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ACCT 200
Financial Accounting Exam III Terms (Ch 8-11, App. D)
| Term | Definition |
|---|---|
| Accelerated depreciation method | Method that produces larger depreciation charges in the early years of an asset's life and smaller charges in its later years. |
| Amortization | Process of allocating the cost of an intangible asset to expense over its estimated useful life. |
| Asset book value | Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account. |
| Betterments | Expenditures to make a plant asset more efficient or productive; also called improvements. |
| Capital expenditures | Additional costs of plant assets that provide material benefits extending beyond the current period; also called balance sheet expenditures. |
| Change in an accounting estimate | Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods. |
| Copyright | Right giving the owner the exclusive privilege to publish and sell musical, literary, or artistic work during the creator's life plus 70 years. |
| Cost | All normal and reasonable expenditures necessary to get an asset in place and ready for its intended use. |
| Declining-balance method | Method that determines depreciation charge for the period by multiplying a depreciation rate (often twice the straight-line rate) by the asset's beginning-period book value. |
| Depletion | Process of allocating the cost of natural resources to periods when they are consumed and sold. |
| Depreciation | Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset. |
| Extraordinary repairs | Major repairs that extend the useful life of a plant asset beyond prior expectations; treated as a capital expenditure. |
| Franchises | Privileges granted by a company or government to sell a product or service under specified conditions. |
| Goodwill | Amount by which a company's (or a segment's) value exceeds the value of its individual assets less its liabilities. |
| Impairment | Diminishment of an asset value. |
| Inadequacy | Condition in which the capacity of plant assets is too small to meet the company's production demands. |
| Indefinite life | Asset life that is not limited by legal, regulatory, contractual, competitive, economic, or other factors. |
| Intangible assets | Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits. |
| Land improvements | Assets that increase the benefits of land, have a limited useful life, and are depreciated. |
| Lease | Contract specifying the rental of property. |
| Leasehold | Rights the lessor grants to the lessee under the terms of a lease. |
| Leasehold improvements | Alterations or improvements to leased property such as partitions and storefronts. |
| Lessee | Party to a lease who secures the right to possess and use the property from another party (the lessor). |
| Lessor | Party to a lease who grants another party (the lessee) the right to possess and use its property. |
| Licenses | Privileges granted by a company or government to sell a product or service under specified conditions. |
| Limited life | Length of time an asset will be productively used in the operations of a business; also called service life or limited life. |
| Modified Accelerated Cost Recovery System (MACRS) | Depreciation system required by federal income tax law. |
| Natural resources | Assets physically consumed when used; examples are timber, mineral deposits, and oil and gas fields; also called wasting assets. |
| Obsolescence | Condition in which, because of new inventions and improvements, a plant asset can no longer be used to produce goods or services with a competitive advantage. |
| Ordinary repairs | Repairs to keep a plant asset in normal, good operating condition; treated as a revenue expenditure and immediately expensed. |
| Patent | Exclusive right granted to its owner to produce and sell an item or to use a process for 17 years. |
| Plant asset age | Plant asset age is an approximation of the age of plant assets, which is estimated by dividing accumulated depreciation by depreciation expense. |
| Plant assets | Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets. |
| Revenue expenditures | Expenditures reported on the current income statement as an expense because they do not provide benefits in future periods. |
| Salvage value | Estimate of amount to be recovered at the end of an asset's useful life; also called residual value or scrap value. |
| Straight-line depreciation | Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life. |
| Total asset turnover | Measure of a company's ability to use its assets to generate sales; computed by dividing net sales by average total assets. |
| Trademark or trade (brand) name | Symbol, name, phrase, or jingle identified with a company, product, or service. |
| Units-of-production depreciation | Method that charges a varying amount to depreciation expense for each period of an asset's useful life depending on its usage. |
| Useful life | Length of time an asset will be productively used in the operations of a business; also called service life or limited life. |
| Contingent liability | Obligation to make a future payment if, and only if, an uncertain future event occurs. |
| Current liabilities | Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer. |
| Current portion of long-term debt | Portion of long-term debt due within one year or the operating cycle, whichever is longer; reported under current liabilities. |
| Deferred income tax liability | Corporation income taxes that are deferred until future years because of temporary differences between GAAP and tax rules. |
| Employee benefits | Additional compensation paid to or on behalf of employees, such as premiums for medical, dental, life, and disability insurance, and contributions to pension plans. |
