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Glossary of Terms
This glossary provides definitions for many terms in financial accounting¹
and refers readers back to those chapter Sections in which the terms are
discussed. If a good definition or discussion appears in a chapter Section,
the reference to that Section may be provided without repeating the definition.
Terms are cross-referenced to other terms where helpful. For additional
help in finding things, consult the index at the end of the book. Technical
terms used in any definition are themselves defined in their alphabetical
location in the glossary.
A B C D
E F G H I
J K L M
N O P Q
R S T U
V W X Y
Z
A
Accelerated amortization (depreciation)
An amortization method, such as declining balance, that records more amortization
in the earlier years of an asset's life, and less in later years, than
does the straight-line method. See Straight-line amortization,
Declining balance amortization, and Section 8.12.
Account
A summary record of an asset, liability, owners' equity, revenue, or expense,
in which the effects of transactions, accruals, and adjustments are indicated
in dollars (where dollars are the currency of the country). See General
journal, General ledger, Transaction, and Sections 2.3, 2.4,
and 2.5.
Accountant
A person who performs accounting functions. Professional accountants are
those who are granted designations by self-regulating bodies on the basis
of special training and successful examination. For example: CA or Chartered
Accountant (Canada, the United Kingdom); CGA or Certified General Accountant
(Canada); CMA or Certified Management Accountant (Canada, the United States);
and CPA or Certified Public Accountant (the United States). See Section
1.5.
Accounting
"To account" is to provide a record, such as of funds paid or received
for something. Being "accountable" is to be responsible for, as in to
account for one's actions. These two ideas together describe the practice
of accounting as the recordkeeping and reporting of an enterprise's performance
and position in monetary terms. Management is responsible for the decisions
made in an enterprise. Accounting provides the reports that summarize
the economic results of these decisions for inside use and transmits them
to outside, interested parties (such as investors, creditors, and regulatory
agencies). See Financial accounting, Management accounting,
and Section 1.1.
Accounting control
The practice of creating accounting records that provide expected quantities
of important assets and liabilities and so improve the internal control
over those assets. Used by most companies for cash, accounts receivable,
sales taxes collected on behalf of governments and employee deductions,
and by many companies for investments, inventories, property and equipment,
and accounts payable. See Internal control and Section
7.9 for various examples of accounting control.
Accounting entity
The enterprise for which the accounting is being done. The entity may
be a single legal corporation or other organization, an economic unit
without legal standing (such as a proprietorship), or a group of corporations
with connected ownership for which consolidated financial statements are
prepared. See Sections 5.2 and 9.7.
Accounting policies
The chosen accounting methods used by a company to recognize economic
events on an accrual basis, and to report the financial position and results
of operations. For examples, see the notes immediately following the financial
statements of any company. The first such note is usually a summary of
significant accounting policies. See Sections 1.1, 5.5, 6.4, 8.4, and
9.2.
Accounting policy choice
A decision among acceptable accounting policies is often needed because
more than one acceptable policy exists in many areas. See Section 6.4,
8.1, and 10.8.
Accounting principles
See Generally accepted accounting principles and Sections
1.1 and 5.1.
Accounting research
The practice of studying accounting phenomena to determine their effects
on other phenomena, such as share prices and the effects of those on accounting.
Introduced in Section 1.5 and mentioned frequently throughout the book.
Accounting standards
The recommending of particular accounting methods or policies by an authoritative
body. In Canada this is done by the Accounting Standards Board of the
Canadian Institute of Chartered Accountants, in the United States, by
the Financial Accounting Standards Board. See Authoritative standards,
Accounting policies, Generally accepted accounting principles,
and Section 5.1.
Accounting Standards Board
The committee of the Canadian Institute of Chartered Accountants that
is responsible for setting financial accounting standards in Canada. See
Section 5.4.
Accounts payable
Liabilities representing amounts owed to short-term trade creditors. (An
account payable for the debtor is an account receivable for the creditor.)
See Sections 2.3, 2.4, and 9.2.
Accounts receivable
Amounts owing by debtors (customers), usually arising from sales of goods
or services. See Sections 2.3, 3.3, 6.3, 6.4, and 8.6.
Accrual accounting
The method of making an economically meaningful and comprehensive measurement
of performance and position by recognizing economic events regardless
of when cash transactions happen, as opposed to the simpler cash basis
of accounting. Under this method, revenues and expenses (and related assets
and liabilities) are reflected in the accounts in the period to which
they relate. See Sections 1.9, 3.1, and 6.2.
Accrual basis
The use of accrual accounting in preparing financial statements. See Section
3.7.
Accrual income
The result of subtracting expenses from revenue(s), when both kinds of
accounts are calculated by accrual accounting. See Accrual accounting,
Net income, and Sections 1.9, 3.3, 3.7, 4.1 6.2, and 6.3.
Accrue
To enter amounts in the accounts to reflect events or estimates that are
economically meaningful but that do not (at present) involve the exchange
of cash. Examples would be recording interest that is building up on a
debt prior to paying it or recording revenue from credit sales prior to
receipt of cash from customers. See Sections 1.9, 3.1, and 6.2, and Accrual
accounting, Revenue recognition, and Matching;
see also Deferral.
Accrued expense
An expense recognized in the accounts prior to paying for it. See Section
6.10.
Accumulated amortization (depreciation)
A balance sheet account that accumulates total amortization (depreciation)
expense over a number of years. The account balance is a credit and so
is opposite to the debit-balance asset cost account. The difference between
cost and accumulated amortization is the "book value" of the asset. See
Book value, Contra accounts, Fixed assets, Amortization and
Amortization expense, and Sections 2.1, 2.3, and 7.7.
Accumulated foreign currency translation adjustment
An account arising as a consequence of the method used to convert foreign
operations' accounting figures into Canadian dollars for the purpose of
combining them with the figures for Canadian operations. Because income
statement accounts are generally converted at average foreign exchange
rates and balance sheet accounts are generally converted at year-end or
historical rates, converted accounts do not quite balance. The difference
is put into equity as a separate item because it does not seem to fit
anywhere else and it is part of the (converted) residual equity of the
owners. See Sections 2.9 and 9.4.
Acid test ratio
Cash, temporary investments, and accounts receivable divided by current
liabilities. Also called the quick ratio. See Ratios
and Sections 2.3 and 10.4 - Ratio #19, where the ratio is explained.
Acquisition
There are two related meanings in accounting. The first is just a purchase.
Buying a new asset is often described as an acquisition of that asset,
or acquiring it. See Acquisition cost and Historical
cost. The second meaning applies to a Business combination
in which one company buys enough of the voting shares of another company
to get voting control and so become the Parent of that
company, which becomes the acquiring company's Subsidiary.
See Section 9.7. (A Merger is a business combination
in which neither company controls the other. Accounting standards now
require virtually all business combinations to be accounted for as acquisitions.)
Acquisition cost
See Historical cost and Section 8.2.
Adjusted trial balance
The list of accounts prepared after all the accrual accounting adjustments
and corrections have been made and so representing the final account balances
used in preparing the financial statements. See Trial balance,
Adjusting (journal) entry, and Sections 3.8 and 3.9.
Adjusting (journal) entry
A journal entry to implement accrual accounting by recognizing in the
accounts economic events not yet adequately accounted for by the routine
transactional accounting system. (For example, if there is no transaction
to reveal the gradual wear and tear of a fixed asset, an adjusting entry
must be made to recognize this depreciation.) See Sections 3.8 and 3.9.
Adjustment(s)
See Adjusting (journal) entry and Section 1.7.
Adverse opinion
A type of Auditor's opinion in which the opinion is that
the financial statements are not fairly presented. See Section 5.8.
Agent
A person who is party to a contract between that person and another, called
the principal. The agent's role is to carry out the wishes of the principal
as specified in the contract. Some examples of agents are managers, auditors,
lawyers, and physicians, who are entrusted with acting on behalf of one
or more others (the principals, such as owners, creditors, defendants,
and patients). Agents have a stewardship responsibility to the principal.
See Contract, Principal, Stewardship, and Section 5.11.
Aggressive accounting
Seeking out accounting methods and policy choices to meet management objectives
for growth, financing, bonuses, or other purposes that seem to violate
principles such as fairness and conservatism. See Section 6.4.
Aging of accounts receivable
The process of classifying accounts receivable by the time that has passed
since the account came into existence. This classification is used as
an aid to estimating the required allowance for doubtful accounts for
the estimated amount of uncollectible accounts receivable. See Section
8.6.
Allocating, allocation
Spreading the impact of an event out over time, as in amortization of
an asset's cost over its useful life or recognition of revenue for a long-term
contract over several periods. See Amortization and Sections
6.5 and 6.10. See also Interperiod tax allocation and
Section 9.3, and Intraperiod tax allocation and Section
3.5. (Allocation is also used, especially in management accounting, to
refer to spreading the impact of an event across activities, such as in
allocating the cost of repairs to different departments.)
Allowance for doubtful accounts
The estimated amount of accounts receivable that will not be collected
(which are "doubtful"). The allowance, which is a contra account to accounts
receivable, is used in order to recognize the bad debts expense related
to such doubtful accounts but without removing those accounts from the
books because the firm will still try to collect the amounts owing. See
Section 7.7.
American Institute of Certified Public Accountants (AICPA)
The national self-regulating body in the United States that sets and monitors
the auditing and professional standards by which CPAs practise.
Amortization
Allocation of the cost of a noncurrent asset to expense over several accounting
periods to recognize the "consumption" of the asset's economic value as
it helps to earn revenue over those periods. Amortization expense for
a period thus is deducted from revenue in that period, recognizing it
as a cost of earning the revenue. The term amortization, and especially
the common term depreciation, is used for the allocation of the cost of
tangible assets over time; amortization is also used for the allocation
of the cost of intangible assets such as patents, franchise rights, and
goodwill. See Accumulated amortization, Intangible assets,
and Sections 1.10, 7.7, 8.10, and 8.12.
Amortization expense
The expense recorded to recognize asset amortization. See Amortization,
Accumulated amortization, and Sections 7.7 and 8.10.
Amortize
To allocate the cost of noncurrent assets (and sometimes liabilities)
to expense over several accounting periods. See Amortization,
Allocating, and Sections 8.10 and 8.12.
Analysis, analyze
The technique, common in accounting, of comparing information derived
from different sources or methods in order to understand what has happened,
identify errors, and answer questions about the effects of possible actions
or events. See Reconciliation and "What if" (effects)
analysis. Also used to refer to the detailed study of accounting
information, such as by using Ratios. See Sections 1.12, 10.1-10.9.
Annual report
The document provided annually to the shareholders by the officers of
a company. It includes the financial statements, the notes to the financial
statements, the auditor's report, supplementary financial information
such as multi-year summaries, and reports from the company's board of
directors and management. See Sections 1.1, 1.3, and 5.6.
Articulate, Articulation
Of the income statement, retained earnings statement, and balance sheet;
refers to the fact that because these three statements are prepared from
one set of balanced accounts, changes in any one of the three normally
affect the others. In particular, recognition of revenue and expense relies
on the fact that a revenue causes a change in the balance sheet, as does
an expense. See Recognition, Revenue recognition, and
Sections 3.3, 3.6, 6.3, 6.4, and 8.2.
Asset(s)
An asset is a resource available to do business in the future, represented
by an ownership of or right to expected future economic benefits. Assets
have value because they are expected to bring benefits as they are used
or sold. See Sections 1.1, 2.3, and 8.2, and Cash equivalent assets,
Inventory, Accounts receivable, Current assets, Fixed assets,
and Intangible assets.
Asset valuation
Determination of the amounts to be used for assets on the balance sheet.
See Balance sheet valuation and Section 8.2.
Assumed cost flow
The practice in inventory accounting of determining the cost of inventories
purchased at varying unit costs by assuming a specific order in which
the inventory will be taken to have flowed into and out of the country.
See Cost flow assumption and Section 8.7.
Assurance
A broader word than "audit," encompassing auditing and similar procedures
to confirm or verify reports or events as fair and proper and assure users
of such reports that they may be relied upon. See Audit, Auditor's
report, and Fairness and Section 5.8.
AT
The total assets turnover ratio, defined and explained in Section 10.4,
Ratio #12. Used in the Scott formula in Section 10.6.
Audit
The examination of accounting records and their supporting documentation
with the objective of determining the fairness with which the financial
statements present the financial position and performance of the company.
See Auditor, Auditor's report, and Section 5.8.
Audit committee
A committee of a corporation's Board of directors, usually
composed largely or entirely of directors not also having management positions,
which reviews the company's accounting statements and communicates directly
with the External auditor. See Section 5.9 and 7.3.
Auditor
The person or firm who performs an audit for the purpose of preparing
a report on the credibility of the financial statements, also called the
External auditor. See Sections 1.4, 1.5, and 5.8. Compare
Internal auditor.
Auditor's opinion
The portion of the auditor's report in which the auditor
expresses a professional opinion that the financial statements are, or
are not, fairly presented.
Auditor's report (or auditors' report)
The document accompanying the financial statements that expresses the
auditor's opinion on the fairness of the financial statements. The auditor's
report explains what the auditor did and states the Auditor's
opinion. See Section 5.8.
Authoritative standards
Written rules and guidance established by official accounting standard-setters
such as the CICA in Canada and the FASB in the United States. See CICA
Handbook and Sections 5.1, 5.4, and 6.4.
Available cost
The total dollar amount represented by the sum of beginning inventory
and purchases during the period, and thus representing the total dollar
cost of inventory available for sale or use during the period. See Sections
8.7 and 8.8.
Average cost (AVGE)
An inventory cost-flow assumption where the cost of an individual unit
of inventory is the weighted average cost of the beginning inventory and
subsequent purchases. See Weighted average and Section
8.7.
