question

Accounting

answer

the information system that measures business activities, processes that information into reports and financial statements and comminicates the results to decisions makers

question

Accounting Equation

answer

Assets = Liabilities + Owner's Equity

question

Asset

answer

an economic resource that is expected to be of benefit in the future

question

Balance Sheet

answer

List of an entity's assets liabilities and owners equity as of a specific date. also called the statement of financial position

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Board of directors

answer

Group selected by the stockholders to set policy for a corporation and to appoint its officers

question

capital

answer

Another name for the owners equity of a business

question

Common Stock

answer

The most basic form of capital stock

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Continuity assumption

answer

the entity will continue to operate long enough to use existing assets (land buildings equipment and supplies)

question

Corporation

answer

a business owned by stockholders. A corporation is a legal entity, an artificial person in the eyes of the law

question

Current Assets

answer

An asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business's normal operating cycle if longer than a year

question

Current Liability

answer

A debt due to be paid within one year or within the entity's operating cycle if the cycle is longer than a year

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Deficit

answer

Negative balance in retained earnings caused by a net loss over a period of years

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Dividends

answer

Distributions (usually cash) by a corporation to its stockholders

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Entity

answer

An organization or a section of an organization that, for accounting purposes, stand apart from other organizations and individual as a separate economic unit

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Ethics

answer

Standards of right and wrong that transcend economic and legal boundaries. Ethical standards deal with the way we treat others and restrain our own action because of the desires, expectations, or rights of others or because of our obligations to them

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Expenses

answer

Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenuse

question

Fair value

answer

the amount that a business could sell an asset for, or the amount that a business could pay to settle liability

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Financial accounting

answer

The branch of accounting that provides information to people outside the firm

question

Financial statements

answer

Business documents that report financial information about a business entity to decision makers

question

Financing activities

answer

Activities that obtain from investors and creditors that cash needed to launch and sustain the business a section of the statements of cash flow

question

Generally Accepted Accounting Principles

answer

Accounting guidelines formulated by the financial accounting standards board that govern how accounting is practiced

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going concern assumption

answer

holds that the entity will remain in operations for the foreseeable future

question

Historical cost principle

answer

Principle that states that assets and services should be recorded at their actual cost

question

income statement

answer

A financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period. Also the statement of operations

question

International Financial Reporting Standards

answer

Accounting guidelines, formulated by the International Accounting Standards Board (IASB).U.S companies are expected to adopt these principles for their financial statements so that they can be compared with those of companies from other countries

question

Investing Activities

answer

Activities that increase or decrease the long-term assets available to the business, a section of the statement of cash flow

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Liability

answer

An economic obligation (a debt) payable to an individual or an organization outside the business

question

limited liability company

answer

A business organization in which the business (not the owner) is liable for the company's debts

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Long-term debt

answer

A liability that falls due beyond one year from the date of the financial statements

question

management accounting

answer

The branch of accounting that generates information for the internal decisions makers of a business such as top executives

question

net income, net earnings,net profit

answer

Excess of total revenues over total expenses,Revenues minus Expenses=net income

question

net loss

answer

Excess of total expenses over total revenue

question

operating Activities

answer

Activities that create revenue or expenses in the entity's major line of business; a section of the statement of cash flow, it also affects the income statement

question

Owners equity

answer

the claim of the owners of a business to the assets of the business. Also called Capital, Stockholders Equity or net assets

question

Paid-in Capital

answer

the amount of stockholders equity that stockholders have contributed to the corporation. Also called contributed capital

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partnership

answer

An association of two or more persons who co-own a business for profit

question

proprietorship

answer

a business with a single owner

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retained earnings

answer

the amount of stockholders equity that the corporation has earned through profitable operation and has not given back to stockholders

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revenues

answer

increase in retained earnings from delivering good or services to customers or clients

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shareholders/stockholders

answer

A person who owns stock in a corporation

question

Stable-monetary unit assumptions

answer

the reason for ignoring the effect of inflation in the accounting records based on the assumption that the dollar's purchasing power is relatively stable

question

Statement of cash flow

answer

Reports cash receipts and cash payments classified according to the entity's major activities such as operating, investing, and financing

question

Statement of cash flow

answer

Reports cash receipts and cash payments classified according to the entity's major activities ; operating, investing and financing

question

statement of retained earnings

answer

Summary of the changes in retained earnings of a corporation during a specific period

question

stock

answer

shares into which the owners equity in a corporation

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Stockholders equity

answer

the stockholders ownership interest in the assets of a corporation

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Chapter 2

answer

Transaction Analysis

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Account

answer

the record of the changes that have occurred in a particular asset, liability or stockholders equity during a period

