanges.  The 1934 act also created the Securities and Exchange Commission (SEC) to enforce the securities laws.  Congress gave the SEC legal authority to establish accounting principles for corporations that are registered on the exchanges.  However, the SEC has generally deferred its rule-making authority to private sector accounting bodies such as the Financial Accounting Standards Board (FASB), effectively allowing the accounting profession to regulate itself.

SOLE PROPRIETORSHIP:  Owned by a single individual who is responsible for making business and profit distribution decisions. 

STOCK CERTIFICATES:  Ownership interests in corporations.

STOCK DIVIDENDS:  Dividends are not always paid in cash.  Companies sometimes choose to issue stock dividends, wherein they distribute additional shares of stock to the stockholders.

STOCKHOLDERS:  The owners who represent the highest level of organizational authority.

STOCK SPLIT:  Replaces shares with a greater number of new shares.  Any par or stated value of the stock is proportionately reduced to reflect the new number of shares outstanding.

TRANSFERABILITY:  An investor simply buys or sells stock to acquire or give up an ownership interest in a corporation. 

TREASURY STOCK:  When a corporation buys back some of its issued stock from the public, however, it is still considered to be issued stock, but it is no longer outstanding.

WITHDRAWALS:  Distributions to the owners of proprietorships and partnerships.

ABSOLUTE AMOUNTS:  Of particular financial statements have many uses.  Various national economic statistics, such as gross domestic product and the amount spent to replace productive capacity are derived by combining absolute amounts reported by businesses. 

ACCOUNTS RECEIVABLE TURNOVER:  Net credit sales/Average accounts receivables.  Net credit sales refer to total sales on account less discounts, allowances, and returns.  When most sales are credit sales or when a breakdown of total sales between cash sales and credit sales is not available, the analyst must use total sales in the numerator.  The denominator is based on net accounts receivable (receivables after subtracting the allowance for doubtful accounts). 

ACID-TEST RATIO:  Sometimes called turnover of assets ratio, measures how many sales dollars were generated for each dollar of assets invested. 

AVERAGE NUMBER OF DAYS TO COLLECT RECEIVABLES:  365/Accounts receivable turnover.  This ratio offers another way to look at turnover by showing the number of days, on average; it takes to collect a receivable.

AVERAGE NUMBER OF DAYS TO SELL INVENTORY:  365/Inventory turnover.  The results approximate the number of days the firm could sell inventory without purchasing more. 

BOOK VALUE PER SHARE:  Stockholder's equity - Preferred rights/Outstanding common shares.  Instead of describing the numerator as stockholder's equity, we could have used assets minus liabilities, the algebraic computation of a company's "net worth."  Net worth is a misnomer.  A company's accounting records reflect book values, not worth.

CURRENT RATIO:  Also called working capital ratio, is calculated as follows:  Current assets/Current liabilities.  The current ratio is expressed as the number of dollars of current assets for each dollar of current liabilities.

DEBT TO ASSETS RATIO:  Measures the percentage of a company's assets that are financed by debt.  Debt to assets = Total liabilities/Total assets.

DEBT TO EQUITY RATIO:  Equity in this definition means stockholder's equity.  The debt to equity ratio compares creditor financing to owner financing.  It is expressed as the dollar amount of liabilities for each dollar of stockholder's equity.  Debt to equity = Total liabilities/Total stockholder's equity.

DIVIDEND YIELD:  Measures dividends received as a percentage of a stock's market price:  Dividend yield = Dividend per share/Market price per share.

EARNINGS PER SHARE:  Represents an attempt to express a company's annual earnings.  Earnings per share = Net earnings available for common stock/Average number of outstanding common shares.

HORIZONTAL ANALYSIS:  Also called trend analysis, refers to studying the behavior of individual financial statement items over several accounting periods.  These periods may be several quarters within the same fiscal year or they may be several different years.

INFORMATION OVERLOAD:  The problem of having so much data that important information becomes obscured by trivial information.  Users faced with reams of data may become so frustrated attempting to use it that they lose the value of key information that is provided.

INVENTORY TURNOVER:  See "Average number of days to sell inventory."

LIQUIDITY RATIOS:  Indicate a company's ability to pay short-term debts.  They focus on current assets and current liabilities.