| Employee earnings report | Record of an employee's net pay, gross pay, deductions, and year-to-date payroll information. |
| Estimated liability | Obligation of an uncertain amount that can be reasonably estimated. |
| Federal depository bank | Bank authorized to accept deposits of amounts payable to the federal government. |
| Federal Insurance Contributions Act (FICA) Taxes | Taxes assessed on both employers and employees; for Social Security and Medicare programs. |
| Federal Unemployment Taxes (FUTA) | Payroll taxes on employers assessed by the federal government to support its unemployment insurance program. |
| Form 940 | IRS form used to report an employer's federal unemployment taxes (FUTA) on an annual filing basis. |
| Form 941 | IRS form filed to report FICA taxes owed and remitted. |
| Form W-2 | Annual report by an employer to each employee showing the employee's wages subject to FICA and federal income taxes along with amounts withheld. |
| Form W-4 | Withholding allowance certificate, filed with the employer, identifying the number of withholding allowances claimed. |
| Gross pay | Total compensation earned by an employee. |
| Known liabilities | Obligations of a company with little uncertainty; set by agreements, contracts, or laws; also called definitely determinable liabilities. |
| Long-term liabilities | Obligations not due to be paid within one year or the operating cycle, whichever is longer. |
| Merit rating | Rating assigned to an employer by a state based on the employer's record of employment. |
| Net pay | Gross pay less all deductions; also called take-home pay. |
| Payroll bank account | Bank account used solely for paying employees; each pay period an amount equal to the total employees' net pay is deposited in it and the payroll checks are drawn on it. |
| Payroll deductions | Amounts withheld from an employee's gross pay; also called withholdings. |
| Payroll register | Record for a pay period that shows the pay period dates, regular and overtime hours worked, gross pay, net pay, and deductions. |
| Short-term note payable | Current obligation in the form of a written promissory note. |
| State Unemployment Taxes (SUTA) | State payroll taxes on employers to support its unemployment programs. |
| Times interest earned | Ratio of income before interest expense (and any income taxes) divided by interest expense; reflects risk of covering interest commitments when income varies. |
| Wage bracket withholding table | Table of the amounts of income tax withheld from employees' wages. |
| Warranty | Agreement that obligates the seller to correct or replace a product or service when it fails to perform properly within a specified period. |
| Annuity | Series of equal payments at equal intervals. |
| Bearer bonds | Bonds made payable to whoever holds them (the bearer); also called unregistered bonds. |
| Bond | Written promise to pay the bond's par (or face) value and interest at a stated contract rate; often issued in denominations of $1,000. |
| Bond certificate | Document containing bond specifics such as issuer's name, bond par value, contract interest rate, and maturity date. |
| Bond indenture | Contract between the bond issuer and the bondholders; identifies the parties' rights and obligations. |
| Callable bonds | Bonds that give the issuer the option to retire them at a stated amount prior to maturity. |
| Capital leases | Long-term leases in which the lessor transfers substantially all risk and rewards of ownership to the lessee. |
| Carrying (book) value of bonds | Net amount at which bonds are reported on the balance sheet; equals the par value of the bonds less any unamortized discount or plus any unamortized premium; also called carrying amount or book value. |
| Contract rate | Interest rate specified in a bond indenture (or note); multiplied by the par value to determine the interest paid each period; also called coupon rate, stated rate, or nominal rate. |
| Convertible bonds | Bonds that bondholders can exchange for a set number of the issuer's shares. |
| Coupon bonds | Bonds with interest coupons attached to their certificates; bondholders detach coupons when they mature and present them to a bank or broker for collection. |
| Debt-to-equity ratio | Defined as total liabilities divided by total equity; shows the proportion of a company financed by non-owners (creditors) in comparison with that financed by owners. |
| Discount on bonds payable | Difference between a bond's par value and its lower issue price or carrying value; occurs when the contract rate is less than the market rate. |
| Effective interest method | Allocates interest expense over the bond life to yield a constant rate of interest; interest expense for a period is found by multiplying the balance of the liability at the beginning of the period by the bond market rate at issuance; also called interest method. |
| Fair value option | Fair Value Option (FVO) refers to an option to measure eligible items at fair value; eligible items include financial assets, such as HTM, AFS, and equity method investments, and financial liabilities. FVO is applied “instrument by instrument” and is elected when the eligible item is “first recognized”; once FVO is elected the decision is “irrevocable.” When FVO is elected, it is measured at “fair value” and unrealized gains and losses are recognized in earnings. |
| Installment note | Liability requiring a series of periodic payments to the lender. |
| Lease | Contract specifying the rental of property. |
| Market rate | Interest rate that borrowers are willing to pay and lenders are willing to accept for a specific lending agreement given the borrowers' risk level. |