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Accured Liability

answer

A liability for an expense that has not yet been paid by the company

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Cash

answer

Money and any medium of exchange that a bank accepts at face value

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Chart of accounts

answer

List of a company accounts and their account numbers

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Credit

answer

The right side of an account

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Debit

answer

The left side of an account

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Journal

answer

The chronological accounting record of an entity's transactions

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Ledger

answer

The book of accounts and their balances

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Posting

answer

Copying amounts from the journal to the ledger

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Transaction

answer

Any event that has a financial impact on the business and can be measured reliably

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Trial Balance

answer

A list of all the ledger accounts with their balances

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Chapter 3

answer

Accrual Accounting & income

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Account format

answer

A balance-sheet format that lists assets on the left and liabilities and stockholders equity on the right

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Accrual

answer

An expense or a revenue that occurs before the business pays or receives cash. An accrual is the opposite of a deferral

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Accrual accounting

answer

Accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected the cash

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Accrued Expense

answer

An expense incurred but not yet paid in cash

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Accrued Revenue

answer

A revenue that has been earned but not yet received cash

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Accumulated Depreciation

answer

The cumulative sum of all depreciation expense from the date of acquiring a plant asset

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Adjusted Trial Balance

answer

A list of all the ledger accounts with their adjusted balances

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Book value

answer

The asset's cost minus accumulated depreciation

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Cash-basis accounting

answer

Accounting that records only transactions in which cash is received or paid

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Classified balance sheet

answer

A balance sheet that shows current assets separate from long-term assets and current liabilities separate from long-term liabilities

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Closing the Books

answer

The process of preparing the accounts to begin recording the next period's transactions. Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends accounts to zero. Also called closing the accounts

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Closing entries

answer

Entries that transfer the revenue, expense and dividends balances from these respective accounts to the retained earnings account

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Contra Account

answer

An account that always has a companion account and whose normal balance is opposite that of the companion account

question

Current Asset

answer

An Asset that is expected to be converted to cash, sold, or consumed during the next 12 months or within the business's normal operating cycle if longer than a year

question

Current Ratio

answer

Current assets divided by current liabilities. measure a company's ability to pay current liabilities with current assets

question

Current Liabilities

answer

A debt due to be paid within one year or within the entity's operating cycle if the cycle is longer than a year

question

Debt ratio

answer

Ratio of total liabilities to total assets. States the proportion of a company's assets that is financed with debt

question

Deferral

answer

An adjustment for which the business paid or received cash in advance. Examples include prepaid rent, prepaid insurance, and supplies

question

Depreciation

answer

Allocation of the cost of a plant asset to expense over its useful life

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Expense Recognition Principle

answer

The basis for recording expenses. Directs accountants to identify all expenses incurred during the period, to measure the expenses, and to match them against the revenue earned during that same period

question

Liquidity

answer

Measure of how quickly an item can be converted to cash

question

Long-term asset

answer

An Asset that is not a current asset

question

Long-term Liability

answer

A liability that is not a current liability

question

multi-step income statement

answer

An income statement that contains subtotals to highlight important relationships between revenues and expenses

question

net working capital

answer

A measure of liquidity; Current assets minus current liabilities

question

Operating cycle

answer

Time span during which cash is paid for goods and services that are sold to customers who pay the business in cash

question

Permanent accounts

answer

Asset, liability, and stockholders equity accounts that are not closed at the end of the period

question

Plant asset

answer

Long-lived assets, such as land, buildings, and equipment used in the operation of the business. Also called fixed assets

question

Prepaid expenses

answer

A category of miscellaneous assets that typically expire or get used up in the near future. Examples include prepaid rent, prepaid insurance, and supplies

question

Report Format

answer

A balance-sheet format that lists assets at the top, followed by liabilities and stockholders equity below

question

Revenue Principle

answer

The basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record

question

Single-step income statement

answer

an income statement that lists all the revenue together under a heading such as revenues or Revenues and gains. Expenses appear in a separate category called Expenses or perhaps Expenses and Losses

question

Temporary Accounts

answer

The revenue and expense accounts that relate to a limited period and are closed at the end of the period are temporary accounts. For a corporation, the dividends account is also temporary

question

Time-period concept

answer

Ensures that accounting information is reported at regular intervals

question

Unearned revenue

answer

A liability created when a business collects cash from customers in advance of earning the revenue. The obligation is to provide a product or a service in the future.