MATERIALITY:  Refers to its relative importance.  An item is considered material if knowledge of it would influence the decision of a reasonably informed user.  Generally accepted accounting principles permit companies to account for immaterial items in the most convenient way, regardless of technical accounting rules.

NET MARGIN:  Sometimes called operating margin, profit margin, or the return on sales ratio, describes the percent remaining of each sales dollar after subtracting other expenses as well as cost of goods sold.  Net margin = Net income/Net sales.

PERCENTAGE ANALYSIS:  Involves computing the percentage relationship between two amounts.  In horizontal percentage analysis, a financial statement item is expressed as a percentage of the previous balance for the same item. 

PLANT ASSETS TO LONG-TERM LIABILITIES:  Suggest how well long-term debt is managed.  Plant assets to long-term liabilities = Net plant assets/Long-term liabilities.

PRICE-EARNINGS RATIO:  Compares the earnings per share of a company to the market price of the company's stock.  Price-earnings ratio = Market price per share/Earnings per share.

PROFITABILITY RATIOS:  Investors can also use a wide array of other ratios to analyze profitability.  Most use the same reasoning.  For example, you can calculate the yield of a variety of financial statements.  Yield represents the percentage the amount received is of the amount invested.  The dividend yield could be calculated for either common or preferred stock.  Investors could measure the earnings yield by calculating earnings per share as a percentage of market price.  Yield on a bond can be calculated the same way:  interest received/the price of the bond.

QUICK RATIO:  Also known as the acid-test ratio, is a conservative variation of the current ratio.  It measures a company's immediate debt-paying ability.  Only cash, receivables, and current marketable securities (quick assets) are included in the numerator.  Less liquid current assets, such as inventories and prepaid items, are omitted.  Quick ratio = Quick assets/Current liabilities.

RATIO ANALYSIS:  Involves studying various relationships between different items reported in a set of financial statements.

RETURN ON EQUITY (ROE):  Often used to measure the profitability of the stockholder's investment.  ROE is usually higher than ROI because of financial leverage.  Financial leverage refers to using debt financing to increase assets available to a business beyond the amount of assets financed by owners.  ROE = Net income/Average total stockholder's equity.

RETURN ON INVESTMENT (ROI):  Also called return on assets or earning power, is the ratio of wealth generated (net income) to the amount invested (average total assets) to generate the wealth.  ROI = Net income/Average total assets.

SOLVENCY RATIOS:  Used to analyze a company's long-term debt-paying ability and its financing structure.  Creditors are concerned with a company's ability to satisfy outstanding obligations. 

TIMES INTEREST EARNED:  Ratio measures the burden a company's interest payments represent.  Times interest earned = Earnings before interest expense and taxes/Interest expense.

TREND ANALYSIS:  See "Horizontal Analysis."

VERTICAL ANALYSIS:  Uses percentages to compare individual components of financial statements to a key statement figure; compares many items within the same time period.

WORKING CAPITAL:  Current assets minus current liabilities.  Current assets include assets most likely to be converted into cash or consumed in the current operating period.  Current liabilities represent debts that must be satisfied in the current period.  Measures the excess funds the company will have available for operations, excluding any new funds it generates during the year.  Think of working capital as the cushion against short-term debt-paying problems.

WORKING CAPITAL RATIO:  See "Current Ratio."

ACTIVITIES:  Represent the measures an organization takes to accomplish its goals.

ACTIVITY-BASED MANAGEMENT (ABM):  Assesses the value chain to create new or refine existing value-added activities and to eliminate or reduce non-value-added activities.

AVERAGE COST:  Accountants therefore normally calculate cost per unit as an average.  Unless otherwise stated, assume cost per unit means average cost per unit.

BENCHMARKING:  Involves identifying the best practices used by world-class competitors.

BEST PRACTICES:  By studying and mimicking these practices, a company uses benchmarking to implement highly effective and efficient operating methods.

CONTINUOUS IMPROVEMENT:  An ongoing process through which employees strive to eliminate waste, reduce response time, minimize defects, and simplify the design and delivery of products and services to customers.