Average interest rate
An average calculated by dividing interest expense by total liabilities.
Defined and explained in Section 10.4 (Ratio #6). An after-tax version
of this is used in the Scott formula in Section 10.6 (see IN(ATI)).
AVGE
See Average cost and Weighted average.
B
Bad debts expense
An expense account that results from the reduction in carrying value of
those accounts receivable that have been projected to be uncollectible
or doubtful. See Allowance for doubtful accounts and
Section 7.7.
Balance (an account total)
The net sum of the amounts added to and subtracted from an account since
the account began. In financial accounting's double-entry system, the
balance is expressed as a net debit (DR) or net credit (CR). See Account,
Double-entry accounting, and Sections 2.4 and 2.5.
Balance (in the balance sheet or the trial balance)
Refers to the double-entry accounting requirement that the sum of the
accounts with debit balances and the sum of those with credit balances
be equal. In the balance sheet, this means that the sum of the assets
equals the sum of the liabilities and equity. See Balance sheet,
Balance sheet equation, Trial balance, and Sections 2.3, 2.7,
and 3.9.
Balance sheet
The "balanced" list of assets, liabilities, and owners' equity constituting
the formal statement of a company's financial position at a specified
date, summarizing by category the assets, liabilities, and owners' equity.
See Balance, Balance sheet equation, Balance sheet valuation,
Statement of financial position, and Sections 2.2, 2.7, and 2.11.
Balance sheet equation
The double-entry arithmetic by which Assets = Liabilities + Owners' Equity.
See Sections 2.3, 2.4, 8.2, and 8.7.
Balance sheet valuation
Assigning numerical values to the balance sheet's assets, liabilities,
and owners' equity accounts. See Section 8.2.
Bank reconciliation
An analysis conducted to determine if the bank account balance according
to the accounting records corresponds with the balance as reported by
the bank. The two balances seldom agree exactly, so the reconciliation
is designed to set out the reasons for any disagreement. See Sections
1.12 and 7.5.
Bankruptcy
The usually involuntary termination of an enterprise due to its inability
to pay its debts and continue in operation. Bankruptcy usually involves
significant losses to both creditors and owners. See Going concern.
Bank overdraft
A negative bank account balance (withdrawals exceeding deposits), which
banks may allow as a de facto loan as long as it is temporary. See Line
of credit and Sections 2.7 and 4.3.
Bank reconciliation
The practice of comparing the accounting records of the bank account with
the information provided by the bank (such as in a monthly bank statement),
to identify any errors in either record. See Analysis
and Sections 1.12 and 7.5.
Betterment
An expenditure to improve an asset's value to the business, more than
just repairs and maintenance. See Section 8.4.
Big Bath
A way of manipulating reported income to show even poorer results in a
poor year in order to enhance later years' results. See Sections 3.10
and 6.4.
Board of directors
The senior level of management, representing and directly responsible
to the owners (shareholders). Normally elected annually by the shareholders,
the board is responsible for hiring and supervising the operating management
(president, chief executive officer, etc.). See Sections 2.3, 3.3, and
5.3.
Bond, bonded debt
A certificate of debt issued by an enterprise in return for cash, in which
a promise is made to repay the debt (usually at a particular date or on
a specified schedule) plus interest. Many bonds may be sold to other people
by those who received them in return for the original cash provided to
the enterprise. See Sections 2.7 and 9.3.
Bond markets
Capital markets in which debt instruments (bonds and similar items), rather
than shares, are traded. See Capital markets.
Bookkeeping
The process of recording, classifying, and summarizing transactions in
the books of account. See Sections 1.7, 2.2, and 2.4.
Books
Colloquial term for the accounting records, including computerized records,
left over from the time when the records were written in bound books.
See Sections 1.7 and 7.2.
Books of original entry
The journals in which transactions are first recorded. See Section 7.2.
Book value
The amount shown in the accounts for any individual asset, liability,
or owners' equity item after deducting any related contra account (for
example, the book value of a truck is the recorded cost minus accumulated
amortization). The term is also commonly used for the whole enterprise,
to refer to the net amount of total assets less total liabilities (the
recorded value of the owners' residual interest, which equals total equity:
Assets = Liabilities + Equity). See Sections 7.7 and 8.11 for the book
value of individual assets and Sections 2.3, 9.4, and 9.7 for the book
value of the whole enterprise. See also Book value per share.
Book value per share
Total shareholders' equity divided by the number of shares issued. It
is defined and explained in Section 10.4, Ratio #9.
Bottom line
A colloquialism referring to the net income (the "bottom line" on the
income statement). See Net income.
Business combination
A merger of separate corporations or an acquisition of control of one
corporation by another, in which the corporations become a single economic
entity. See Accounting entity, Consolidation, and Section
9.7.
C
CA
Chartered accountant. See Canadian Institute of Chartered Accountants.
See Sections 5.8 and 5.9.
Callable debt
Debt, such as bonds, that might have to be repaid ahead of schedule at
the option of the creditor. Most bank loans are callable, in that the
bank can ask for repayment within a few days even if the original repayment
plan extended over a longer period. See Section 9.2.
Canada Business Corporations Act (CBCA)
The federal corporations act that provides the authority for the incorporation
of federally incorporated companies in Canada and generally sets the requirements
for their activities. It requires any such company to prepare annual financial
statements.
Canadian Certified General Accountants Association (CGA-Canada)
An association whose members (CGAs) have had training in accounting, taxation,
auditing, and other areas of business and have passed qualifying exams.
CGA-Canada and provincial associations of CGAs set and monitor standards
by which CGAs practise. CGA-Canada is one of the three national professional
accounting bodies. See Accountant and Sections 1.5, 5.8, and 5.9.
Canadian Institute of Chartered Accountants (CICA)
A national, self-regulating association of chartered accountants in which
the accountants have met education and examination standards in Canada.
The CICA and provincial institutes of CAs set and monitor the standards
by which CAs practise. One of the three national professional accounting
bodies. See Accountant and Sections 1.5, 5.8, and 5.9.
Capital
The owner's contribution to or interest in a business (the equity). Often
used specifically to refer to the equity of unincorporated businesses
(proprietorships and partnerships). See Equity and Sections
2.9 and 9.4.
Capital cost allowance
The Canadian Income Tax Act's version of amortization (depreciation),
used in calculating taxable income for assessment of income tax. See Section
9.3.
Capitalization, capitalize
The recognition of an expenditure that may benefit a future period as
an asset rather than as an expense of the period of its occurrence. Expenditures
are capitalized if they are likely to lead to future benefits, and, thus,
meet the criterion to be an asset. See Sections 3.8 and 8.4.
Capitalized costs
Costs that have been included with an asset on the balance sheet instead
of being deducted as expenses on the income statement. See Sections 7.7,
8.4, and 8.14.
Capital lease
A lease having the economic character of asset ownership. See Sections
8.14 and 9.3.
Capital markets
Markets in which financial instruments such as shares and bonds are traded.
See Sections 3.2 and 5.10, Financial instruments, and
Stock exchange.
Cash
Currency and coin on hand, balances in bank accounts, and other highly
liquid assets. See Cash and equivalents and Sections 4.3, 7.5, and 8.5.
Cash and equivalents
Cash and near-cash assets minus near-cash liabilities: cash equivalent
assets minus cash equivalent liabilities. Changes in cash and equivalents
are explained by the cash flow statement (SCFP). See Cash flow
statement, Cash, and Sections 4.3 and 8.5.
Cash disbursements
Cash payouts, by cheque, currency, or direct deductions from the bank
account. See Cash payments, Cash disbursements journal, Cash receipts,
Cash income, and Section 4.4.
Cash disbursements journal
The record of cheques and other cash payments made. See Books
of original entry and Section 7.2.
Cash equivalent assets
A term used to describe cash plus very liquid bank deposits and similar
assets that can be converted into cash on demand. See Sections 4.3 and
8.5.
Cash equivalent liabilities
Liabilities that are payable on demand and so represent a reduction in
the liquidity otherwise apparent from the amount of cash. Under current
accounting standards, temporary bank overdrafts are the only common cash
equivalent liabilities. See Bank overdraft and Section
4.3.
Cash flow
The inflows of cash (cash receipts) and outflows of cash (cash disbursements)
over a period. Information about cash flow is presented in the Cash
flow statement. See also Sections 4.2 and 4.3.
Cash flow analysis
A method of accounting analysis directed at understanding
the enterprise's cash inflows, outflows, and resulting balances. This
analysis lies behind the cash flow statement. See Section
4.2.
Cash flow statement
A statement that explains the changes in cash (and equivalent) balances
during a fiscal period. Also referred to as "Statement of changes in financial
position (SCFP)," "Funds statement," or "Statement of cash flows." See
Direct method of cash flow analysis, Indirect method of cash flow
analysis, and Sections 1.1, 4.2, 4.3, and 10.5.
Cash flow to total assets
The ratio of cash from operations divided by total assets. It is defined
and explained in Section 10.4, Ratio #7. See Cash from operations.
Cash from operations
Cash generated by day-to-day business activities and highlighted as the
first Section in the Cash flow statement. See Sections
4.2, 4.3, 4.9, and 10.5.
Cash income
Cash receipts minus cash disbursements, or that subset of both that relates
to day-to-day operations. The operating subset is roughly equivalent to
the Cash flow statement's Cash from operations figure.
See Cash receipts, Cash disbursements, Direct method of cash flow
analysis, and Sections 1.10 and 4.4.
Cash payments
Payments by currency, cheque, or other bank withdrawal. See Cash
transaction, Cash disbursements journal, and Section 4.4.
Cash receipts
Cash inflows, by currency, others' cheques, or direct bank deposits. See
Cash transaction, Cash receipts journal, and Section
4.4.
Cash receipts journal
The record of customers' cheques and other cash received. See Books of
original entry and Section 7.2.
Cash received basis
Recognition of revenue only when the cash comes in. See Revenue
recognition, Conservatism, and Section 6.7.
Cash transaction
The simplest kind of economic exchange routinely recorded by financial
accounting, and an important starting point for the financial statements.
See Sections 1.7 and 4.4.
CCA
See Capital cost allowance.
CGA
Certified general accountant. See Canadian Certified General Accountants
Association (CGA-Canada) and Sections 5.8 and 5.9.
Change effects analysis
Analysis of the effects on financial statements of economic or accounting
policy changes. See Sections 1.12 and 10.8 and "What if" (effects)
analysis.
Change in cash
Demonstrating why cash changed as it did is the objective of the Cash
flow statement's analysis. Cash income is part
of this change. See Sections 1.10 and 4.3-4.5.
Chart of accounts
An organized list of the accounts used in the accounting system. This
can be contrasted with the "trial balance," which displays all the accounts
and their debit or credit balances. See Section 7.2.
Cheque
A request by one party that the party's bank pay a specified amount to
another party. See Section 7.2.
CICA Handbook
The authoritative source of financial accounting standards in Canada.
See Section 5.4.
Classification
Choice of where in the financial statements to place an account, such
as whether an investment asset should be shown as a current asset or a
noncurrent asset. See Sections 2.7, 3.5, and 3.8.
Classification policies
Accounting policies covering where within a financial statement an account
or description is to appear. See Sections 2.7, 3.5, 3.8, and 6.4 and Accounting
policies.
Classified financial statements
Financial statement with accounts organized under headings that clarify
the accounts' meaning, done to increase the information value of the statements.
See Sections 2.3, 2.7, 3.5, and 4.3.
Clean opinion
An external auditor's report which states the auditor's opinion that the
financial statements are fairly presented. This is the kind of auditor's
report that most companies receive because it indicates the auditor found
no problems. See Auditor's report, Qualified opinion,
and Section 5.8.
Close, closing
Transfer(ring) the temporary accounts (revenues, expenses, and dividends
declared) to retained earnings at the end of the fiscal period. See Closing
entry and Sections 3.6 and 3.7.
Closing entry or entries
Journal entries recorded at year-end to transfer the balances in temporary
accounts (revenues, expenses, and dividends) to the balance sheet account
retained earnings and set those balances to zero in preparation for entering
the next year's transactions. See Sections 3.6-3.8.
CMA
Certified management accountant. See Society of Management Accountants
of Canada and Sections 5.8 and 5.9.
COGS
See Cost of goods sold and Sections 7.9 and 8.7.
COGS expense
See Cost of goods sold expense and Sections 7.9 and 8.7.
Collection ratio
The ratio of accounts receivable to the daily sales, expressed in number
of days' sales represented by accounts receivable. Also called Days'
sales in receivables. It is defined and explained in Section
10.4, Ratio #14.
Common shares
The basic voting ownership interests in a corporation. See Corporation
and Sections 2.9 and 9.4.
Common size financial statements
A technique of analyzing financial statements in which income statement
figures are expressed in percentages of revenue and balance sheet accounts
are expressed in percentages of total asset. It is defined and explained
in Section 10.4, Ratio #4.
Company
See Corporation.
Comparability
Information that enables users to identify similarities in and differences
between two sets of economic phenomena, such as two different years of
a company's financial statements. Comparability between companies and
consistency of one company over time are major objectives of financial
accounting. See Fairness, Consistency, and Sections 5.2,
5.3, and 6.4.
Compilation
A service performed by accountants practising Public accounting, whereby
they prepare financial statements for enterprises without taking responsibility
for the quality of the accounting information used to prepare them and
without auditing them. See Section 5.8.
Completed contract
A method of revenue recognition for long-term contracts in which the revenue
is not reported on the income statement until the contract has been completed.
See Revenue recognition, Conservatism, and Section 6.7.
Compound, compounded, compounding
These refer to the frequency in which interest calculated on a loan or
other debt is periodically added to the principal and so attracts future
interest itself. Annual compounding, for example, means that interest
built up on a loan starts to bear interest itself on each annual anniversary
of the loan. See Present value and Section 10.7.