question

Chapter 4

answer

Internal Control & Cash

question

Audit

answer

A periodic examination of a company's financial statements and the accounting systems, control and records that produce them. Audits may be either external or internal. External audits are usually performed by Certified Public accountants

question

Bank collections

answer

Collection of money by the bank on behalf of a depositor

question

Bank Reconciliation

answer

A document explaining the reasons for the difference between a depositors records and the banks records about the depositor's cash

question

Bank Statement

answer

Document showing the beginning and ending balances of a particular bank account listing the months transactions that affected the account

question

Budget

answer

A quantitative expression of a plan that helps managers coordinate the entity's activities

question

Cash Budget

answer

A budget that projects the entity's future cash receipts and cash disbursements

question

Cash Equivalent

answer

Investments such as a time deposits, certificated of deposit, or high-grade government securities that are considered so similar to cash that they are combined with cash for financial disclosure purposes in the balance sheet

question

Check

answer

Document instructing a bank to pay the designated person or business the specified amount of money

question

Computer Virus

answer

A malicious program that enters a company's computer system by email or other means and destroys program and data files

question

Controller

answer

The chief accounting officer of a business

question

Deposits in transit

answer

A deposit recorded by the company but not yet by its bank

question

Electronic fund transfer

answer

System that transfers cash by electronic communication rather than by paper documents

question

Encryption

answer

Mathematical rearranging of data within an electronic file to prevent unauthorized access to information

question

Exception Reporting

answer

Identifying data that is not within "normal limits" so that managers can follow up and take corrective action.Exception reporting is used in operating and cash budgets to keep company profits and cash flow in line with management's plans

question

Fidelity bond

answer

An insurance policy taken out on employees who handle cash

question

Firewall

answer

An electronic barrier usually provided by passwords, around computerized data files to protect local area networks of computers from unauthorized access

question

Fraud

answer

An intentional misrepresentation of facts made for the purpose of persuading another party to act in a way that causes injury or damage to that party

question

Fraud Triangle

answer

The three elements that are present in almost all cases of fraud. These elements are motive, opportunity and rationalization on the part of the perpetrator

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Fraudulent Financial reporting

answer

Fraud perpetrated by management by preparing misleading financial statements

question

Imprest System

answer

A way to account for petty cash by maintaining a constant balance in the petty cash account, supported by the fund (Cash plus Payment Tickets) totallung the same amount

question

Internal Control

answer

Organizational plan and related measures adopted by an entity to safeguard assets, encourage adherence to company policies, promote operational efficiency, and ensure accurate and reliable accounting records

question

lapping

answer

A fraudulent scheme to steal cash through misappropriating certain customer payments and posting payments from other customers to the affected accounts to cover it up. Lapping is caused by weak internal controls (improper access to cash and monitoring activities)

question

lock-box system

answer

A system of handling cash receipts by mail whereby customers remit payment directly to the bank rather than through the entity's mail system

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Misappropriation of assets

answer

Fraud committed by employees by stealing assets from the company

question

Non sufficient funds check

answer

A "hot" check one for which the payers bank account has insufficent money to pay the check. NSF checks are cash receipts that turn out to be worthless

question

Operating budget

answer

A budget of future net income. The operating budget projects a company's future revenue and expenses. It is usually prepared by line item of company's income statement.

question

Outstanding checks

answer

A check issued by the company and recorded on its books but not yet paid by its bank

question

Password

answer

A special set of characters that must be provided by the user of computerized program or data files to prevent unauthorized access to those files

question

Petty Cash

answer

Fund containing a small amount of cash that is used to pay minor amounts

question

Phishing

answer

Creating bogus websites for the purpose of stealing unauthorized data, such as names, addresses, social security number, bank accounts and credit card numbers

question

Remittance Advice

answer

An optional attachment to a check (sometimes a perforated tear-off document and sometimes capable of being electronically scanned) that indicated the payer date, and purpose of the cash payment. The remittance advice is often used as the source documents for posting cash receipts or payments

question

Treasurer

answer

the individual in charge of the department that has final responsibility for cash handling and cash management.the treasurer's department include cash budgeting, cash collections, writing checks, investing excess funds and making proposals for raising additional cash needed

question

Trojan Horse

answer

A malicious program that hides within legitimate programs and acts like a computer virus

question

Acid-Test ratio

answer

Ratio of the sum of cash plus short-term investment plus net current receivable divided by total current liabilities, tell whether the entity can pay all its current liabilities if they come due immediately. Also called the quick ratio

question

Accounts receivable turnover

answer

Net sales divided by average net accounts receivable

question

aging-of-receivables

answer

A way to estimate bad debts by analyzing individual accounts receivable according to the length of time they have been receivable from the customer

question

Allowance for Uncollectible Accounts

answer

The estimated amount of collection losses.Another name is Allowance for Doubtful Accounts.

question

Allowance method

answer

A method of recording collection losses based on estimates of how much money the business will not collect from its customers

question

Bad-debt expense

answer

Another name for uncollectible account expense

question

Creditor

answer

The party to whom money is owed

question

Days' sales in receivables

answer

Ratio of average net accounts receivable to one days sales. Indicated how many days sales remain in Accounts receivables awaiting the collection. Also called the collection period

question

debtor

answer

the party who owes money

question

Direct write off method

answer

A method of accounting for bad debts in which the company waits until a customers account receivables proves uncollectible and then debits. Uncollectible accounts expense and credits the customers account receivables.