COST ALLOCATION:   A process of dividing a total cost into parts and assigning the parts to relevant cost objects.

COST-PLUS PRICING:  Managers need to know the cost of their products for a variety of reasons, for example cost-plus pricing is a common business practice.

DIRECT LABOR:  Labor costs that can be easily and conveniently traced to products.

DIRECT RAW MATERIALS:  The costs of materials that can be easily and conveniently traced to products.

DOWNSTREAM COSTS:  Companies normally incur significant costs after the manufacturing process begins, like transportation, advertising, sales commissions and uncollectible accounts receivable.

FINANCIAL ACCOUNTING:  Is not designed to satisfy all the information needs of business managers.  Its scope is limited to the needs of external users such as investors and creditors.

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB):  Allows the accounting profession considerable influence over financial accounting reports.

FINISHED GOODS INVENTORY:  One asset (cash) decreases while another asset (tables) increases.  A company does not recognize any expense until the inventory is sold; in the meantime, the cost of inventory is held in an asset account called Finished Goods Inventory.

GENERAL, SELLING, AND ADMINISTRATIVE COSTS:  Are normally expensed in the period in which they are incurred.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):  Severely restricts the accounting procedures and practices permitted in published financial statements.

INDIRECT COSTS:  Costs that cannot be traced to products and services in a cost-effective manner.

INVENTORY HOLDING COSTS:  Financing, warehouse space, supervision, theft, damage, and obsolescence.  Other hidden costs--diminished motivation, sloppy work, inattentive attitudes, and increased production time.

JUST IN TIME (JIT):  Businesses that have been able to simultaneously reduce their inventory holding costs and increase customer satisfaction by making products available for consumer consumption.

MANAGERIAL ACCOUNTING:  Designed to meet the needs of internal users.

MANAFACTURING OVERHEAD:  The indirect costs incurred to make products.  Some of the items commonly included in manufacturing overhead are indirect materials, indirect labor, factory utilities, rent of manufacturing facilities, and depreciation on manufacturing assets.

MOST-FAVORED CUSTOMER STATUS:  Ensures priority treatment over other customers when shortages exist.  Assured priority delivery from a reliable supplier enables a company to minimize the amount of inventory it carries and thereby reduces inventory holding cost.

NONVALUE-ADDED ACTIVITIES:  Tasks undertaken that do not contribute to a product's ability to satisfy customer needs.

OPPORTUNITY COST:  Cost of lost opportunities such as the failure to make sales due to an insufficient supply of inventory or the wage a working student forgoes to attend class.

OVERHEAD:  The cost of making products includes the cost of materials, labor, and other resources.

PERIOD COSTS:  Nonproduction expenses incurred in the period in which they incurred.

PRODUCT COSTS:  A major focus for managerial accountants in determining product cost.

PRODUCT COSTING:  Used to control business operations.  Useful in answering such questions like:  Are costs higher or lower than expected?  Who is responsible for the variances between expected and actual costs?  What action can be taken to control the variances?

RAW MATERIALS:  Materials used to make products. 

REENGINEERING:  A key ingredient to the success that global competition has forced many companies to reengineer their production and delivery systems to eliminate waste, reduce errors, and minimize costs.

SARBANES-OXLEY ACT OF 2002:  Around the turn of the century, a number of high-profile business failures raised questions about the effectiveness of self-regulation and the usefulness of audits to protect the public.  This act was adopted to address these concerns.  It creates a five-member Public Company Accounting Oversight Board (PCAOB) with the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies.  The PCAOB is empowered to impose disciplinary and remedial sanctions for violations of its rules, securities laws, and professional auditing and accounting standards.

SECURITIES AND EXCHANGE COMMISSION (SEC):  Has the authority to regulate public financial reporting practices and delegates much of its authority for developing accounting rules to the private sector FASB.

TOTAL QUALITY MANAGEMENT (TQM):  A two-dimensional management philosophy using (1) a systematic problem-solving philosophy that encourages front-line workers to achieve zero defects and (2) an organizational commitment to achieving customer satisfaction.

UPSTREAM COSTS:  Occur before the manufacturing costs prior to manufacturing process begin, like:  research and development costs prior to mass producing a product or model.