Conditional sale contract
A form of borrowing whereby the title to an asset purchased on credit
does not pass to the buyer until all the payments, usually plus interest,
are made. See Section 9.3.
Conservatism, conservative
A prudent reaction to uncertainty to ensure that risks inherent in business
situations are adequately considered-often phrased as "anticipate possible
losses but not possible gains." In situations where the accountant cannot
decide on the superiority of one of two accounting treatments on the basis
of accounting principles alone, being conservative means choosing the
treatment that has the least favourable impact on the income of the current
period. See Historical cost, Cash received basis, Completed contract
method, and Lower of cost or market for examples
of conservatism, and see also Sections 5.2, 5.3, 6.4, 6.7, and 8.2.
Consistency
Treatment of like transactions in the same way in consecutive periods
so that financial statements will be comparable. The reporting policy
implying that procedures, once adopted, should be followed from period
to period by a company. See Accounting policies and Sections
5.2, 5.3, and 6.4.
Consolidated financial statements, consolidation
Consolidation is a method of preparing financial statements for a group
of corporations linked by ownership as if they were a single corporation.
Consolidated financial statements recognize that the separate legal entities
are components of one economic unit. They are distinguishable from the
separate parent and subsidiary corporations' statements, and from combined
statements of affiliated corporations. See Pooling of interests
method, Purchase method, and Sections 1.1, 2.9, 9.6, and 9.7.
Consolidated goodwill
A form of Goodwill arising only when companies' financial
statements are combined in Purchase method consolidation.
See Sections 2.9 and 9.7.
Contingency, contingent asset, contingent liability
An economic event (especially a negative one) that is in the process of
occurring and so is not yet resolved. Contingencies would include but
are not limited to pending or threatened litigation, threat of expropriation
of assets, guarantees of the indebtedness of others, and possible liabilities
arising from discounted bills of exchange or promissory notes. See Conservatism
and Section 9.3.
Contra accounts
Accounts established to accumulate certain deductions from an asset, liability,
or owners' equity item. See Book value, Amortization, Depreciation,
Allowance for doubtful accounts, and Sections 7.7 and 9.3.
Contract
A contract is an oral or written agreement between or among parties, setting
out each party's responsibilities and specifying actions agreed to and
resulting payments or other settlements. See Agent and
Principal regarding one type of contract important in
accounting, and Section 5.11.
Contributed surplus
The difference between the legal Par value (or Stated
value) of a share and the cash or other consideration received
by the company when the share was issued. Also referred to with terms
like "capital in excess of par value." Does not apply to No-par
shares, which are the usual kind in Canada. See Sections 2.9,
2.10, and 9.4.
Control account
An account used to contain the aggregate amounts of many detailed transactions
and so help to prevent or detect errors in the detailed records. The accounts
receivable control account, for example, should have the same total as
the sum of all the individual customers' accounts receivable. Control
accounts with detailed backup include cash, accounts receivable, inventory,
accumulated amortization, accounts payable, sales tax due, employee deductions
due, and share capital. See Internal control, Accounting control,
and Sections 7.2, 7.6, and 7.7.
Convertible
A bond or share that can be changed into another kind of Security,
usually a Preferred share that can be converted into
a Common share. See Section 9.5.
Corporate governance
The arrangements by which the board of directors and top management operate
the corporation on behalf of its shareholders. See Section 7.3.
Corporate group
A group of corporations linked by common or mutual ownership. See Consolidation
and Sections 2.8, 9.6, and 9.7.
Corporation
A legal entity with or without share capital, legally separate from those
who own it or work as a part of it. It enjoys most of the rights and responsibilities
of a person except for those that only an actual person can enjoy. Its
main feature is limited liability; in other words, only the assets of
the company can be claimed by creditors, not the assets of owners. See
Partnership, Proprietorship, and Sections 1.4, 2.9, 3.2,
and 9.4.
Cost
The value of an asset when it is acquired by the business. See Historical
cost and Sections 1.7, 8.2, and 8.4.
Cost allocation
Spreading the cost of an asset out over the periods in which it is useful.
See Allocating, Amortization, and Sections 8.8 and 8.9.
(Cost allocation is also used in managerial accounting to refer to spreading
the cost of an activity out across various products or services affected
by that activity.)
Cost basis
Usually used to account for a noncurrent intercorporate investment when
a corporation owns less than 20% of another corporation. The investment
is carried at cost, and any receipt of dividends or interest is recorded
as "other income." See Equity basis, Intercorporate
investments, and Section 9.6.
Cost-benefit
The idea of comparing the benefits of a particular action with its costs,
and taking action only if the benefits exceed the costs. See Sections
1.5 and 5.2.
Cost flow assumption
An assumption made about the order in which units of inventory move into
and out of an enterprise, used to compute inventory asset value and cost
of goods sold expense in cases where the order of flow is not or cannot
be identified. Possible assumptions include FIFO, LIFO, and weighted average.
See Cost of goods sold, FIFO, AVGE, Weighted average,
and LIFO for specific examples. See also Section 8.7.
Cost of capital
The cost of raising debt or equity funds (e.g., the cost of borrowed funds
is mostly the interest to be paid to the lender). See Section 10.7.
Cost of goods sold (COGS) expense
An expense account that reflects the cost of goods that generated the
revenue (also called cost of sales). The method of calculating COGS depends
on the method of inventory costing. See Cost flow assumption,
Inventory costing, and Sections 3.3, 3.4, 7.9, and 8.7.
Cost principle
The use of the historical cost of assets to value them on the balance
sheet. See Historical cost, Balance sheet valuation,
and Sections 5.2 and 8.2.
CPA
Certified public accountant (a designation used especially in the United
States). See American Institute of Certified Public Accountants
and Sections 5.8 and 5.9.
Credit (CR or Cr)
The right hand of double-entry accounting. The term credit can be used
as a noun to refer to the right-hand side of a journal entry or account,
or as a verb referring to the action of making an entry to the right-hand
side of an account. Most accounts on the right-hand side of the balance
sheets have credit balances (in other words, the credits to them exceed
the debits to them). The term credit also refers to the right to buy or
borrow on the promise of future payment. A credit journal entry to the
liabilities and equity side of the balance sheet causes an increase in
the account, while a credit to the assets side of the balance sheet causes
a decrease. See Double-entry accounting, Debit,
and Sections 2.4-2.6.
Credit transaction
An economic exchange in which at least one party makes a promise to pay
cash or other consideration later. This kind of transaction is recognized
by most financial accounting systems, especially if it is a routine way
of doing business. See Accounts receivable, Accounts payable,
and Section 1.7.
Creditor
One who extends credit (that is, gives someone the right to buy or borrow
now in consideration of a promise to pay at a later date). See Sections
1.5 and 2.3.
Critical event
A point in the revenue generation and collection process chosen to represent
the earning of the revenue, and so the point at which the revenue is recognized
in the accounts. This is a simplification: a common critical event is
the point at which the customer takes delivery of the goods sold. Not
all revenue is accounted for this way: some is allocated over more than
one point in the process: long-term construction projects and franchise
revenue are examples where the critical event simplification is generally
not used. See Revenue recognition and Section 6.6.
Current assets
Cash and other assets such as temporary investments, inventory, receivables,
and current prepayments that are realizable or will be consumed within
the normal operating cycle of an enterprise (usually one year). See such
current asset categories as Cash equivalent assets, Inventory,
and Accounts receivable. See also Sections 2.3, 2.10,
2.11, and 8.2.
Current liabilities
Debts or estimated claims on the resources of a firm that are expected
to be paid within the normal operating cycle of an enterprise (usually
one year). See Cash equivalent liabilities, Accounts payable,
and Sections 2.3, 2.10, and 9.2.
Current or market value
The estimated sale value of an asset, settlement value of a debt, or trading
value of an equity share. See Sections 8.2, 8.5, and 8.9.
Current portion of income tax expense
The part of the year's income tax expense that has been paid or is due
to be paid within the next year. The rest of the income tax expense is
the Future portion of income tax expense. See Section
9.3.
Current ratio
Also called Working capital ratio, equalling current
assets divided by current liabilities. It is defined and explained in
Section 10.4, Ratio #18. See also Section 2.3.
Current value accounting
A proposed accounting method that would use current or market values to
value assets and liabilities and to calculate income. See Sections 2.9
and 8.2.
Cut off
The end of a fiscal period and the procedures used to ensure accuracy
in measuring phenomena up to that date. See Section 6.5.
D
Days' sales in receivables
The ratio of accounts receivable to the daily sales, expressed in number
of days' sales represented by accounts receivable. Also called Collection
ratio. Defined and explained in Section 10.4, Ratio #14.
DCF
See Discounted cash flows, another phrase for "present
value" analysis of future cash flows. See Present value
and Section 10.7.
Debenture
A form of Security taken by a creditor on a loan or bond,
in which the creditor has a general ability to influence or direct management
decisions if the debt payments are not made on schedule; not a claim on
a specific asset as a Mortgage has. See Sections 2.7
and 9.3.
Debit (DR or Dr)
The left-hand side of double-entry accounting. The term debit can be used
as a noun to refer to the left-hand side of a journal entry or account
or as a verb referring to the action of making an entry on the left-hand
side of an account. Most accounts (except contra accounts) on the left-hand
side of the balance sheet have debit balances, which means the debits
to them exceed the credits to them. A debit will increase the amounts
on the asset side of the balance sheet, but decrease the amounts on the
liabilities and equity side. See Double-entry accounting, Credit,
and Sections 2.4-2.6.
Debt
An obligation to make a future payment in return for a benefit already
received. See Sections 2.3, 9.2, and 9.3.
Debt to assets ratio
Total liabilities divided by total assets. It is defined and explained
in Section 10.4, Ratio #17.
Debt-equity ratio
Total liabilities divided by total equity. It is defined and explained
in Section 10.4, Ratio #15. See also Section 2.3, and used in the Scott
formula in Section 10.6.
Decelerated amortization
The opposite of accelerated amortization or depreciation. Not acceptable
for most enterprises. See Accelerated amortization and
Section 8.12.
Decision relevance
An accounting objective: information should be available to the user at
a time and in a form that is useful to the user's decision making. See
Relevance and Sections 5.2, 5.3, and 6.6.
Declining balance amortization
An accelerated amortization (depreciation) method in which the annual
amortization (depreciation) expense is calculated as a fixed percentage
of the book value of the asset, which declines over time as amortization
is deducted. See Accelerated amortization, Amortization,
and Section 8.12.
Deferral
Part of accrual accounting but often used as the opposite to an accrual.
A deferral involves keeping a past cash receipt or payment on the balance
sheet, in other words, putting it on the income statement as revenue or
expense at a later time. An example is recognizing a deferred revenue
liability resulting from a recent cash receipt, such as for a magazine
subscription to be delivered later. (In contrast, accruals involve recording
a revenue or expense before the cash receipt or payment occurs.) See Sections
6.2 and 6.3.
Deferral method
A way of accounting for future income tax expenses incurred by present
activities, now largely replaced by future income tax liability estimates.
See Deferred income tax.
Deferred charge
A noncurrent Prepaid expense, in which the costs of issuing
bonds, incorporation costs, or other expenditures benefiting several future
periods are shown as noncurrent assets and usually amortized to expense
over several periods or otherwise charged to expenses in some future period.
See Sections 2.10 and 8.14.
Deferred income tax (expense and liability)
An expense account and corresponding liability intended to recognize the
future tax consequences of income reported on the current income statement
but not to be reported on the tax return until a future period. Now largely
replaced by future income tax liability estimates. See Future
income tax and Section 9.3.
Deferred revenue
A liability account used for customer deposits or other cash receipts
prior to the completion of the sale (for example, before delivery). See
Section 9.3.
Deficit
Negative retained earnings and sometimes also used to refer to negative
earnings. See Retained earnings, Net loss, and Sections
2.3 and 3.3.
Delivery
The most common basis of recognizing revenue. Revenue is said to be earned
when the product or service has been delivered to the customer. See Revenue
recognition and Sections 6.6 and 6.7.
Demand loans
Loans that are repayable whenever the creditor wants. These are a form
of Callable debt. See Section 9.2.
Denial of opinion
A form of Auditor's opinion in which the auditor reports
that no opinion may be given about the financial statements' fairness.
See Section 5.8.
Depletion
An amortization (depreciation) method used for physically wasting assets
such as natural resources. See Section 8.10.
Depreciation
The recognition of the expense due to use of the economic value of fixed
tangible assets (for example, trucks, building, or plant). Usage, at least
in Canada, appears to be changing to replace the term depreciation with
the more general term amortization. See Amortization, Declining
balance amortization, Straight-line amortization, Book value,
and Accumulated amortization (depreciation).
See also Sections 1.10, 7.7, 8.10, and 8.12.
Diminishing balance
Another name for Declining balance amortization. See
Section 8.12.
Direct method of cash flow analysis
A method of preparing the Cash flow statement, especially
the Cash from operations Section, using records of cash
receipts and disbursements instead of the adjustments to net income used
in the more traditional Indirect method of cash flow analysis.
See Sections 4.3 and 4.4.
Direct write-off
Transferring the cost of an asset to an expense or Loss
account by removing the amount entirely from the asset account. Used in
cases where there is no prior allowance for the expense or loss, so used
when there is no Contra account such as Accumulated
amortization or Allowance for doubtful
accounts. See Section 7.7.
Disbursements
See Cash disbursements and Section 4.3.
Disclosure
Provision of information about economic events beyond that included in
the financial statement figures. Usually given in the notes to the financial
statements, but also provided outside the financial statements in press
releases, speeches, and other announcements. See Notes to the
financial statements, Management of corporate financial disclosure,
and Sections 1.10, 4.7, 5.2, 5.3, and 6.4.