question

doubtful-account expense

answer

Another name for uncollectible account expense

question

FOB

answer

Acronym for "free on board";used in quoting shipping terms

question

interest

answer

the burrowers cost of renting money from a lender. Interest is revenue for the lender and expense for the burrower

question

marketable securities

answer

Another name for short term investment

question

maturity

answer

the date on which a debt instrument must be paid

question

maturity date

answer

the date on which the debtor must pay the note

question

percent of sales method

answer

computes uncollectible account expenses as a percentage of net sales. Also called the income statement approach because it focuses on the amount of expense to be reported on the income statement

question

principal

answer

the amount borrowed by a debtor and lent by a creditor

question

quick ratio

answer

Another name for acid-test ratio

question

receivables

answer

monetary claims against a business or an individual, acquired mainly by selling goods or services and by lending money

question

sales discount

answer

percentage reduction of sales price by the seller as an incentive for early payment before the due date. A typical way to express sales discount is "2/10,n/30". this means the seller will grant a 2% discount if the invoice is paid within 10 days and the entire amount is due within 30 days

question

sales return and allowance

answer

Merchandise returned for credit or refunds for services provided

question

Shipping terms

answer

terms provided by the seller of merchandise that dictate the date on which title transfers to the buyer. A typical way to express shipping terms is through FOB terms.

question

Short-term investment

answer

investments that a company plans to hold for one year or less. Also called marketable securities

question

term

answer

the length of time for inception to maturity

question

trading securities

answer

stock investments that are to be sold in the near future with the intent of generating profits on the sale

question

uncollectible-account expense

answer

cost to the seller of extending credit. Arises from the failure to collect from credit customers. Also called doubtful-account expense or bad debt expense

question

Chapter 6

answer

Inventory and cost of goods sold

question

average cost method

answer

Inventory costing method based on the average cost of inventory during the period. Average cost is determined by dividing the cost of goods available by the number of units available. Also called the weighted-average method

question

consignment

answer

An inventory arrangement where the seller sells inventory that belongs to another party. The seller does not include consigned merchandise on hand in its balance sheet because the seller does not own this inventory

question

cost of goods sold

answer

cost of the inventory the business has sold to customers

question

cost of goods sold model

answer

formula that brings together all the inventory data for the entire accounting period: Beginning inventory+purchases=goods available. Then, goods available minus ending inventory=cost of goods sold

question

debit memorandum

answer

A document issued to the seller (vendor) when an item of inventory that is unwanted or damaged is returned. This document authorizes a reduction (debit) to accounts payable for the amount of the goods returned.

question

disclosure principle

answer

A business's financial statements must report enough information for outsiders to make knowledge decisions about the business. the company should report relevant, reliable, and comparable information about its economic affairs

question

First-in, first out cost method

answer

FIFO inventory costing method by which the first costs into inventory are the first costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases.

question

gross margin

answer

another name for gross profit

question

gross margin method

answer

another name for the gross profit method

question

gross margin percentage

answer

another name for the gross profit percentage

question

gross profit

answer

sales revenue minus cost of goods sold. Also called gross margin

question

gross profit method

answer

a way to estimate inventory based on a rearrangement of the cost of goods sold model: beginning inventory +net purchases=goods available minus cost of goods available sold=ending inventory. Also called the gross margin method

question

gross profit percentage

answer

gross profit divided by net sales revenue. Also called the gross margin percentage

question

inventory

answer

the merchandise that a company sells to customers

question

inventory turnover

answer

ratio of costs of good sold to average inventory . indicates how rapidly inventory is sold.

question

last in first out cost method

answer

LIFO inventory costing method by which the last costs into inventory are the first costs out to cost of goods sold. This method leaves the oldest costs, those of beginning inventory and the earliest purchases of the period in ending inventory

question

lowest of cost or market rule

answer

LCM requires that an asset be reported in the financial statements at whichever is lower, its historical cost or its market value, current replacement cost for inventory

question

periodic inventory system

answer

an inventory system in which the business does not keep a continuous record of the inventory on hand. Instead, at the end of the period, the business makes a physical count of the inventory on hand and applies the appropriate unit costs to determine the cost of the ending inventory

question

perpetual inventory system

answer

an inventory system in which the business keeps a contiuous record for each inventory item to show the inventory on hand at all times

question

purchase allowance

answer

a decrease in the cost of purchases because the seller has granted the buyer a subtraction, an allowance from the amount owed

question

purchase discount

answer

a decrease in the cost of purchases earned by making an early payment to the vendor

question

purchase return

answer

a decrease in the cost of purchases because the buyer returned the goods to the seller

question

specific unit cost method

answer

inventory cost method based on the specific cost of particular units of inventory

question

weighted average method

answer

another name for the average cost method

question

Chapter 7

answer

Plant Assets, Natural Resources, & intangibles

question

Accelerated depreciation method

answer

a depreciation method that writes off a relatively larger amount of the assets costs nearer the start of its use full life than the straight line method does

question

amortization

answer

the systematic reduction of a lump sum amount. expense that applies to intangible assets in the same way depreciation applies to plant assets and depletion applies to natural resources

question

capital expenditure

answer

Expenditure that increases an assets capacity or efficiency or extends its use full life. capital expenditures are debited to an asset account

question

copyright

answer

exclusive right to reproduce and sell a book, musical composition, film, other work of art, or computer program. Issued by the federal government, copyrights extend 70 years beyond the authors life.