| Mortgage | Legal loan agreement that protects a lender by giving the lender the right to be paid from the cash proceeds from the sale of a borrower's assets identified in the mortgage. |
| Off-balance-sheet financing | Acquisition of assets by agreeing to liabilities not reported on the balance sheet. |
| Operating leases | Short-term (or cancelable) leases in which the lessor retains risks and rewards of ownership. |
| Par value of a bond | Amount the bond issuer agrees to pay at maturity and the amount on which cash interest payments are based; also called face amount or face value of a bond. |
| Pension plan | Contractual agreement between an employer and its employees for the employer to provide benefits to employees after they retire; expensed when incurred. |
| Premium on bonds | Difference between a bond's par value and its higher carrying value; occurs when the contract rate is higher than the market rate; also called bond premium. |
| Registered bonds | Bonds owned by investors whose names and addresses are recorded by the issuer; interest payments are made to the registered owners. |
| Secured bonds | Bonds that have specific assets of the issuer pledged as collateral. |
| Serial bonds | Bonds consisting of separate amounts that mature at different dates. |
| Sinking fund bonds | Bonds that require the issuer to make deposits to a separate account; bondholders are repaid at maturity from that account. |
| Straight-line bond amortization | Method allocating an equal amount of bond interest expense to each period of the bond life. |
| Term bonds | Bonds scheduled for payment (maturity) at a single specified date. |
| Unsecured bonds | Bonds backed only by the issuer's credit standing; almost always riskier than secured bonds; also called debentures. |
| Appropriated retained earnings | Retained earnings separately reported to inform stockholders of funding needs. |
| Authorized stock | Total amount of stock that a corporation's charter authorizes it to issue. |
| Basic earnings per share | Net income less any preferred dividends and then divided by weighted-average common shares outstanding. |
| Book value per common share | Recorded amount of equity applicable to common shares divided by the number of common shares outstanding. |
| Book value per preferred share | Equity applicable to preferred shares (equals its call price [or par value if it is not callable] plus any cumulative dividends in arrears) divided by the number of preferred shares outstanding. |
| Call price | Amount that must be paid to call and retire a callable preferred stock or a callable bond. |
| Callable preferred stock | Preferred stock that the issuing corporation, at its option, may retire by paying the call price plus any dividends in arrears. |
| Capital stock | General term referring to a corporation's stock used in obtaining capital (owner financing). |
| Changes in accounting estimates | Change in an accounting estimate that results from new information, subsequent developments, or improved judgment that impacts current and future periods. |
| Common stock | Corporation's basic ownership share; also generically called capital stock. |
| Complex capital structure | Capital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock. |
| Convertible preferred stock | Preferred stock with an option to exchange it for common stock at a specified rate. |
| Corporation | Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders. |
| Cumulative preferred stock | Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid. |
| Date of declaration | Date the directors vote to pay a dividend. |
| Date of payment | Date the corporation makes the dividend payment. |
| Date of record | Date directors specify for identifying stockholders to receive dividends. |
| Diluted earnings per share | Earnings per share calculation that requires dilutive securities be added to the denominator of the basic EPS calculation. |
| Dilutive securities | Securities having the potential to increase common shares outstanding; examples are options, rights, convertible bonds, and convertible preferred stock. |
| Discount on stock | Difference between the par value of stock and its issue price when issued at a price below par value. |
| Dividend in arrears | Unpaid dividend on cumulative preferred stock; must be paid before any regular dividends on preferred stock and before any dividends on common stock. |
| Dividend yield | Ratio of the annual amount of cash dividends distributed to common shareholders relative to the common stock's market value (price). |
| Earnings per share (EPS) | Amount of income earned by each share of a company's outstanding common stock; also called net income per share. |
| Financial leverage | Earning a higher return on equity by paying dividends on preferred stock or interest on debt at a rate lower than the return earned with the assets from issuing preferred stock or debt; also called trading on the equity. |
| Large stock dividend | Stock dividend that is more than 25% of the previously outstanding shares. |
| Liquidating cash dividend | Distribution of assets that returns part of the original investment to stockholders; deducted from contributed capital accounts. |
| Market value per share | Price at which stock is bought or sold. |
| Minimum legal capital | Amount of assets defined by law that stockholders must (potentially) invest in a corporation; usually defined as par value of the stock; intended to protect creditors. |
| Noncumulative preferred stock | Preferred stock on which the right to receive dividends is lost for any period when dividends are not declared. |
| Nonparticipating preferred stock | Preferred stock on which dividends are limited to a maximum amount each year. |