Discontinued operations
Portions of the business that the enterprise has decided not to keep going
and/or to sell to others. It is good practice to separate the effects
of discontinued operations from continuing operations when measuring income
and cash flow. See Section 3.5.
Discount on bonds
Arises when bonds are issued at a price below their legal face value,
such as a $100 bond being issued for $95 cash, indicating a $5 discount.
See Section 9.3.
Discounted cash flows
"Present value" analysis of future cash flows by removing their presumed
interest components. See Present value and Section 10.7.
Discretionary expenses
Expenses that depend on management's discretion rather than on the necessities
of producing, selling, or shipping goods and services. Examples might
be donations, political contributions, some maintenance and warranty costs,
and bonuses not specifically called for in employment contracts. See Section
6.6.
DIT
See Deferred income tax.
Dividend payout ratio
The ratio of dividends declared to net income. It is defined and explained
in Section 10.4, Ratio #11.
Dividends
Distributions of a portion of net income to shareholders in the company.
Since this type of payment does not relate to the operating performance
of the company, it is placed on the statement of retained earnings and
not the income statement. See Statement of retained earnings,
Stock dividend, and Sections 2.3, 3.3, 3.4, and 9.4.
Double declining balance
See Declining balance amortization, Accelerated amortization,
Amortization and Section 8.12.
Double-entry accounting
The practice of recording two aspects of each transaction or event: the
resource effect and the source or story of that effect. Though much expanded
since its invention several hundred years ago, it is still the basis of
bookkeeping and financial accounting. See Sections 2.2 and 2.3.
Double-entry bookkeeping
See Double-entry accounting.
E
Earnings
A common synonym for net income. See Net income and Sections
2.3 and 3.3.
Earnings management
Choosing accounting methods and/or making business deals with the specific
objective of altering the size, trend, or interpretation of the company's
earnings (net income). Usually frowned on as a form of Manipulation
of accounting information. See Sections 3.10, 6.5, and 9.5.
Earnings per share (EPS)
The ratio of net income to the average number of common (voting) shares
outstanding, used to allow the owner of the shares to relate the corporation's
earning power to the size of his or her investment. The calculation of
EPS can be quite complex, so most public companies calculate it for the
users (as required by generally accepted accounting principles for such
corporations) and report it on their income statements. See Ratios,
Section 3.4, and Section 10.4, Ratio #8, where EPS is defined and explained.
Earnings-price ratio
The inverse of the Price-earnings ratio. Earnings per
share divided by the market price of one share of a corporation. See PE
ratio, Ratios, and Section 10.4, Ratio #10, where the ratio is
defined and explained.
EBITDA
Earnings before interest, tax, depreciation and amortization. A more positive
measure of net income for a company because it includes all revenues but
not all expenses. See Section 3.10.
E-commerce
See Electronic commerce and Sections 1.7 and 7.2.
Economic entity
The financial accounting definition of an enterprise, used to determine
what is to be included in transactions and in the financial statements.
Also used to refer to a group of companies considered to be under the
same control and, so, constituting a larger economic group. See Accounting
entity, Transaction, Consolidation, and Sections 2.9, 3.2, 5.2,
and 9.7.
Effective income tax rate
The income tax rate the company appears to incur, as deduced from the
financial statements. Differs from the statutory or legal rate because
of many possible tax incentives, varying rates across jurisdictions, etc.
Can be estimated as the company's income tax expense divided by income
before income tax, both from the income statement. See Section 9.3.
Effects analysis
See "What if" (effects) analysis and Sections 1.12 and
10.8.
Efficiency (of information use, or informational efficiency)
Refers to a market's prices quickly and appropriately changing to reflect
new information. See Section 5.10.
Efficient capital market
A theoretical description of a capital market whose prices respond quickly
and appropriately to information. See Section 5.10.
Efficient market hypothesis
The proposal that capital markets actually are "efficient," responding
quickly, smoothly, and appropriately to information. Some seem to be efficient,
and some do not. See Efficient capital market and Section
5.10.
Electronic commerce
Also called e-commerce, this is the conduct of financial
transactions, and much of the business transactions behind them, over
electronic media such as telecommunication lines or the Web. See Section
7.2.
Electronic funds transfer (EFT)
Transfer of money between a buyer's bank account and the seller's bank
account without need to write cheques or make deposits. EFT is what is
happening if a customer uses a bank card to pay for groceries in the supermarket
and the amount is automatically deducted from the customer's bank account.
See Section 7.2.
Employee deductions
Amounts an employer is required to deduct from an employee's pay and remit
to someone else on behalf of the employee. Such deductions include income
tax, pension contributions, union dues, and many other amounts the employee
wants to or has to pay before receiving the net pay that is left over.
See Section 7.6.
Entity
See Accounting entity and Economic entity.
Entry
See Journal entry and Sections 2.4, 2.6, and 3.6.
EPS
See Earnings per share and Section 10.4, Ratio #8.
Equities
A term sometimes used to refer to the right-hand side of the balance sheet
(Equities = Liabilities + Owners' equity).
Equity
The net assets or residual interest of an owner or shareholder (Assets
= Liabilities + Equity, or restated as Equity = Assets - Liabilities).
See Balance sheet equation and the components of equity
under Shareholders' equity, Retained earnings, and Sections
2.3, 2.9, and 9.4.
Equity basis
A method of accounting for intercorporate investments usually used when
a company owns between 20% and 50% of another company. The investment
is carried at cost, and any profit or loss, multiplied by the percentage
ownership of the owned company, is added to or deducted from the investment.
Any dividends received are deducted from the investment. See Cost
basis and Section 9.6.
Exchange
A transfer of goods, services, or money between two parties. In financial
accounting, the most significant kind of exchange is external, that is,
between the enterprise and parties it deals with, such as customers, suppliers,
owners, employees, and creditors. See Transaction and
Sections 1.7 and 2.4.
Expenditure
The term can mean any Cash payment, but usually spending
on noncurrent assets or debts is meant. Also used instead of the word
Expense for governments and other nonbusiness organizations
that may not use full accrual accounting and therefore do not have expenses
as accountants usually mean them. See Sections 3.3 and 5.5.
Expense
The cost of assets used and/or obligations created in generating revenue,
whether or not paid for in cash in the period they appear on the Income
statement. See Revenue, Matching, Expense recognition, Accrual
accounting, and Sections 1.10, 3.3, 3.4, 6.3, and 6.8.
Expense recognition
Incorporating measures of expenses incurred into the measurement of income
by entering into the accounts the amount of expense determined, according
to the firm's accounting policies, to be attributable to the current period.
See Matching, Revenue recognition, and Sections 6.3 and
6.8.
Expensing
Classifying an expenditure or promised expenditure (accrual) as an expense
rather than an asset. Opposite of Capitalization. See
Section 8.4.
External audit
The audit conducted by an External auditor. See Section
5.8.
External auditor
An independent outside auditor appointed to review the financial statements.
See Auditor and Sections 1.5, 5.1, 5.2 and 5.8.
Extraordinary items
Gains and losses that arise out of situations that are not normal to the
operations of a firm, not under the control of management, and not expected
to recur regularly in the future. See Section 3.5.
F
Fair market value
A value or price determined by an unrelated buyer and seller who are separate
and acting rationally in his or her own self-interest. The value is considered
more meaningful if established in an actual transaction than if estimated
hypothetically. Historical cost is assumed to have been
the fair market value of an asset when it was acquired. See forms of estimated
fair market value under Fair value accounting, Net
realizable value and Replacement cost, and Sections
8.2 and 9.7.
Fair value
An estimate of the fair market values of assets and liabilities of an
acquired company used in the purchase method of consolidation accounting.
See Sections 8.2 and 9.7.
Fair value accounting
Valuing assets on the balance sheet at their estimated value to the company,
such as if sold in a fair transaction. Fair value accounting would use
these values instead of Historical cost amounts on the
balance sheet. See Fair market value and Fair
value, and Section 6.3.
Fairness
Because of all the estimations, judgments, and policy choices that go
into preparing financial statements, there is no one correct set of figures
or disclosures. Instead, there is the idea of fairness, which means playing
by the rules and preparing statements honestly, without any intent to
deceive or to present any particular view. The opinion paragraph of the
auditor's report states that the financial statements "present fairly
... in accordance with generally accepted accounting principles." Attention
to fairness in the application of accounting principles requires care
and judgment in distinguishing the substance from the form of a transaction
and identifying the accepted principles and practices. See Generally
accepted accounting principles, Accounting standards, and Sections
5.2, 5.3, and 6.4.
FASB
See Financial Accounting Standards Board and Section 5.4.
FIFO
An inventory cost flow assumption by which cost of goods sold is determined
from the cost of the beginning inventory and the cost of the oldest purchases
since; thus the acronym FIFO, which stands for "first in, first out."
It follows therefore that under FIFO, ending inventory cost is determined
from the cost of the most recent purchases. Since the older inventory
is assumed to be sold first, FIFO in a period of inflation usually creates
a smaller cost of goods sold and higher income and ending inventory asset
value than LIFO or Weighted average.
See Cost flow assumption, Cost of goods sold, and Section
8.7.
Financial accounting
The reporting in Financial statements of the financial
position and performance of a firm to users external to the firm on a
regular, periodic basis. See Management accounting and
Section 1.3.
Financial Accounting Standards Board (FASB)
A U.S. body responsible for setting the standards that financial reporting
must follow. The Canadian counterpart is the Canadian Institute of Chartered
Accountants. See CICA Handbook and Section 5.4.
Financial assets
Near-cash assets such as traded shares, bonds, some kinds of loans, and
accounts receivable, especially as would be held by financial institutions
such as banks. Part of the general category of Financial instruments.
See Section 8.2.
Financial instruments
Debts, shares, foreign exchange contracts, and other financial obligations
and assets, many of which are traded on Stock markets
and other Capital markets. See Sections 2.9, 5.10, and
9.5.
Financial leverage
See Leverage and Section 10.6.
Financial performance
The enterprise's ability to generate new resources from day-to-day operations
over a period of time, via dealing with customers, employees, and suppliers.
Measured by the Net income figure in the Income
statement and the Cash from operations figure
in the Cash flow statement, as well as by the details
of both statements. See Sections 1.3 and 3.3.
Financial position
The enterprise's set of assets, liabilities, and owners' equity at a point
in time. Measured by the Balance sheet, also called the
Statement of financial position. See Sections 1.3 and 2.3.
Financial reporting
Use of Financial statements and Disclosure
to report to people outside the enterprise on its Financial performance
and Financial position. See Section 5.6.
Financial statement analysis
Use of the financial statements to develop summary measures (ratios) and
interpretive comments about an enterprise's financial performance and
position. See Ratios and Sections 10.3 and 10.4.
Financial statements
The reports, for people external to the enterprise but also of interest
to management, referred to in the definition of Accounting,
which generally comprise a Balance sheet, Income statement, Statement
of retained earnings, Cash flow statement, and the Notes
to these statements. See each of these statements in this glossary and
Sections 1.3 and 5.6.
Financing
The combination of Debt and Equity that
accounts for the company's assets. See Section 2.3. See also Balance
sheet equation. Sometimes there is also Off-balance-sheet
financing.
Financing activities
The category of the Cash flow statement that describes
the cash obtained or used in connection with noncurrent debt and equity.
See Section 4.3.
First-in, first-out
See FIFO and Section 8.7.
Fiscal
Refers to the finances of an entity, and so is used to designate the period
covered by the financial statements, which may not accord with regular
calendar periods. For example, some companies use a 52-week "fiscal year"
in some years and 53 weeks in others, and such a Fiscal period
may end at any time of the calendar year the company has chosen. See Section
2.10.
Fiscal period
The period (usually a year, a quarter, or a month) over which performance
(net income) is measured and at the end of which position (balance sheet)
is determined. See Section 6.5.
Fixed assets
Tangible, noncurrent, physical assets that are not expected to be used
up in one operating cycle, but are expected to be used in generating revenue
for many periods (for example, machines, buildings, land). See Noncurrent
assets and Section 8.10.
Foreign currency translation, foreign currency translation adjustment
The conversion of foreign monies into domestic monies at a specific date-either
a transaction date, if translating a single transaction, or a financial
statement date, if translating a foreign operation for consolidation purposes.
This process normally produces an adjustment to make the accounts balance,
shown in the Equity Section of the balance sheet. See Accumulated
foreign currency translation adjustment and Sections 2.9 and
2.10.
Form versus substance
A potential choice or conflict among accounting methods in which one possibility
("form") fits the accounting rules better and another possibility ("substance")
reports the business and economic reality better. See Sections 5.2 and
5.3.
Franchising
A franchisor sells the right to use the franchisor's name, products, or
other economic goods to a franchisee. See Section 6.8.
Fund accounting
A kind of accounting used by governments and other nonbusiness organizations
to segregate groups of assets, liabilities, some forms of equity, revenues,
and expenditures, in accordance with the purpose for which the funds were
obtained. For example, donations received might be segregated from research
grants received so that each kind of money is put to the use intended
when it was obtained. See comments at the end of Section 9.4.
Funds statement
See Cash flow statement and Section 4.2.
Future income tax, future portion of income tax expense
Income tax expected to be paid in future years based on business events
and income tax calculations done up to the present. The liability and
associated expense are calculated by the Liability method,
which estimates the likely future tax payments directly, and which has
recently replaced the Deferral method and Deferred
income tax. See Section 9.3.
Future income tax liability
Estimated income taxes due in the future, based on accounting income and
income tax calculations done up to the present. The liability results
from Future income tax accounting. This liability is
usually non-current. (Future income tax assets also can arise from future
income tax accounting.) See Section 9.3.