VALUE-ADDED ACTIVITY:  A value-added activity is any unit of work that contributes to a product's ability to satisfy customer needs.

VALUE-ADDED PRINCIPLE:  Information not distributed to the public need not be regulated to protect the public interest.  Management accounting is restricted only by the value-added principle and management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost, like management accountants are free to provide forecasted information to internal users.

VALUE CHAIN:  The sequence of activities used to provide products.  The primary goal of all organizations is to provide products (goods and services) their customers value. 

ACTIVITY BASE:  Factor that causes changes in variable cost; is usually some measure of volume when used to define cost behavior.

BREAK-EVEN POINT:  The point where total revenue equals total costs. 

CONTRIBUTION MARGIN:  Represents the amount available to cover fixed expenses and thereafter to provide company profits.

CONTRIBUTION MARGIN PER UNIT:  The contribution margin per unit is equal to the sales price per unit minus the variable cost per unit.

COST-PLUS PRICING:  Pricing strategy that set the price at cost plus a markup equal to a percentage of the cost.

COST BEHAVIOR:  (Fixed versus variable) can significantly impact profitability.

FIXED COST:  Cost that in total remains constant when activity volume changes; varies per unit inversely with changes in the volume of activity.

MARGIN OF SAFETY:  Measures the cushion between budgeted sales and the break-even point.  It quantifies the amount by which actual sales can fall short of expectations before the company will begin to incur losses.

MIXED COSTS (SEMIVARIABLE COSTS):  Costs composed of a mixture of fixed and variable components.

OPERATING LEVERAGE:  Operating condition in which a percentage change in revenue produces a proportionately larger percentage change in net income; measured by dividing the contribution margin by net income.  The higher the proportion of fixed cost to total costs, the greater the operating leverage.

RELEVANT RANGE:  Descriptions of cost behavior pertain to a specified range of activity.  The range of activity over which the definitions of fixed and variable costs are valid.

VARIABLE COST:  Cost that in total changes in direct proportion to changes in volume of activity; remains constant per unit when volume of activity changes.

ALLOCATION BASE:  Cost driver used as the basis for the allocation process.

ALLOCATION RATE:  Total cost to be allocated/Cost driver (allocation base) = Allocation rate.

COST ACCUMULATION:  Determines the cost of a particular object.

COST ALLOCATION:  Process of dividing a total cost into parts and assigning the parts to relevant objects.

COST DRIVER:  Determining the costs of the secondary cost objects requires identifying what drives those costs.  It has a cause-and-effect relationship with a cost object.

COST OBJECTS:  Objects for which managers need to know the cost; can be products, processes, departments, services, activities, and so on.

COST POOL:  many individual costs that have been accumulated into a single total for the purposes of allocation.

COST TRACING:  Relating specific costs to the objects that cause their incurrence.

DIRECT COST:  Costs that can be easily traced to a cost object.

INDIRECT COST:  Cannot be easily traced to a cost object.

OVERHEAD COST:  The cost of supplies, and indirect costs.

PREDETERMINED OVERHEAD RATE:  Overhead allocation rate is determined before actual cost and volume data are available.  Companies use predetermined overhead rates for product costing estimates and pricing decisions during a year, but they must use actual costs in published year-end financial statements.

AVOIDABLE COSTS (RELEVANT COSTS):  are the costs managers can eliminate by making specific choices.

BATCH-LEVEL COSTS:  The costs associated with producing a batch of products.  For example, the cost of setting up machinery to produce 1,000 products is a batch-level cost.  The classification of batch-level costs is context sensitive.  Postage for one product would be classified as a unit-level cost.  In contrast, postage for a large number of products delivered in a single shipment would be classified as a batch-level cost.

CERTIFIED SUPPLIERS:  Preferred customers of the suppliers by offering incentives such as guaranteed volume purchases with prompt payments.

DIFFERENTIAL REVENUES:  Relevant revenues must (1) be future oriented and (2) differ for the alternatives under consideration. 

EQUIPMENT REPLACEMENT DECISIONS:  Decisions managers base equipment replacement on profitability analysis rather than physical deterioration.

FACILITY-LEVEL COSTS:  Incurred to support the entire company.  They are not related to any specific product, batch, or unit of product.