question

depletion

answer

that portion of a natural resource's cost that is used up in a particular period. Depletion expense is computed in the same way as units of production depreciation. A depleted asset usually flows into inventory and eventually to cost of goods sold as the resource is sold

question

depreciable sold

answer

the cost of a plant asset minus its estimated residual value

question

double declining balance method

answer

an accelerated depreciation method that computes annual depreciation by multiplying the assets decreasing book value by a constant percentage which is two times the straight line rate

question

DuPont Analysis

answer

a detailed approach to measuring rate of return on equity. in this chapter we confine our discussion to return on assets, compromising the fist two components of return on equity, calculated as follows: net profit margin(net income before taxes/net sales) times total asset turnover(net sales/average total assets)

question

estimated residual value

answer

expected cash value of an asset at the end of its useful life. Also called residual value, scrap value or salvage value

question

estimated useful life

answer

length of service that a business expects to get from an asset. May be expressed in years, units of output, miles, or other measures

question

fair value

answer

the asset's estimated market value at a particular date

question

franchise and licenses

answer

privileges granted by a private business or a government to sell a product or service in accordance with specified conditions

question

good will

answer

excess of the cost of an acquired company over the sum of the market values of its net assets, assets minus liabilties

question

impairment

answer

the condition that exists when the carrying amount of a long lived asset exceeds the amount of the estimated cash flows from the asset. Under GAAP once impaired the carrying value of a long lived asset may never be increased. Under IFRS if the fair value is impaired it can be increased in the future

question

intangible assets

answer

An asset with no physical form, a special right to current and expected future benefits

question

Modified Accelerated cost recovery system

answer

a special depreciation method used only for income tax purposes. Assets are grouped into classes and for a given class depreciation is computed by the double declining balance method

question

natural resources

answer

assets such as oil and gas reserves, coal mines, or stand of timber accounted for as long term assets when purchased or developed, their cost is transferred to expense through a process called depletion

question

net profit margin

answer

computed by the formula net income divided by net sales. this ratio measures the portion of each net sales dollar generated in net profit

question

patent

answer

a federal government grant giving the holder the exclusive right for 20 years to produce and sell an invention

question

plant assets

answer

long lived assets such as land, buildings and equipment, used in the operation of the business. Also called fixed assets or property and equipment

question

return on asset

answer

also known as rate of return on asset. measures how profitably management has used the assets that stockholders and creditors have provided the company

question

straight line method

answer

depreciation method in which an equal amount of depreciation expense is assigned to each year of asset use

question

total asset turnover

answer

a measure of efficiency in usage of total assets. the ratio calculates how many times per year total assets are covered by net sales. Formula: net sales divided by average total asset.

question

unit production method

answer

depreciation method by which a fixed amount of depreciation is assigned to each unit of output produced by the plant asset

question

Chapter 8

answer

Long-term investment & the time value of Money

question

Available for sale securites

answer

all investments not classified as held to maturity or trading securities

question

consolidated financial statement

answer

financial statements of the parent company plus those of majority owned subsidiaries as if the combination were a single legal entity

question

controlling majority interest

answer

ownership of more than 50% of an investee company's voting stock

question

equity method

answer

the method used to account for investments in which the investor has 20-50% of the investee's voting stock and can significantly influence the decision of the investee

question

fair value

answer

the amount that a seller would receive in the sale of an investment to a willing purchaser on a given date. Securities and available for sale securities are valued at fair market values on the balance sheet date. other assets may be recorded at fair market value on occasion

question

foreign currency exchange rate

answer

the measure of one country's currency against another country's currency

question

foreign currency translation adjustment

answer

the balancing figure that brings the dollar amount of the total liabilities and stockholders equity of the foreign subsidiary into agreement with the dollar amount of its total assets

question

future value

answer

measures the future sum of money that given current investment is "worth" at a specified time in the future assuming a certain interest rate

question

held to maturity investments

answer

bonds and notes that an investor intends to hold until maturity

question

long term investment

answer

any investment that does not meet the criteria of a short term investment;any investment that the investor expects to hold longer than a year or that is not readily marketable

question

noncontrolling minority interest

answer

a subsidiary company's equity that is held by stockholders other than the parent company

question

parent company

answer

an investor company that owns more than 50% of the voting stock of a subsidiary company