Future value (FV)
The amount to which presently held financial assets or liabilities will
build up to as interest is added to the principal amount invested or borrowed.
Often contrasted with Present value, which is the future
cash flows minus interest included in them. See Section 10.7.
G
GAAP
See Generally accepted accounting principles and Sections
5.1, 5.3, 6.4, 8.2, and 8.5.
GAAS
See Generally accepted auditing standards and Section
5.8.
Gain, gains
Usually refers to the profit (proceeds minus book value) obtained from
the disposition of assets (or liabilities) not normally disposed of in
the daily course of business, such as from selling land, buildings, or
other noncurrent assets, or from refinancing debt. Gains are considered
nonoperating items and so, if they are material, they are segregated from
normal revenues and expenses on the income statement and the cash flows
involved are included in the investing or financing Sections of the cash
flow statement. See Sections 7.7 and 8.11.
Gain (loss) on sale
A gain on sale occurs when a company receives a larger
amount of proceeds for an asset than its book value. An income statement
account is then credited with the difference. A loss
on sale occurs when the asset's book value is more than the proceeds received
from the sale. An income statement account is then debited with the difference.
See Book value and Sections 7.7 and 8.11.
General journal
An accounting record used mainly to record accrual adjustments (journal
entries) not provided for in separate specialized journals. See Sections
3.8 and 7.2.
General ledger
A collection of individual accounts that summarizes the entire financial
accounting system of an enterprise. See Section 2.5, 3.8, and 7.2.
Generally accepted accounting principles (GAAP)
Principles and methods of accounting that have the general support of
standard-setting bodies, general practice, texts, and other sources. See
Accounting standards and Sections 1.1, 5.1, and 5.3.
Generally accepted auditing standards (GAAS)
The professional standards of care and evidence compilation that external
auditors are expected to follow when preparing their reports on financial
statements. See Auditor's report and Section 5.8.
Going concern
A fundamental assumption in financial accounting that a firm will be financially
viable and remain in business long enough to see all of its current plans
carried out. If a firm is not a going concern, normal accounting principles
do not apply. See Liquidation value and Sections 5.2,
8.2, and 9.2.
Goods and services tax
See GST and Sections 7.2 and 7.6.
Goodwill
The difference between the price paid for a group of assets and the sum
of their apparent fair (market) values. Arises when a bundle of assets
or a whole company is acquired and when the difference is positive. ("Badwill,"
a negative difference, is not recognized.) See Sections 2.9, 2.11, 8.14,
and 9.7.
Goodwill arising on consolidation
Goodwill existing only in Consolidated financial statements accounted
for using the Purchase method, indicating that the "parent"
corporation paid more for its investment in a "subsidiary" corporation
included in the consolidated statements than the fair values of the subsidiary's
assets. See Goodwill and Sections 2.9 and 9.7.
Governments
In this book, governments are used mainly as an example of organizations
that have accounting systems and prepare financial statements but do not
have the characteristics of businesses, especially the goals and ownership
structure. See Section 5.5. Governments also levy GST, income and other
taxes and so have an influence on businesses' accounting. See Sections
7.6 and 9.3.
Governmental accounting
Accounting procedures, usually different from GAAP for
businesses but in recent years becoming more like GAAP,
used to account for governments and their agencies. See Section 5.5.
Gross margin or gross profit
Revenue minus cost of goods sold expense. See Sections 3.4 and 10.4.
Gross margin ratio or gross profit ratio
Equals (revenue - cost of goods sold expense) / revenue. See Ratios
and Section 10.4, Ratio #5, where the gross margin (or gross profit) ratio
is defined and explained. See also Section 3.4.
GST (Goods and services tax)
The Canadian federal goods and services tax, a kind of sales tax which
businesses must collect on most of their revenue and remit to the government
after deducting any GST the businesses paid on their own purchases. See
HST, PST, and Sections 7.2 and 7.6.
H
Harmonization
The movement toward making countries' accounting standards the same as
those of other countries, and that would strengthen the internationalization
of accounting standards. See Section 5.5.
Historical cost
The dollar value of a transaction on the date it happens, normally maintained
in the accounting records from then on because of accounting's reliance
on transactions as the basis for recording events. The cost, or historical
cost, of an asset is therefore the dollar amount paid for it or promised
to be paid as of the date the asset was acquired. See Cost, Lower
of cost or market, Conservatism, and Sections 1.7, 5.2, 8.2,
and 9.2.
HST
Harmonized sales tax. See GST and Section 7.6.
I
IASB
See International Accounting Standards Board and Section
5.4.
IASC
See International Accounting Standards Committee.
Impaired assets
Assets whose value to the business has gone down since they were acquired.
This is especially used in reference to Investments and
Goodwill, which, if impaired, have to be reduced in value
on the balance sheet, creating a Write-off or loss expense.
See Sections 8.2 and 8.14.
IN(ATI)
The after-tax overall interest rate paid by an enterprise on its liabilities.
Used in the Scott formula. See Section 10.6.
Income
The (net) income of a business is the residual after deducting expenses
from revenues. Also referred to as profit or earnings. See Accrual
income, Cash income, Net income, and Sections 1.9, 2.3, 3.3,
3.4, and 6.6.
Income before (income) tax
An amount equal to revenue plus other income minus all other ordinary
expenses except income tax. Appears quite low down on the income statement.
Some nontaxed or special items, such as Extraordinary items,
are placed after income tax has been deducted, and are therefore not part
of income before income tax. See Section 3.5.
Income from continuing operations
Income after deducting income tax but before adding gains or deducting
losses from Discontinued operations. See Section 3.5.
Income measurement
A phrase used to describe financial accounting's way of calculating (net)
income as shown on the income statement. The phrase is also used to describe
the general problem of determining what income is and considering alternatives
to the usual Accrual accounting basis. See Sections 3.2
and 8.2.
Income smoothing
The "manipulation" of net income so that the year-to-year variations in
reported income are reduced. See Sections 3.10 and 6.4.
Income statement
A financial statement that summarizes revenues and expenses of a business
for a stated period of time and computes the residual net income (revenues
minus expenses). Sometimes referred to as "Statement of Earnings," "Statement
of Operations," or "Statement of Income." See components of the income
statement such as Revenue, Expense,
and Net income; also Financial performance
and Sections 1.1, 3.3 and 3.5.
Income tax
Tax assessed on income, according to laws about the computation of income
for income tax purposes. See Sections 3.5 and 9.3.
Income tax allocation
The attempt to allocate income tax expense to the appropriate year or
activity to which it applies even if it is paid in another year or in
aggregate across activities. See Income tax expense, Deferred
income tax, Future income tax, Intraperiod tax allocation, and
Sections 3.5 and 9.3.
Income tax expense
An estimate of the current and future income tax arising from the income
as computed on the income statement and matched to the revenues and expenses
shown on the statement. See Income tax allocation and
Sections 3.5 and 9.3.
Income tax payable
The liability for the amount of income tax due on the year's income, calculated
according to the income tax law whether or not that matches the Income
tax expense. See Section 9.3.
Indenture
A contract signed by a borrower and lender under which the borrower undertakes
to meet certain conditions, such as keeping the working capital ratio
above a specified amount, violation of which would give the lender the
right to ask for immediate repayment of the loan or to take other action.
See Section 9.3.
Independence
Having no financial or other interest that would influence one's decisions.
External auditors are expected to be independent of the
enterprises they audit, and so can hold no shares, nor management positions,
etc. See Sections 1.4, 5.8, and 5.9.
Indirect method of cash flow analysis
The traditional method of deriving the Cash flow statement,
especially the Cash from operations Section, by adjusting
net income for noncash items. See Sections 4.3 and 4.5.
Information system
An organized and systematic way of providing information to decision makers.
Accounting is an information system. See also Management information
system and Section 1.7.
Input market value
The market value of an asset calculated as the amount it would cost to
replace or reproduce it. See Replacement cost and Section
8.2.
Intangible assets
Nonphysical, noncurrent assets such as copyrights, patents, trademarks,
import and export licences, other rights that give a firm an exclusive
or preferred position in the market place, and goodwill. See Assets,
Amortization, Goodwill, and Sections 2.11, 7.7, and 8.14.
Intercorporate investments
Investments by one corporation in other corporations. See Consolidation,
Equity basis, Cost basis, and Section 9.6.
Interest
The amount charged by a lender for the use of borrowed money. See Sections
3.5, 10.2, and 10.7.
Interest coverage ratio
Usually calculated as (income before interest expense + income tax) /
interest expense. See Ratios and Section 10.4, Ratio
#20, where the interest coverage ratio is defined and explained.
Interim financial reporting
Reporting financial position and performance at a shorter interval than
one year. The most common example is the three-month "quarterly reporting"
done by companies listed on stock exchanges. See Section 5.6.
Internal auditor
An auditor who works for the enterprise and thus verifies information
for management's use and to help the enterprise perform better. See Section
1.5 and contrast with External auditor.
Internal control
Methods of providing physical security and management control over an
enterprise's cash, inventories, and other assets. See Sections 7.2-7.9.
Internal financing
Financing provided from funds raised in day-to-day operations rather than
by borrowing or issuing equity. See Cash from operations
and Section 4.7.
International Accounting Standards Board (IASB)
The international accounting standard-setter, headquartered in London,
England. See Sections 5.4 and 5.5.
International Accounting Standards Committee (IASC)
The predecessor of the International Accounting Standards Board
(IASB).
Interperiod tax allocation
Allocating the enterprise's income tax expenses over several years to
match the expenses to the incomes shown in the income statement. Necessitated
by timing differences between GAAP and the income tax law in the recognition
of various revenues and expenses. See Sections 3.5 and 9.3. Contrast Intraperiod
tax allocation.
Intraperiod tax allocation
The attempt to match income tax expense to the various items in the income
statement, especially separating general income tax expense from that
due to special items below that expense on the income statement, such
as Extraordinary items and Discontinued operations.
See Sections 3.5 and 9.3.
Inventory(ies)
The goods purchased or manufactured by a company for sale, resale, or
further use in operations, including finished goods, goods in process,
raw materials, and supplies. See Current assets, Inventory costing,
and Sections 2.3, 2.4, 3.3, 7.9, and 8.7.
Inventory costing
Comprises various methods of determining the cost of inventory for balance
sheet valuation purposes and of valuing cost of goods sold. The more common
methods are FIFO, LIFO, and Weighted
average. See also Sections 8.4 and 8.7.
Inventory turnover
Cost of goods sold expense / average inventory assets. See Ratios
and Section 10.4, Ratio #13, where inventory turnover is defined and explained.
Inventory valuation
The process of determining the amount at which inventory is shown on the
balance sheet, normally the Lower of cost or market.
See Inventory costing and Section 8.7.
Investing activities
The category of the Cash flow statement that describes
the cash used to acquire, or obtained by disposing of, noncurrent assets.
See Section 4.3.
Investments
Usually refers to such assets as shares or bonds held for their financial
return (interest or dividends), rather than for their use in the enterprise's
operations. See Sections 8.5, 9.6, and 10.2.
Investors
People who own Investments and who, because of their
interest in the value of those shares or bonds, are interested in information
about the enterprises issuing such shares and bonds. See Sections 1.5
and 5.10.
J
Joint venture
A business arrangement between corporations that is like a corporate partnership.
See Section 9.6.
Journal entry
A record of a transaction or accrual adjustment that lists the accounts
affected and in which the total of the debits equals the total of the
credits. See Account and Sections 2.4, 2.6, and 3.8.
Journals
Records in which accounting transactions of a similar nature are permanently
recorded. See Books of original entry, General journal,
and Section 7.2.
L
L/E
Total liabilities / total equity, the Debt-equity ratio
used in the Scott formula. See Section 10.6.
Last-in, first-out
See LIFO and Section 8.7.
Lease
A contract requiring the user of an asset to pay the owner of the asset
a predetermined fee for the use of the asset. See Section 8.14.
Leasehold improvements
Assets such as fixtures, decorating, and alterations installed into rented
(leased) premises and so being economic assets for the enterprise even
though not strictly owned because they form part of the leased property.
Such improvements are usually amortized over the period of the lease,
as a reasonable estimate of their useful life. See Sections 3.12 and 8.4.
Ledger
Any book or electronic record that summarizes the transactions from the
"books of original entry" in the form of accounts. See Accounts,
General ledger, Journals, Trial balance, and Section 7.2.
Letter to the shareholders
Part of the Annual report, it is a letter from senior
management to the shareholders, summarizing major decisions and strategies,
commenting on the company's performance for the year and usually looking
ahead to future performance. See Section 5.6.
Leverage
Leverage, or financial leverage, refers to the increased rate of return
on owners' equity when assets earn a return larger than the interest rate
paid for debt financing them. The Scott formula indicates
how part of the Return on equity is made up of Operating return
and Leverage return. See Scott formula
and Sections 10.4 and 10.6.
Leverage analysis
Study of the financial statements and corporate financial structure in
order to determine how, and how well, the company is making use of Leverage.
See Section 10.6.
Leverage potential
The difference between operating return (return on assets) and borrowing
cost, which produces Leverage when multiplied by the
degree of borrowing in the Scott formula. See Section 10.6.
Leverage return
The portion of the Return on equity that is due to earning
more return on borrowed funds than it costs in interest to borrow them.
See Scott formula, Operating return, and Section 10.6.
Liability
A debt or obligation, legally existing or estimated via accrual accounting
techniques, of the enterprise to another party (creditor) arising from
a past transaction (for example, a bank loan, a shareholder loan, an account
payable, a mortgage, an accrued expense, or deferred revenue). See Creditor
and Sections 1.1, 2.3, 2.9, 2.10, 9.2, and 9.3.