LOW-BALL PRICING:  An unscrupulous supplier may lure an unsuspecting manufacturer into an outsourcing decision.  Once the manufacturer is dependent on the supplier, the supplier raises prices.  If a price sounds too good to be true, it probably is too good to be true. 

OPPORTUNITY COSTS:  The sacrifice represented by a lost opportunity. 

OUTSOURCING:  Buying goods and services from other companies rather than producing them internally.

PRODUCT-LEVEL COSTS:  Costs incurred to support specific products or services.  Product-level costs include quality inspection costs, engineering design costs, the costs of obtaining and defending patents, the costs of regulatory compliance, and inventory holding costs such as interest, insurance, maintenance, and storage.

QUALITATIVE CHARACTERISTICS:  Nonquantifiable features such as company reputation, welfare of employees, and customer satisfaction can be affected by certain decisions.

QUANTITATIVE CHARACTERISTICS:  Numbers in decision making subject to mathematical manipulation, such as the dollar amounts of revenues and expenses.

RELEVANT COSTS (Avoidable Costs):  Are the costs managers can eliminate by making specific choices.

RELEVANT INFORMATION:  Differs among the alternatives under consideration, and it is future oriented.

SEGMENT:  Data used to make comparisons among different products, departments, or divisions. 

SPECIAL ORDER DECISION:  Occasionally, a company receives an offer to sell its goods at a price significantly below its normal selling price.  The company must make a special order decision to accept or reject the offer.

SUNK COSTS:  Has been incurred in a past transaction.  Since sunk costs have been incurred in past transactions and cannot be changed, they are not relevant for making current decisions.

UNIT-LEVEL COSTS:  Costs incurred each time a company generates one unit of product, like the cost of direct materials, direct labor, inspections, packaging, shipping, and handling. 

VERTICAL INTEGRATION:  A company that controls the full range of activities from acquiring raw materials to distributing goods and services.  Outsourcing reduces the level of vertical integration, passing some of a company's control over its products to outside suppliers. 

BUDGETING:  Planning is crucial to operating a profitable business.  Expressing business plans in financial terms, called budgeting, involves coordinating plans of all areas of the business.

CAPITAL BUDGET:  Describes the company's intermediate-range plans for investments in facilities, equipment, new products, store outlets, and lines of business.  The capital budget affects several operating budgets.

CAPITAL BUDGETING:  Focuses on intermediate range planning.  It involves such decision as whether to buy or lease equipment, whether to stimulate sales, or whether to increase the company's asset base.

CASH BUDGET:  Preparing a cash budget alerts management to anticipated cash shortages or excess cash balances.  Management can plan financing activities, making advance arrangements to cover anticipated shortages by borrowing and planning to repay past borrowings and make appropriate investments when excess cash is expected.

MASTER BUDGET:  A group of detailed budgets and schedules representing the company's operating and financial plans for a future accounting period.  The master budget usually includes (1) operating budgets, (2) capital budgets, and (3) pro forma financial statements.

OPERATING BUDGETS:  Focus on detailed operating activities, like (1) a sales budget, (2) an inventory purchases budget, (3) a selling and administrative (S & A) expense budget, and (4) a cash budget.

PARTICIPATIVE BUDGETING:  Has frequently proved successful in creating a healthy atmosphere.  This technique invites participation in the budget process by personnel at all levels of the organization, not just upper level managers.  Information flows from the bottom up as well as from the top down during budget preparation. 

PERPETUAL (CONTINUOUS) BUDGETING:  Covers a 12-month reporting period.  As the current month draws to a close, an additional month is added at the end of the budget period, resulting in a continuous 12-month budget.  A perpetual budget offers the advantage of keeping management constantly focused on thinking ahead to the next 12 months.

PRO FORMA FINANCIAL STATEMENTS:  Based on projected (budgeted) rather than historical information--pro forma income statement, balance sheet, and statement of cash flows.

STRATEGIC PLANNING:  Involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue, and identifying the most profitable market niche.

BALANCED SCORECARD:  Includes financial and nonfinancial performance measures.  Standard costs, income measures, ROI, and residual income are common financial measures used in a balanced scorecard.  Nonfinancial measures include defect rates, cycle time, on-time deliveries, number of new products or innovations, safety measures, and customer satisfaction surveys.