question

present value

answer

the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money

question

short-term investment

answer

investment that a company plans to hold for 1 year or less. Also called marketable securities

question

strong currency

answer

a currency whose exchange rate is rising relative to other nations curriencies

question

subsidiary

answer

an investee company in which a parent company owns more than 50% of the voting stock

question

weak currency

answer

a currency whose exchange rate is falling relative to that of other nations

question

Chapter 10

answer

Liabilities

question

accounts payable turnover

answer

the number of times per year a company pays off its accounts payable

question

accrued expense

answer

an expense incurred but not yet paid in cash. also called accrued liability

question

accrued liability

answer

a liability for an expense that has not yet been paid also called accrued expense

question

bonds payable

answer

groups of notes payable issued to multiple lenders called bondholders

question

callable bond

answer

bonds that are paid off early at a specified price at the option of the issuer

question

capital lease

answer

lease is assumed to be a capital lease if it meets any one of four criteria. 1 the lease transfers title of the leaded asset to the lesse. 2 the lease contains a bargain purchase option.3 the lease term is 75% or more of the estimated useful life of the leased asset. 4 the present value of the lease payments is 90% or more of the market value of the leased asset

question

convertible bonds or notes

answer

bonds or notes that may be converted into the issuing company's common stock at the investors option

question

current portion of long term debt

answer

the amount of the principal that is payable within one year

question

days payable outstanding

answer

accounts payable turnover expressed in days 365 divided by turnover

question

debentures

answer

Unsecured bonds-bonds backed only by the good faith of the burrower

question

discount ( on a bond)

answer

Excess of a bonds face par value over its issue price

question

earnings per share

answer

amount of a company's net income per share of its outstanding common stock

question

equity multiplier

answer

another name for leverage ratio

question

interest coverage ratio

answer

another name for the times interest earned ratio

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lease

answer

rental aggrement in which the tennant (lesse) agrees to make rent payments to the property owner (lessor) in exchange for the use of the asset

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lessee

answer

tenant in a lease agreement

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lessor

answer

property owner in a lease agreement

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leverage

answer

using burrowed funds to increase the return on equity. successful use of leverage means earning more income on burrowed money than the related interest expense, thereby increasing the earnings for the owners of the business. Also called trading on the equity

question

leverage ratio

answer

the ratio of total asset divided by total stockholders equity, showing the proportion of total stockholders equity to total assets. tells the mixture of a companys debt and equity financing and is useful in calculating rate of return on stockholders equity through the dupont model

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market interest ratio

answer

interest rate that investors demand for loaning their money. Also called effective interest rate

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operating lease

answer

a lease in which the lessee does not assume the risks or rewards of asset ownership

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payroll

answer

Employee compensation a major expense of many businesses

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pension

answer

Employee compensation that will be received during the retirement

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premium on a bond

answer

excess of a bonds issue price over its face (par) value

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serial bond

answer

bonds that mature in installments over a period of time

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short term notes payable

answer

note payable that are due within one year

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stated interest rate

answer

interest rate that determines the amount of cash interest the burrower pays and the investor receives each year

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term bonds

answer

bonds that all mature at the same time for a particular issue

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times interest earned ratio

answer

ratio of income from operations to interest expense. Measures the number of times that operating income can cover interest expense. Also called the interest coverage ratio

question

trading on the equity

answer

earning more income on burrowed money than the related interest expense thereby increasing the earnings for the owners of the business.Also called leverage, the power of which is illustrated through the leverage ratio

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underwriter

answer

organization that purchases the bonds from an issuing company and resells them to its clients or sells the bonds for a commission, agreeing to buy all unsold bonds

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Chapter 10

answer

Stockholders Equity

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authorized stock

answer

Maximum number of shares a corporation can issue under its charter

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board of directors

answer

Group elected by the stockholders to set policy for a corporation and to appoint its officers

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book value

answer

Amount of owners equity on the company's books for each share of its stock

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bylaws

answer

Constitution for governing a corporation

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chairperson

answer

Elected by a corporations board of directors usually the most powerful person in the corporation

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common stock

answer

the most basic form of capital stock. the common stockholders own corporation

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contributed capital

answer

the amount of stockholders equity that stockholders have contributed to the corporation. Also called paid in capital

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cumulative preferred stock

answer

preferred stock whose owners must receive all dividends in arrears before the corporation can pay dividends to the common stockholder

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deficit

answer

Debit balance in the retained earnings account

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dividend

answer

Distribution (usually cash) by a corporation to its stockholders

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double taxation

answer

Corporations pay income tax on corporate income. then, the stockholders pay personal income tax on the cash dividends that they receive from corporations

question

DuPont analysis

answer

a detailed approach to measuring rate of return on equity: Net profit margin (net income before taxes /net sales)x total asset turnover (net sales/average total assets)x leverage ratio (average total asset/average stockholders equity)

question

Issued stock

answer

Number of shares a corporation has issued to its stockholders

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legal capital

answer

Minimum amount of stockholders equity that a corporation must maintain for the protection of creditors. For corporations with par-value stock, legal capital is the par value for the stock issued