Liability method
A method of Income tax allocation in which the impact
of Future income tax is estimated according to what is
expected to be paid rather than according to past timing differences as
done in the former Deferred income tax accounting. The
liability method is common in other countries, and Canada has recently
adopted it too. See Section 9.3.
LIFO
A cost flow assumption that is the opposite of FIFO. "Last in, first out"
assumes that the units sold are from the most recent purchases and thus
bases cost of goods sold on the most recent purchases and ending inventory
on the oldest purchases. Because of this, in a period of inflation the
LIFO cost of goods sold figure is usually the highest of the inventory
costing methods, and the inventory value on the balance sheet is usually
the lowest. See Cost flow assumption, FIFO, Weighted average,
Inventory costing, and Section 8.7.
Line of credit
Advance approval from a bank to borrow money under agreed conditions.
A line of credit usually means that the borrower can get the money as
needed (for example, when the bank account is overdrawn), without further
approval.
Liquidation value
The value of a firm's assets if they are all to be sold off when it is
no longer a going concern. See Section 8.2.
Liquidity
The excess of very short-term assets over short-term debts, and so the
measure of a company's ability to pay its immediate obligations in cash
at the present moment. See Solvency and Sections 4.2,
4.8, and 10.4 (Ratios #18-#20).
Listed (shares)
A listed company (corporation) is one whose shares are available for trading
on a Stock exchange. See Public company
and Sections 5.3 and 5.10.
Loans from shareholder(s)
Informal loans to the corporation by shareholders(s), who therefore act
as creditors as well as owners. They are most common in private company
corporations. See Section 9.3.
Long-term debt-equity ratio
Calculated as (long-term loans + mortgages + bonds + similar long-term
debts) / total equity. See Ratios and Section 10.4, Ratio
#16, where the ratio is defined and explained.
Loss, losses
Usually refers to the case of a negative return (proceeds being less than
book value) obtained from the disposition of assets (or liabilities) not
normally disposed of in the daily course of business, such as from selling
land, buildings or other noncurrent assets, or from refinancing debt.
These are considered nonoperating items and so if material are segregated
from normal revenues and expenses on the income statement and the cash
flows involved are included in the investing or financing Sections of
the cash flow statement. See Sections 2.3, 3.3, 7.7, and 8.11.
Loss on sale
Selling a noncurrent asset for less than its book value. See Gain
(loss) on sale, Book value, Loss, and Sections 7.7 and 8.11.
Lower of cost or market
A method of valuing items of inventory, temporary investments, or other
current assets, under which losses inherent in declines of the market
prices of items held below their costs are recognized in the period in
which such declines become apparent. Gains from market increases above
cost are not recognized until the items are sold. Lower of cost or market
is a conservative procedure. See Conservatism and Sections
8.2, 8.5, and 8.9.
M
Management
The people (managers) who run the day-to-day operations of an enterprise
or other organization, in contrast to the shareholders (investors), members,
and voters who own or legally control the enterprise. See Section 1.3.
Management accounting
Accounting information designed to aid management in its operation and
control of the firm, and in its general decision making. It is different
from Financial accounting, which is aimed primarily at
users external to the firm. See Section 1.3.
Management discussion and analysis (MD&A)
A Section of a company's annual report in which management reviews the
results for the year and explains what happened in some detail. The MD&A
is used by many analysts to supplement ratios and other forms of analysis.
See Annual report and Sections 5.6 and 10.3.
Management information system
The accounting, marketing, production, employee, and other recordkeeping
and reporting systems within the enterprise used by management in its
internal decision making. Often abbreviated as MIS and often associated
with computer systems. See Management accounting, Electronic commerce
and Section 7.3.
Management of corporate financial disclosure
Steps taken by management to manage the outward flow of information about
an enterprise, much as other aspects of the enterprise are managed. See
Section 3.10.
Managers
See Management and Section 1.3.
Manipulation
The accusation that management, in choosing its accounting and disclosure
policies, attempts to make the performance and position measures suit
its wishes. See Sections 3.10 and 6.4.
Marginal analysis
Focusing on revenues or expenses that change between two alternatives,
rather than including all revenues and expenses, so as to highlight effects.
See "What if" (effects) analysis and Section 1.12.
Market capitalization
An estimate of the value of a listed public company made by multiplying
the current share price times the number of shares issued and outstanding.
See Section 2.3 and comments under Ratio #9 in Section 10.4.
Market value
See Fair market value and Sections 2.3, 8.2, and 8.3.
Marketable securities
Investments having a ready market for resale and held as a way of earning
a return from temporarily unneeded cash. See Temporary investments
and Sections 8.5 and 9.6.
Markup
The difference between the enterprise's selling prices for its products
and the unit costs it incurs for those products, often a function of a
specific decision to add a profit margin to the cost incurred. See comments
about markup in Section 3.4 regarding Gross margin and
Sections 7.9 and 8.9 regarding the Retail inventory control method.
Matching, matching principle
The concept of recognizing expenses in the same accounting period in which
the related revenues are recognized. See Accrual accounting, Expense
recognition, Revenue recognition, and Sections 5.2, 5.3, 5.8,
6.3, 6.4, 8.6, and 9.3.
Material, materiality
In accounting, material means that the magnitude of an omission or misstatement
of accounting information makes it probable that, in the light of surrounding
circumstances, the judgment of a reasonable person relying on the information
would have been changed or influenced by the omission or misstatement.
Materiality and Decision relevance are both defined in
terms of what influences or what makes a difference to a decision maker.
A decision not to disclose certain information may be made because it
is believed that investors or other users have no need for that kind of
information (it is not relevant) or that the amounts involved are too
small to make a difference (it is not material). See Relevance
and Sections 3.5, 5.2, 5.3, and 6.4.
MD&A
See Management discussion and analysis and Sections 5.6
and 10.3.
Measurement, measuring
The attachment of dollar figures to assets, liabilities, revenues, and
expenses in order to produce the figures (values) on the balance sheet
and to enable the computation of income (revenues minus expenses) and
equity (assets minus liabilities). See Asset valuation, Balance
sheet valuation, Income measurement, Recognition, Income, and
Section 8.2.
Merger
The joining together of two corporations such that the owners of both
become the owners of the combined corporation and both corporations are
approximately equal contributors to the combination. See Section 9.7.
Minority interest, noncontrolling interest
An account in the liabilities part of the consolidated balance sheet.
The percentage of the subsidiary's equity not owned by the parent company
is designated as minority (noncontrolling) interest liability. A minority
(noncontrolling) interest expense calculated in a similar way is also
deducted in computing consolidated net income. See Consolidation
and Sections 2.9 and 9.7.
Mortgage
A form of Security on a loan in which the lender has
a direct claim on title to property specified in the mortgage. Usually
used to finance the acquisition of that property. See Sections 2.3, 2.7,
and 9.3.
Moving average cost, moving weighted average
See AVGE, Average cost, and Section
8.7.
N
Net
In accounting, net means the residual after one quantity is subtracted
from another. Examples are Net book value, Net income, Net-of-tax
analysis, and Net realizable value. See Section 2.7.
Net book value
The cost of an asset minus any accumulated depreciation, amortization,
allowance for doubtful accounts, and so on. See Book value
and Sections 7.7 and 8.11.
Net income
Equals income minus income tax expense, plus or minus extraordinary and
special items (each Net of any income tax). See Income,
Retained earnings, Matching, and Sections 1.12, 3.3, 3.5, and
6.3.
Net loss
Negative Net income. See Section 3.3.
Net present value
The present value of future cash flows minus the initial investment required
to obtain those cash flows. See Section 8.2.
Net-of-tax analysis
A method of determining the impact of management decisions or accounting
changes in which the effects of income tax are included to produce the
net after-tax effect of the decision or change. See Sections 1.12, 10.2,
and 10.8.
Net realizable value
The fair market value that an asset will bring if it is sold through the
usual product market minus any completion or disposal costs. See Fair
market value, Lower of cost or market, and Sections 8.2 and 8.9.
Neutrality
An objective of preparing financial accounting information in which the
information should represent phenomena neutrally, without attention to
the particular interests of any party or parties. See Objectivity,
Independence, and Section 5.2.
Noncontrolling interest
The portion of a subsidiary corporation included in consolidated financial
statements that is not owned by the controlling (majority) owners of the
parent corporation. See Minority interest, Consolidation,
and Sections 2.9 and 9.7.
Noncurrent assets
Assets expected to bring benefit for more than one fiscal year. See Fixed
assets, Current assets, and Sections 2.3 and 8.11.
Noncurrent liabilities
Liabilities expected to be repaid or otherwise removed more than one year
in the future. See Liability and Sections 2.3 and 9.3.
Nonoperating cash flows
Cash inflows and outflows related to noncurrent investments, financing,
and usually dividends, and so separate from the cash flows resulting from
day-to-day operations. See Cash flow statement and Sections
4.2 and 4.3.
No-par (shares)
Shares having no legal minimum issue price (Par value)
and so the proceeds of which are simply added to share capital at whatever
price is obtained in each issue. See Section 2.9.
Notes payable
Accounts payable that are supported by signed contracts or other agreements
and usually carrying interest. Often used to describe financing obtained
from banks and other financial institutions that is used to provide operating
funds or funds for construction prior to completion of projects. Notes
may be used prior to obtaining more secured financing like a Mortgage.
Notes receivable
Accounts receivable supported by signed contracts or other agreements
specifying repayment terms, interest rate, and other conditions. See Section
8.6.
Notes, Notes to the financial statements
Notes appended to the statements, providing information about the accounting
policies chosen and other supplementary information helpful to interpreting
the figures. See Sections 1.3, 2.3, 2.7, 4.7, 5.6, 5.7, 6.4, and 10.3.
Not-for-profit accounting
Procedures used to account for nonbusiness, nongovernment entities. These
procedures increasingly follow GAAP. See Section 5.5.
Not-for-profit organizations
In this book, another example of organizations, other than Governments,
that have accounting systems and prepare financial statements but differ
from businesses, especially in goals and ownership structure. See Section
5.5.
O
Objectivity
The notion that the information in financial statements must be as free
from bias as possible, in order that all user groups can have confidence
in it. An accountant attempts to record and report data that are based
on objective sources to make the data more acceptable to outside parties.
Because completed arm's-length transactions are supported by documents
that can be verified by any interested observer, these constitute the
preferred basis of measurement. See Fairness, Neutrality, Relevance,
Reliability, and Sections 1.4, 5.2, 5.3, and 5.8.
Off-balance-sheet financing
Methods of obtaining financing that avoid having to record the sources
as liabilities or equity. See Sections 2.9 and 9.5.
Ontario Securities Commission (OSC)
The securities-trading regulator for Ontario and the leading such regulator
in Canada. See Section 5.4.
Operating activities
See Cash from operations and Section 4.2.
Operating income before tax
The income after deducting the day-to-day expenses incurred in earning
revenues but before deducting expenses coming from other sources such
as interest (based on borrowing), gains or losses on asset disposals,
and income tax. See Section 3.10.
Operating lease
A contract to rent or use an asset that does not convey rights similar
to ownership of the asset and that therefore is accounted for simply as
rental expense. See Capital lease and Section 8.14.
Operating return
The return earned by an enterprise before considering the cost of financing
and usually also before considering nonrecurring items. See Leverage
return, Scott formula, and Section 10.6.
Opportunity cost
The return that could have been earned if funds were used in another way
than the way they are being used or are proposed to be used. It is called
a cost because it is the return given up by not adopting that other use.
See Section 10.7.
OSC
See Ontario Securities Commission and Section 5.4.
Other assets
A catch-all category used for noncurrent (and occasionally current) assets
that do not fit into other categories, are not material individually but
aggregate to a material total. See Section 8.14.
Output market value
The market value of an asset if sold. See Net realizable value
and Section 8.2.
Overdraft
See Bank overdraft and Section 2.7.
Overhead costs
Costs of manufacturing inventories or constructing other assets that are
incurred indirectly, such as heat, power, and supervisors' salaries. See
Section 8.4.
Owners
Parties who have contributed resources in return for the right to dividends
and any residual value (equity) of the enterprise. See Sections 1.5, 2.9,
and 9.4.
Owner's capital
The owner's equity of the proprietor of an unincorporated business. See
Capital, Equity, and Sections 2.9 and 9.4.
Owners' equity
See Equity, Shareholders' equity, and Sections 2.3, 2.9,
2.10, and 9.4.
P
Pacioli
Luca Pacioli's Suma is the first known book describing double-entry bookkeeping.
It was published in 1494 and quickly became influential in the development
of accounting and business in Europe. See Section 2.2.
Packing slip
A document accompanying a shipment that describes the shipment's contents
and can be used to verify the supplier's invoice for the cost of the shipment.
See Section 7.2.
Par value
A value set as the legal minimum amount for which a corporations's shares
may be issued. Used in earlier years to prevent "watering the stock" and
other frauds in which managers sold shares cheaply to themselves or their
friends and then outvoted more legitimate shareholders. With the protection
to shareholders provided by greater regulation and scrutiny of companies'
affairs in the present time, Canadian companies typically have No-par
shares instead, but par value is still used in many other jurisdictions,
including some in the United States. See Contributed surplus
and Sections 2.9 and 9.4.
Parent
The dominant corporation in a corporate group linked by ownership, the
name of which is usually used in the consolidated financial statements.
See Sections 2.9 and 9.7.
Partners' capital, Partners' equity
The owners' equity Section of a partnership's balance sheet. See Partnership
and Sections 2.3, 2.9, and 9.4, and the example in Section 3.8.
Partnership
A contractual agreement among individuals to share resources and operations
in a jointly run business. This form of business does not have the privilege
of limited liability. See Corporation, Proprietorship,
and Sections 2.9 and 9.4.