CONTROLLABILITY CONCEPT:  Is crucial to an effective responsibility accounting system.  Managers should only be evaluated based on revenues or costs they control.  Holding individuals responsible for things they cannot control is de-motivating.  Isolating control, however, may be difficult.

COST CENTER:  Is an organizational unit that incurs expenses but does not generate revenue. 

DECENTRALIZATION:  Delegating authority and responsibility.  This decision-making authority is similarly delegated to individuals responsible for managing specific organization functions such as production, marketing, and accounting.

FAVORABLE VARIANCE:  When actual sales revenue is greater than expected (planned) revenue. 

FLEXIBLE BUDGET:  Is an extension of the master budget and is based solely on the planned volume of activity.

FLEXIBLE BUDGET VARIANCE:  The actual cost figures are similarly computed.  The differences between the flexible budget figures and the actual result.

INVESTMENT CENTER:  Managers are responsible for revenues, expenses, and the investment of capital and normally appear at the upper levels of an organization chart.

MAKING THE NUMBERS:  When managers refer to this, they usually mean reaching the sales volume in the static (master) budget.

MANAGEMENT BY EXCEPTION:  Because management talent is a valuable and expensive resource, businesses cannot afford to have managers spend large amounts of time on operations that are functioning normally.  Instead, managers should concentrate on areas not performing as expected.  In other words, management should attend to the exceptions.

MARGIN:  A measure of management's ability to control operating expenses relative to the level of sales.  In general, high margins indicate superior performance. 

PROFIT CENTER:  Differs from a cost center in that it not only incurs costs but also generates revenue.  The manager of a profit center is judged on his ability to produce revenue in excess of expenses.

RESIDUAL INCOME:  This approach measures a manager's ability to maximize earnings above some targeted level. 

RESPONSIBILITY ACCOUNTING:  Focuses on evaluating the performance of individual managers, like expenses controlled by a production department manager are presented in one report and expenses controlled by a marketing department manager presented in a different report.

RESPONSIBILITY CENTER:  An organizational unit that controls identifiable revenue or expense items.  The unit may be a division, a department, a sub-department, or even a single machine.

RETURN ON INVESTMENT:  The ratio of wealth generated (operating income) to the amount invested (operating assets) to generate the wealth.  ROI = Operating income/Operating assets.

SALES PRICE VARIANCE:  Difference between actual sales and expected sales based on the standard sales price times actual level of activity.

SALES VOLUME VARIANCE:  The difference between the static budget (which is based on planned volume) and a flexible budget based on actual volume.

STATIC BUDGET (MASTER BUDGET):  Remains unchanged even if the actual volume of activity differs from the planned volume. 

SUBOPTIMATIZATION:  Situation in which managers act in their own self interests even though the organization as a whole suffers.

TURNOVER:  A measure of the amount of operating assets employed to support the achieved level of sales. 

UNFAVORABLE VARIANCE:  When actual sales are less than expected.

VARIANCES:  The differences between the standard and actual amounts.

ACCUMULATED CONVERSION FACTOR:  Factors used to convert a series of future cash inflows into their present value equivalent and that are applicable to cash inflows of equal amounts spread over equal interval time periods and that can be determined by computing the sum of the individual single factors for each period.

ANNUITY:  A series of cash flows that meets 3 criteria:  (1) equal payment amounts, (2) equal time intervals between payments, and (3) a constant rate of return.

CAPITAL INVESTMENTS:  Purchases of long-term operational assets. 

COST OF CAPITAL:  Return paid to investors and creditors for the use of their assets (capital); usually represents a company's minimum rate of return.

INCREMENTAL REVENUE:  Refers to the additional cash inflows from operating activities generated by using additional capital assets.

INTERNAL RATE OF RETURN:  The rate at which the present value of cash flows equals the cash outflows.  It is the rate that will produce a zero net present value.

MINIMUM RATE OF RETURN:  Minimum amount of profitability required to persuade a company to accept an investment opportunity; also know as desired rate of return, required rate of return, hurdle rate, cutoff rate, and discount rate.