| No-par value stock | Stock class that has not been assigned a par (or stated) value by the corporate charter. |
| Organization expenses | Costs such as legal fees and promoter fees to bring an entity into existence. |
| Paid-in capital | Total amount of cash and other assets received from stockholders in exchange for stock; also called paid-in capital. |
| Paid-in capital in excess of par value | Amount received from issuance of stock that is in excess of the stock's par value. |
| Participating preferred stock | Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock. |
| Par value | Value assigned a share of stock by the corporate charter when the stock is authorized. |
| Par value stock | Class of stock assigned a par value by the corporate charter. |
| Preemptive right | Stockholders' right to maintain their proportionate interest in a corporation with any additional shares issued. |
| Preferred stock | Stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets. |
| Premium on stock | Difference between the par value of stock and its issue price when issued at a price above par. |
| Price-earnings (PE) ratio | Ratio of a company's current market value per share to its earnings per share; also called price-to-earnings. |
| Prior period adjustments | Correction of an error in a prior year that is reported in the statement of retained earnings (or statement of stockholders' equity) net of any income tax effects. |
| Proxy | Legal document giving a stockholder's agent the power to exercise the stockholder's voting rights. |
| Restricted retained earnings | Retained earnings not available for dividends because of legal or contractual limitations. |
| Retained earnings | Cumulative income less cumulative losses and dividends. |
| Retained earnings deficit | Debit (abnormal) balance in Retained Earnings; occurs when cumulative losses and dividends exceed cumulative income; also called accumulated deficit. |
| Reverse stock split | Occurs when a corporation calls in its stock and replaces each share with less than one new share; increases both market value per share and any par or stated value per share. |
| Simple capital structure | Capital structure that consists of only common stock and nonconvertible preferred stock; consists of no dilutive securities. |
| Small stock dividend | Stock dividend that is 25% or less of a corporation's previously outstanding shares. |
| Stated value stock | No-par stock assigned a stated value per share; this amount is recorded in the stock account when the stock is issued. |
| Statement of stockholders' equity | Financial statement that lists the beginning and ending balances of each major equity account and describes all changes in those accounts. |
| Stock dividend | Corporation's distribution of its own stock to its stockholders without the receipt of any payment. |
| Stock options | Rights to purchase common stock at a fixed price over a specified period of time. |
| Stock split | Occurs when a corporation calls in its stock and replaces each share with more than one new share; decreases both the market value per share and any par or stated value per share. |
| Stockholders' equity | A corporation's equity; also called shareholders' equity or corporate capital. |
| Treasury stock | Corporation's own stock that it reacquired and still holds. |
| C corporation | Corporation that does not qualify for nor elect to be treated as a proprietorship or partnership for income tax purposes and therefore is subject to income taxes; also called C corp. |
| General partner | Partner who assumes unlimited liability for the debts of the partnership; responsible for partnership management. |
| General partnership | Partnership in which all partners have mutual agency and unlimited liability for partnership debts. |
| Limited liability company (LLC) | Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management. |
| Limited liability partnership | Partnership in which a partner is not personally liable for malpractice or negligence unless that partner is responsible for providing the service that resulted in the claim. |
| Limited partners | Partners who have no personal liability for partnership debts beyond the amounts they invested in the partnership. |
| Limited partnership | Partnership that has two classes of partners, limited partners and general partners. |
| Mutual agency | Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership's business. |
| Partner return on equity | Partner net income divided by average partner equity for the period. |
| Partnership | Unincorporated association of two or more persons to pursue a business for profit as co-owners. |
| Partnership contract | Agreement among partners that sets terms under which the affairs of the partnership are conducted; also called articles of partnership. |
| Partnership liquidation | Dissolution of a partnership by (1) selling noncash assets and allocating any gain or loss according to partners' income-and-loss ratio, (2) paying liabilities, and (3) distributing any remaining cash according to partners' capital balances. |
| S corporation | Corporation that meets special tax qualifications so as to be treated like a partnership for income tax purposes. |
| Statement of partners’ equity | Financial statement that shows total capital balances at the beginning of the period, any additional investment by partners, the income or loss of the period, the partners' withdrawals, and the partners' ending capital balances; also called statement of partners' capital. |
| Unlimited liability | Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares. |
Created by:
EdL
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