PE ratio
The price-earnings ratio is calculated as the current price of a share
in the corporation divided by its earnings per share. See Price-earnings
ratio, Ratios, and Section 10.4, Ratio #10, where the ratio is
defined and explained.
Percentage of completion
A method of allocating revenue (and associated expenses) over several
fiscal periods during which the revenue is earned. Used for long-term
construction contracts, franchise revenue, and similar multi-period revenues.
See Sections 6.7 and 6.8.
Period expenses
Expenses that are related to the passage of time rather than to the level
of sales volume or other activities. Examples are interest, many salaries,
and portions of some Overhead costs such as heat, light,
and property taxes. See Section 6.6.
Periodic inventory control method
A method of calculating inventory that uses data on beginning inventory,
additions to inventory, and an end-of-period count to deduce the cost
of goods sold. See Perpetual inventory control method, Retail
inventory control method, and Section 7.9.
Periodic reporting
A basic convention of financial accounting that holds that accounting
information must be assembled and presented to users at regular intervals
(at least yearly and often quarterly or monthly). See Section 6.5.
Perpetual inventory control method
A method of controlling inventory that maintains continuous records on
the flow of units of inventory. Thus, there are figures on record for
beginning inventory, each unit added to inventory, and each unit removed
from inventory for sale. From this, an ending inventory figure can be
determined and checked against the figure from a physical count. This
method provides better internal control than the periodic inventory method,
but it is also more costly to maintain the extra records. See Periodic
inventory control method and Section 7.9.
Personal guarantees
Additional Security on loans, often taken by banks lending
to private corporations, in which some or all shareholders sign agreements
to contribute personal assets if the corporation does not repay the loans
or pay interest on schedule. See Section 9.3.
Petty cash
A small fund of cash kept on hand by an employee for paying small expenses
such as postage, minor supplies, and courier charges. See Section 7.5.
Plug
The double-entry system requires that debits equal credits. If adding
up all the debits and the credits does not produce two equal figures,
the statements must be adjusted so that a balance occurs. The amount of
adjustment needed is often called a "plug." This would only be needed
if there had been an error somewhere, though sometimes the word plug is
used in criticism of accrual, consolidation, or other adjustments that
produce amounts the critic does not like.
Point of sale
Often used to refer to the point in time when a sale has been completed
and the product or service has been delivered to the customer, which is
the most common point of recognizing revenue. See Revenue recognition
and Sections 6.6 and 6.7.
Pooling of interests method
A type of business combination (compare with Purchase method).
In pooling of interests, the assets, liabilities, equities, revenues,
and expenses of the firms are added together using their book values.
See Consolidation and Section 9.7.
Post-closing accounts
The accounts as they exist after the revenues, expenses, and dividends
accounts have been transferred to retained earnings ("closed"). See Sections
3.6 and 3.7.
Post-closing trial balance
A Trial balance of the Post-closing accounts. See Section 3.7.
Post, posting, posted
Transfer, transferring, or having transferred, journal entries to ledger
accounts and thereby making them permanent. The only way to fix a mistake
is to use an adjusting or correcting entry and post that. See Sections
2.5, 2.6, 3.6, 3.8, and 7.2.
Preferred shares
Ownership shares having special rights in addition to (or instead of)
those going with common shares. See Sections 2.9 and 9.4.
Premium on bonds
Arises when bonds are issued at a price above their legal face value,
such as a $100 bond being issued for $105 cash, indicating a $5 premium.
See Section 9.3
Prepaid expense
An expenditure recorded as a current asset because the benefit will be
obtained in the near future (for example, insurance coverage good for
the next year). See Section 6.10.
Preparers
Managers and accountants who produce financial statements. See Section
1.5.
Present value
Future cash inflows or outflows reduced to their "present" amount by removing
from them the interest that could have been earned or paid had the money
been on hand for investment today. See Sections 8.6, 8.14, 9.3 and 10.7.
Present value analysis
Analysis of future cash flows done by removing the presumed interest components
of those flows. See Discounted cash flows and Section
10.7.
Priced to yield
A reference to issuing a security such as a bond for different proceeds
than the face value (the amount that will have to be repaid), so that,
based on those proceeds, the bond's effective interest rate equals ("yields")
some desired rate. For example, a $100 5% bond could be issued for less
than $100 cash so that the bond's interest would amount to 6% on the lower
amount the bond sold for. The bond would be said to yield 6%. See Section
10.7.
Price-earnings ratio
Market price of one share of a corporation divided by earnings per share.
See PE ratio, Ratios, and Section 10.4, Ratio #10, where
the ratio is defined and explained.
Price-level-adjusted historical cost
A rarely used asset valuation method in which the historical cost of each
asset is revalued for inflation. See Historical cost,
Fair market value, and Section 8.2.
Price to book ratio
The ratio of a share's current market value to its Book value,
or in aggregate, the ratio of the company's total Market capitalization
to the Book value of its equity. See Sections 2.3, 2.10
and 10.4, Ratio #9, where the ratio is defined and explained.
Principal
(1) In interest calculations, the principal is the amount of money initially
borrowed, lent, or invested and on which interest is calculated. See Section
10.7. (2) In some kinds of Contracts, the principal is
the person to whom the Agent is responsible. See Sections
5.11 and 10.7.
Prior-period adjustment
A method formerly used in Canada but not recommended any more by Accounting
standards, in which accounting is done separately for a gain or loss specifically
identified with and directly related to the activities of particular prior
periods, but not attributable to economic events occurring subsequent
to those periods (so net income of those later periods is not increased
or decreased because doing so could cause a distortion in the later results).
Professional ethics
Codes of conduct to guide professionals in applying their professional
judgment and that are conducive to their professional activities. See
Sections 5.8 and 5.9.
Professionalism
Acting according to the levels of competence, ethics, independence, etc.,
expected of professionals. See Section 5.9.
Professional judgment
The judgment of professionals about problems in their domain, for example,
that of accountants or auditors about financial accounting matters. See
Section 5.9.
Profit
See Net income and Section 2.3.
Profit margin
See Sales return ratio, Ratios, and
Section 10.4, Ratio #3, where the sales return or profit margin ratio
is defined and explained.
Pro forma earnings
Another income number than that reported as net income, which is suggested
for use to evaluate a company's performance rather than net income. Pro
forma earnings, like EBITDA, usually do not include various
major expenses, especially losses and write-offs, and so are a more positive
measure of income than net income. See Section 3.10.
Proprietor's equity
The Equity of an unincorporated business that is owned
by a single person. See Section 2.9.
Proprietorship
A firm that is neither a corporation nor a partnership but is under the
sole control of one individual. Such a firm is not legally separate from
that individual. See Partnership, Corporation, and Sections
2.9 and 9.4.
Prospectus
A formal document that includes detailed financial information, which
is required by law when a company invites the public to subscribe to its
securities.
Provision
Another phrase for a usually noncurrent accrual such as for future pension
costs or warranties (see Section 9.3). Particularly common when the liability
is created to anticipate losses or major expenses involved in discontinuing
a business line, refinancing debts, or disposing of major assets. See
Section 9.3.
PST
Provincial sales tax. See Section 7.6.
Public accounting, Public accounting firms
Offering auditing, accounting, tax, consulting, and related services to
the public on a professional basis. Some of these firms are very large,
with thousands of professionals and staff, while others are very small
one-person offices. See Sections 1.5 and 5.8.
Public company
A Corporation whose shares and related securities are
sold widely to members of the public and other investors and whose securities
are traded on Stock exchanges and other capital markets.
See Sections 2.9 and 5.10.
Purchase method
A type of accounting for business combinations (compare with the Pooling
of interests method). Under this method, which is the overwhelmingly
dominant method of determining consolidated financial statement figures,
the assets and liabilities of the acquired company are added to those
of the parent at fair values and any difference between the portion of
the sum of fair values acquired by the parent and the total price paid
is accounted for as goodwill. See Consolidation and Section
9.7.
Purchase order
A document used when a formal request to buy products or services is made.
See Section 7.2.
PV
See Present value and Section 10.7.
Q
Qualified opinion
A report by the external auditors that indicates there is a deficiency
in the financial statements. See Section 5.8.
Quarterly financial reporting
A form of Interim financial reporting in which the financial
statements are issued to cover three-month periods. See Section 5.6
Quarterly report
See Quarterly financial reporting and Sections 1.3 and 5.10.
Quick ratio
Cash, temporary investments, and accounts receivable divided by current
liabilities. Also called the acid test ratio. See Ratios
and Sections 2.3 and 10.4, Ratio #19, where the ratio is defined and explained.
R
R&D
Research and development activities, a controversial accounting problem
because the activities are intended to lead to future benefits and thus
their costs may be considered to be assets, yet GAAP require that generally
such costs be charged to expense as incurred. See Section 8.14.
Ratios, ratio analysis
Numbers produced by dividing one financial statement figure by another
figure; for example, the working capital ratio is the total current assets
figure divided by the total current liabilities figure. Standard ratios
are used to assess aspects of a firm, particularly profitability, solvency,
and liquidity. See Sections 10.2, 10.4, and 10.6. Section 10.4 describes
20 common ratios. See Section 10.4.
Realized
Used in this book as a synonym of received, or collected. Revenue is recognized
when earned, but that is usually before it is collected or realized. See
Revenue recognition and Sections 6.3 and 6.6.
Receivable
Funds expected to be collected by the enterprise. The usual kind is trade
Accounts receivable but other kinds include taxes receivable,
employee expense advances receivable, and Notes receivable.
See Section 2.4.
Reclassification (entry)
A journal entry or repositioning of an account that changes the location
of the account within the balance sheet or within the income statement
but does not affect income. See Classification policies
and Section 2.7.
Reclassified account
An account moved to a different place within a financial statement without
changing income or equity. See Sections 2.7 and 8.5.
Recognition
Giving effect in the accounts to revenue believed to be earned, or expenses
believed to be incurred, before (or after) the cash is collected or paid.
See Revenue recognition, Expense recognition, and Sections
5.2, 6.4, 6.6, 6.7, and 6.8.
Recognized
Revenues or expenses (usually), entered into the accounts or given effect
in the accounts. See Recognition and Section 6.2.
Reconcile, Reconciliation
The Analysis technique of comparing two sets of information
that relate to the same account or activity and identifying differences
that indicate errors in either or both records. See Bank reconciliation
and Sections 1.12, 4.9, 7.5, and 7.9.
Recordkeeping
The bookkeeping and other methods used to create the underlying records
on which accounting information is based. See Sections 5.2, 5.3, 6.2,
and 6.3.
Redeemable
Shares or bonds that have the right to be sold back to the company. See
Section 9.5.
Refined ROA
A version of the Return on assets ratio. See ROA(ATI),
Ratios, and Section 10.4, Ratio #2, where the ratio is
defined and explained.
Relevance
The capacity of information to make a difference in a decision by helping
users to form predictions about the outcomes of past, present, and future
events, or to confirm or correct prior expectations. See Decision
relevance and Sections 5.2 and 5.3.
Reliability
A characteristic of information that is represented faithfully and is
free from bias and verifiable. See Timeliness, Objectivity,
and Sections 5.2 and 5.3.
Replacement cost
The price that will have to be paid in order to replace an existing asset
with a similar asset. This is likely to be a different amount than that
of Fair market value or Net realizable value.
See also Lower of cost or market and Sections 8.2 and
8.9.
Resources
In financial accounting, the recognized assets of the enterprise as shown
on the balance sheet. See Section 2.3.
Retail inventory control method
Providing internal control and deducing inventory amounts for financial
statements by using ratios of cost to selling price; for example, deducing
cost of goods sold from sales revenue minus the markup on cost. Ending
inventory cost can be determined by measuring inventory at retail prices
minus markup. See Perpetual inventory method, Periodic inventory
method, Inventory costing, and Sections 7.9 and 8.9.
Retained earnings
Earnings not yet distributed to owners; the sum of net incomes earned
over the life of a company, less distributions (dividends declared) to
owners. See Equity and Sections 2.3, 2.9, 3.3, 3.5, and
9.4.
Retained earnings statement
See Statement of retained earnings and Sections 3.3,
3.4, 3.5, and 5.5.
Return
Some amount of gain (income or performance) usually measured in relation
to the amount invested to get the return. See Risk, Sections
5.10 and 10.2, and such ratios as Return on equity and
Return on assets in Sections 10.4 and 10.6.
Return on assets (ROA or ROA(ATI))
Net income, before considering interest expense or the tax saving provided
by interest expense, divided by total assets. This measures the Operating
return before the cost of financing. See Ratios
and Sections 10.3, 10.4, Ratio #2, where the ratio is defined and explained,
and Section 10.6, where it is used in the Scott formula.
Return on equity (ROE)
Net income divided by owners' equity. The most frequently used ratio for
measuring the business's return to owners. See Ratios
and Sections 10.2, 10.4, Ratio #1, where the ratio is defined and explained,
and Section 10.6, where it is used in the Scott formula.
Return on investment (ROI)
A general term for measures of return related to the investment needed
to earn the return. See Return on assets, Return on equity,
and Section 10.2.
Revenue
The amount of benefit received or promised from the sale of goods or services,
before any deductions for the cost of providing the goods or services.
See Income statement, Revenue recognition, and Sections
1.10, 3.3, 3.5, 6.3, and 6.6.
Revenue recognition
The entering into the accounts of the amount of revenue determined, according
to the firm's accounting policies, to be attributable to the current period.
See Accrual accounting, Accounts receivable, Revenue,
and Sections 6.3, 6.6, and 6.7.
Review
A report prepared on an enterprise's financial statements by a Public
accounting firm that is less than an Audit but
more than a Compilation: the accounting firm studies
the statements' contents and compliance with GAAP to determine if there
are any apparent problems but does not verify individual accounts or the
underlying records. See Section 5.8.