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limited liability

answer

no personal obligation of a stockholder for corporation debts. A stockholders can lose no more on an investment in a corporations stock than the cost of the investment

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liquidation value

answer

The amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business

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market value (of a stock)

answer

Price for which a person could buy or sell a share of stock

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outstanding stock

answer

stock in the hands of stockholders

question

paid in capital

answer

the amount of stockholders equity that stockholders have contributed to the corporation. Also called contributed capital

question

par value

answer

arbitrary amount assigned by a company to a share of its stock

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preferred stock

answer

stock that gives its owners certain advantages, such as the priority to receive dividends before the common stockholders and the priority to receive asset before the common stockholders if the corporation liquidates

question

president

answer

chief operating officer in charge of managing the day to day operations of a corporation

question

rate of return on common stockholders equity

answer

net income minus preferred dividends,divided by average common stockholders equity. a measure of profitability. Also called return on equity

question

rate of return on total assets

answer

net income divided by average total assets. The ratio measures a company's success in using its assets to earn income for the persons who finance the business. Also called return on assets

question

redeemable preferred stock

answer

A corporation reserves the right to buy an issue of stock back from its shareholders with the intent to retire the stock

question

redemption value

answer

the price a corporation agrees to eventually pay for its redeemable preferred stock set, when the stock is issued

question

retained earning

answer

the amount of stockholders equity that the corporation has earned through profitable operation of the business and has not given back to stockholders

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return on assets

answer

Another name for rate of return on total assets

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return on equity

answer

Another name for rate of of return on common stockholders equity

question

shareholders

answer

persons or other entities that own stock in a corporation. Also called stockholders

question

stated value

answer

An arbitrary amount assigned to no par stock; similar to par value

question

stock

answer

shares into which the owners equity of a corporation is divided

question

stock dividend

answer

a proportional distribution by a corporation of its own stock to its stockholders

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stockholders

answer

a person who own stock in a corporation

question

stockholders equity

answer

the stockholders ownership interest in the assets of a corporation

question

stock split

answer

an increase in the number of authorized issued and outstanding share of stock coupled with a proportionate reduction in the stocks par value

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treasury stock

answer

a corporations own stock that it has issued and later reacquired

question

Chapter 11

answer

The income statement,the statement of comprehensive income,and the statement of stockholders equity

question

channel stuffing

answer

a type of financial statement fraud that is accomplished by shipping more to customers (usually around the end of the year) than they ordered, with the expectation that they may return some or all of it. the objective is to record more revenue than the company has actually earned with legitimate sale and shipments

question

clean opinion

answer

an unqualified option

question

comprehensive income

answer

a company's change in total stockholders equity from all sources other than from the owners of the business

question

earnings per share

answer

amount of a company's net income per share of its outstanding common stock

question

earnings quality

answer

the characteristics of an earnings number that make it most useful for decision making. the degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time. Assuming that revenues and expenses are measured accurately, high quality earnings are reflected in steadily improving sales and steadily declining costs over time so that income from continuing operations follows a high and improving pattern over time

question

extraordinary gains and losses

answer

Also called extraordinary gain or loss

question

foreign-currency exchange rate

answer

the measure of one country's currency against another country's currency

question

hedging

answer

to protect oneself from losing money in one transaction by engaing in a counterbalance transaction

question

investment capitalization rate

answer

An earning rate used to estimate the value of an investment in stock

question

pretax accounting income

answer

income before tax on the income statement

question

prior period adjustment

answer

a correction to beginning balance of retained earnings for an error of an earlier period

question

statement of comprehensive income

answer

a statement showing all of the changes in stockholders equity during a period other than transactions with owners. The statement of comprehensive income includes net income as well as other comprehensive income such as gain/losses on available for sale securities and foreign currency translation adjustments

question

statement of stockholders equity

answer

Reports the changes in all categories of stockholders equity during the period

question

taxable income

answer

the basis for computing the amount of tax to pay the government

question

unqualified (clean) opinion

answer

An audit opinion stating that the financial statement are reliable

question

weighted average cost of capital

answer

The combined rate of return expected for a company by its creditors and investors. in general, the higher the risk associated with the company the greater the expected returns by creditors and investors

question

Chapter 12

answer

Statement of cash flow

question

cash equivalents

answer

highly liquid short term investments that can be converted into cash immediately

question

cash flows

answer

cash receipts and cash payments

question

direct method

answer

format of the operating activities of section of the statement of cash flows lists the major categories of operation cash receipts (collections from customers and receipts of interest and dividends) and cash disbursements (payments to suppliers to employees for interest and income taxes)