Risk
The probable variability in possible future outcomes above and below the
expected level of outcomes (for example, returns), but especially below.
Risk and return go hand in hand, because a high risk should mean a higher
potential return and vice versa. See Section 5.10 and Return,
and Section 10.4, Ratios #14-#20.
ROA
See Return on assets.
ROA(ATI)
See Refined ROA, Return on assets and
Sections 10.3, 10.4, and 10.6.
ROE
See Return on equity and Sections 10.4 and 10.6
ROI
See Return on investment and Section 10.2.
S
Sales invoice
A document containing the details of a sale. See Section 7.2.
Sales journal
A record of sales made, used to produce the Revenue data
in the accounts. See Books of original entry and Section
7.2.
Sales return
The ratio of net income to revenue. See Ratios and Section
10.4, Ratio #3, where the ratio is defined and explained, and Section
10.6, where a refined version (SR(ATI)) is used in the
Scott formula.
Sales taxes
Taxes the enterprise must charge its customers and remit to the government.
See Section 7.6.
SCFP (Statement of changes in financial position)
See Cash flow statement.
Scott formula
A financial analysis technique for studying leverage effects by combining
a group of ratios into a more comprehensive explanation of performance.
The formula separates Return on equity into Operating
return and Leverage return. See Leverage,
Ratios, and Section 10.6.
SEC
See Securities and Exchange Commission and Sections 5.4
and 5.10.
Securities
Shares, bonds, and other financial instruments issued by corporations
and governments and usually traded on Capital markets.
See Sections 5.10 and 9.3.
Securities and Exchange Commission (SEC)
An agency of the U.S. government that supervises the registration of security
issues, prosecutes fraudulent stock manipulations, and regulates securities
transactions in the United States. See Sections 5.4 and 5.10.
Security
(1) Singular of Securities. (2) Protection to a lender
or other creditor in which the lender is given rights to specific assets
(as in a Mortgage), more general rights to monitor the
borrower (Debenture or Indenture), or
other promises (such as Personal guarantees).
Segmented information
Financial statement information desegregated by geographical or economic
area of activity in order to provide greater insight into financial performance
and position. Segmented information is usually placed at the end of the
notes to the financial statements.
Segregation of duties
An internal control technique whereby tasks involved in sensitive assets
such as cash, accounts receivable, or inventories are divided up so that
no one both handles the asset and keeps the records of the asset. See
Sections 7.3 and 7.5.
Share capital
The portion of a corporation's equity obtained by issuing shares in return
for cash or other considerations. See Sections 2.3, 2.9, and 9.4.
Share split
Reissuing shares in which the number of new shares is some multiple of
the previous number. For example, a two for one split results in a shareholder
owning twice as many shares as before. Because there has been only a change
in the number of shares but not in the underlying value of the corporation,
the share price should fall in accordance with the split (e.g., the new
shares above should have a share price about half the previous price).
See Section 9.4.
Shareholders
The holders of a corporation's Share capital, and so
the owners of the corporation. See Section 1.4.
Shareholders' equity
The sum of shareholders' direct investment (share capital) and indirect
investment (retained earnings). See Share capital, Equity, Retained
earnings, and Sections 2.3, 2.9, and 9.4.
Shares (stock)
Units of Share capital, evidenced by certificates and,
for Public companies, traded on Capital markets
with other Securities. See Sections 2.3 and 2.9.
Significant accounting policies
The main choices among possible accounting methods made by the enterprise
in preparing its financial statements. These policies are usually summarized
in the first note to the financial statements. See Accounting
policies, Notes to the financial statements,
and Sections 5.6, 5.7, and 6.4.
Significant influence
An investment in another corporation that is not large enough for voting
control but is large enough to influence how that corporation does business.
See Equity basis and Section 9.6.
Society of Management Accountants of Canada (SMA-Canada)
A society whose members have had training in tax, accounting, internal
audit, and other related areas, with a particular focus on internal management
accounting, and have passed qualifying exams. It is one of the three national,
professional accounting bodies. See Accountant.
Solvency
The condition of being able to meet all debts and obligations. See Statement
of changes in financial position, Liquidity, Sections 3.4, 4.2,
and Section 10.4, Ratios #18-#20.
Source documents
The evidence required to record a Transaction. See Section
7.2.
Sources
The right-hand side of the balance sheet (liabilities and equity) are
the sources of the enterprise's assets. See Section 2.3.
Specialized ledgers
Ledgers used to keep track of particular assets, liabilities, or equities,
such as accounts receivable, fixed assets, or share capital. See Section
7.2.
Specific identification
Accounting for inventories according to the specific cost of the items,
which therefore requires some sort of identification of the items, such
as by serial number. Contrast Assumed cost flow and see
Section 8.7.
SR(ATI)
See Sales return and Section 10.4.
Standard cost
A method of determining manufactured inventory costs that uses expected
normal production costs rather than actual costs. See Section 8.9.
Stated value
A value provided to shares that is similar to Par value
but less legally binding. See Section 2.9.
Statement of cash flows
See cash flow statement and Section 4.2.
Statement of changes in financial position (SCFP)
See cash flow statement and Section 4.2.
Statement of financial position
A synonym for Balance sheet. See Section 2.3.
Statement of retained earnings
A financial statement that summarizes the changes in retained earnings
for the year. Change in retained earnings equals Net income
minus Dividends plus or minus any retained earnings adjustments.
See Sections 3.3, 3.4, and 5.5.
Statement of source and application of cash
See cash flow statement and Section 4.2.
Stewardship
The concept that some persons (for example, management) are responsible
for looking after the assets and interests of other persons (for example,
shareholders), and that reports should be prepared that will be suitable
to allow the "stewards" to be held accountable for the actions taken on
behalf of the other persons. See Agent Sections 2.2,
3.2, and 5.11.
Stock-based compensation
A way of paying executives and other employees by giving them shares in
the company or Stock options that allow them to acquire
shares in the future at attractive prices. Such compensation is in addition
to salaries and bonuses. See Section 9.5.
Stock dividend
A Dividend paid by issuing more shares to present shareholders
rather than paying them cash. See Sections 3.3 and 9.4.
Stock exchange
A place where Shares and other Securities
are traded. See Section 5.10.
Stockholder
An alternative term for Shareholder, particularly used
in the United States.
Stock market
A Capital market in which equity shares are traded. Often
used as a generic term for stock exchanges and capital markets. See Sections
1.5, 2.3, 3.2, and 5.10.
Stocks
Usually used to mean Shares, but also used to mean Inventories,
as in "stocktaking" for counting inventories. See Section 2.3.
Stock option(s)
Promises, usually made to senior managers, to issue shares to them at
specified prices. The prices are usually set to be higher than present
prices but lower than expected future prices, to provide an incentive
to work to increase those future prices. See Sections 3.10 and 9.5.
Straight-line amortization (depreciation)
A method of computing amortization (depreciation) simply by dividing the
difference between the asset's cost and its expected salvage value by
the number of years the asset is expected to be used. It is the most common
amortization method used in Canada. See Amortization
and Section 8.12.
Subsidiary
A company that is owned by another company (the Parent).
The parent need not own all the subsidiary's shares, but does own at least
a majority of the voting shares of the subsidiary. See Consolidation
and Sections 2.9 and 9.7.
Subsidiary ledgers
See Specialized ledgers.
Sum-of-years'-digits
An accelerated method of computing amortization (depreciation) that produces
a declining annual expense, which is used in the United States but rare
in Canada. See Accelerated amortization and Note 21 to
Chapter 8.
Synoptic
A bookkeeping record listing cash transactions of the business.
T
T-account
A T-shaped representation of a ledger account used in analysis or demonstration.
See Section 2.5.
Tangible assets
See Fixed assets and Section 8.4.
Taxable income
Income calculated according to income tax law and used as the basis for
computing income tax payable. See Section 9.3.
Temporary differences
Differences between accounting calculations of income and calculations
required for income tax purposes that will eventually net out to zero.
These affect income tax expense calculations. See Section 9.3.
Temporary investments
Investments made for a short term, often used as a place to put temporarily
excess cash to work. See Sections 8.5 and 9.6.
Term preferred shares
Preferred shares issued with a fixed term and dividend rate, and therefore
having some of the characteristics of debt. See Section 9.5.
Timeliness
Timely information is usable because it relates to present decision needs.
Information received late may be too late to be usable, since decisions
pass it by. See Relevance, Reliability, and Section 5.2.
Time value of money
Money can earn interest, so money received in the future is worth less
in "present value" terms because the lower amount can be invested to grow
to the future amount. Money has a time value because interest accrues
over time. See Present value and Section 10.7.
Toronto Stock Exchange
The leading Stock exchange in Canada. See Section 5.4.
Total assets turnover
The ratio of revenue to total assets. See Ratios and
Section 10.4, Ratio #12, where the ratio is defined and explained. See
also Section 10.6, where the ratio is used in the Scott formula.
Trade receivables
These are Accounts receivable arising in the normal course
of business with customers. See Section 8.6.
Transaction
An accounting transaction is the basis of bookkeeping and is defined by
four criteria described and explained in Section 1.7.
Transaction base
The idea that financial accounting is substantially defined by the use
of the Transaction as the fundamental recordkeeping basis
underlying the accounting data. See Section 1.7.
Treasury shares (stock)
Share capital issued and then reacquired by the firm that issued the shares.
The result is a reduction of shareholders' equity because resources have
been used to reduce the actual amount of outstanding equity. See Sections
2.9 and 9.4.
Trial balance
A list of all the general ledger accounts and their balances. The sum
of the accounts with debit balances should equal the sum of those with
credit balances. This is contrasted with the Chart of accounts,
which lists only the account names. See Account and Sections
2.5, 3.6, 3.7, and 3.8.
TSX
The Toronto Stock Exchange. See Section 5.4.
U
Unadjusted trial balance
The Trial balance of the accounts prior to making various
accrual adjustments in preparation for the financial statements. See Sections
3.8 and 3.9.
Unaudited
Refers to financial statements that have not received an External
audit and so are not accompanied by an Auditor's opinion.
See Section 5.8.
Units-of-production amortization
An amortization (depreciation) method in which the annual amortization
expense varies directly with the year's production volume. See Section
8.12.
Unusual items
Unusual revenues or expenses that are large enough to be worth identifying
separately in the income statement. See Section 3.5.
Users
People who use financial statements to assist them in deciding whether
to invest in the enterprise, lend it money, or take other action involving
financial information. See Section 1.5.
V
Valuation
Determining the amounts at which assets, liabilities, and equity should
be shown in the balance sheet. See Section 8.2.
Value in use
The value of an asset determined by the future cash flows it brings in,
or the future expenses that will be avoided by owning the asset. See Section
8.2.
Verifiability
Ability to trace an accounting entry or figure back to the underlying
evidence of its occurrence and validity. See Source documents
and Sections 1.7, 5.2, 5.3, and 5.8.
W
Warrants
Attachments to shares or bonds giving rights to acquire further shares
or bonds on specified terms. See Section 9.5.
Weighted average
An inventory cost flow assumption that determines cost of goods sold and
ending inventory cost by averaging the cost of all of the inventory available
during the period. See AVGE, Average cost, LIFO, FIFO, Inventory
costing, and Section 8.7.
"What if" (effects) analysis
Analyzing potential business decisions or accounting policies by determining
their effects on income, cash flow, or other important items. See Sections
1.12, 10.8, and 10.9.
Work order
A document specifying the components and assembly or other work to be
done to provide a product ordered by a customer. See Section 7.2.
Working capital
The difference between current assets and current liabilities. See Current
assets, Current liabilities, and Sections 2.3, 9.2, and 10.4.
Working capital ratio
Current assets divided by current liabilities. See Ratios
and Sections 2.3, 9.2 and Section 10.4, Ratio #18, where the ratio is
defined and explained.
Write-down
Reducing an asset's value on the balance sheet but not removing the asset
completely (which is a Write-off). See Sections 7.7 and
8.11.
Write-off
Refers to the elimination of an asset from the balance sheet. If there
is a Contra account against the asset already, the write-off
is made against the contra, so expense and income are not affected. If
there is no contra account, the write-off (a Direct write-off,
Section 7.7) is made to expense or a loss account and income is reduced.
See Sections 7.7 and 8.11.
Write-off (bad debts)
Refers to eliminating an account receivable deemed to be uncollectible.
If the elimination is done by deducting the amount from both the Accounts
receivable asset and the Allowance for doubtful
accounts, there is no effect on income. Otherwise, the write-off reduces
income. See Section 7.7.
Write-off (noncurrent assets)
Refers to eliminating a noncurrent asset, such as land, buildings, equipment,
investments or Goodwill, deemed not to have further value
to the enterprise. The elimination is done by removing both the asset
cost and the Accumulated amortization related to that asset, if any. Income
is reduced by the amount by which the asset cost exceeds the accumulated
amortization. Otherwise, the write-off reduces income. See Sections 7.7
and 8.11.
Y
Yield
The effective interest rate a financial instrument such as a Bond
earns, given the amount of money received when it was issued. See Present
value and Section 10.7.
NOTES
1. Some supplementary help in developing this glossary originally came
from the CICA Handbook (Toronto: Canadian Institute of Chartered
Accountants, various versions); S. Davidson, C.L. Mitchell, C.P. Stickney,
and R.L. Weil, Financial Accounting: An Introduction to Concepts,
Methods and Uses (Toronto: Holt, Rinehart & Winston, 1986); Funk
& Wagnalls Canadian College Dictionary (Markham: Fitzhenry & Whiteside,
1986); and Ross M. Skinner, Accounting Standards in Evolution
(Toronto: Holt, Rinehart & Winston, 1987).
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