question

financing activities

answer

activities that obtain from investors and creditors the cash needed to launch and sustain the business a section of the statement of cash flows

question

free cash flows

answer

the amount of cash available from operation after paying for planned investments in plant assets

question

indirect method

answer

format of the operating activities section of the statement of cash flows; starts with net income and reconciles to cash flows from operating activites

question

investing activites

answer

activities that increase or decrease the long term assets available to the business; a section of the statement of cash flows

question

operating activities

answer

activities that create revenue or expense in the entity's major line of business; a section of the statement of cash flows . operating activities affect the net income statement

question

statement of cash flows

answer

reports cash receipts and cash payments classified according to the entity's major activities; operating, investing and financing

question

Chapter 13

answer

Financial statement Analysis

question

accounts receivable turnover

answer

measures a company's ability to collect cash from credit customers. To compute accounts receivable turnover divide net credit sales by average net accounts receivable

question

acid test ratio

answer

ratio of the sum of cash plus short term investment plus net current receivables divided by total current liabilities. Tell whether the entity can pay all its current liabilities if they come due immediately. Also called the quick ratio

question

asset turnover

answer

The dollars of sales generated per dollar of assets invested formula is net sales divided by average total asset

question

benchmarking

answer

the comparison of a company to a standard set by other companies with a view toward improvement

question

book value per share of common stock

answer

common stockholders equity divided by the number of shares of common stock outstanding. The record amount for each share of common stock outstanding

question

capital charge

answer

The amount that stockholders and lenders charge a company for the use of their money. Calculated as notes payable + current maturities on longterm debt+longterm debt+stockholders equity x cost of capital

question

cash conversion cycle

answer

the number of days it takes to convert cash inventory, inventory to receivable, and receivable back into cash after paying off payables. The formula is days inventory outstanding + days sales outstanding - days payables outstanding

question

common size statement

answer

a financial statement that reports only percentage ( no dollar amounts)

question

current ratio

answer

current assets divided by current liabilites. measures a companys ability to pay current liabilities with current assets

question

days in sale receivables

answer

ratio of average net accounts receivables to one days sales. indicates how many days sales remain in accounts receivables awaiting collection. Also called the collection period and days sales outstanding

question

debt ratio

answer

ratio of total liabilites divided by total assets. states the proportion of a companys assets that is financed with debt.

question

dividend yield

answer

ratio of dividends per share of stock to the stocks market price per share. tells the percentage of a stocks market value that the company returns to stockholders as dividends

question

Dupont Analysis

answer

detailed method analzing rate of return on common stockholders equity. Rate of return on sales x asset turnover x leverage = return on average common stockholders equity

question

earnings per share

answer

Amount of a company's net income earned for each share of its outstanding common stock

question

economic value added

answer

Used to evaluate a companys operating performance. EVA combines the concepts of accounting income and corporate finance to measure whether the companys operatins have increased stockholders wealth. EVA= net income + interest expense - capital charge

question

efficent capital market

answer

a capital market in which market prices fully reflect all information available to the public

question

horizontal analysis

answer

study of the percentage changes in comparitive financial statments

question

inventory turnover

answer

ratio of cost of goods sold to average inventory. Indicates how rapidly inventory is sold

question

leverage

answer

earnings more income on burrowed money than the related interest expense, thereby increasing the earnings for the owners of the business. Also called trading on the equity

question

leverage ratio

answer

ratio of average total assets divided by average common stockholders equity. Measures the proportion of average total assets actually owned by the stockholders

question

price/earnings ratio

answer

ratio of the market price of a share of common stock to the companys earnings per share. Measures the value that the stock market places on one dollar of a companys earnings

question

quick ratio

answer

another name for the acid test ratio

question

rate of return on common stockholders equity

answer

Net income minus preferred dividends, divided by average common stockholders equity. A measure of profitability. Also called return on equity. Also can be computed with Dupont analysis

question

rate of return on net sales

answer

ratio of net income to net sales. A measure of profitability. Also called return on sales

question

rate of return on assets

answer

Net income divided by average total assets. This ratio measures a companys success in using its assets to earn income for the persons who fiance the business

question

times interest earned ratio

answer

ratio of income from operations to interest expense. measures the number of times that operating income can cover interest expense. Also called the interest coverage ratio

question

trading on equity

answer

another name for leverage

question

trend percentage

answer

a form of horizontal analysis that indicated the direction a business is taking

question

vertical analysis

answer

analysis of a financial statement that reveals the relationship of each statement item to a specified base which is 100% figure

question

weighted average cost of capital

answer

a weighted average returns demanded by the company's stockholders and lenders. often referred to as the weighted average cost of capital

question

working capital

answer

current assets minus current liabilities measures a bussiness's ability to meet its short term obligations with its current assets. Also called net working capital

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